When I hear businessmen and women discuss the social responsibility their firms have to the world, I am reminded of Milton Friedman’s article published in the New York Times about 46 years ago. In it he said, “the social responsibility of business is to increase its profits” and those who think otherwise are “unwitting puppets”. That, in fact, they were preaching “pure and unadulterated socialism.”
Man, how times have changed.
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As Friedman, and now I, will pose, “What does it mean to say that business has responsibilities? What does that imply and for whom?”
Friedman suggests that only people – humans – can have responsibilities and that a corporation cannot have responsibilities, even in the vaguest sense, because they are “fictional”. He believes the individuals who need to be responsible are corporate executives. However, their direct responsibility is to the shareholders, not society; that corporate executives need to “conduct the business in accordance with their [the shareholders] desires, which generally will be to make as much money as possible…”
While there are a few points Friedman makes that I do agree with, overall his argument is what Jack Welch has called, “the dumbest idea in the world”.
As an aside, the way Friedman thinks about the responsibility of business isn’t the only thing outdated. Although this was written in the 1970s, let’s all agree to change the language of an executive to “he or she or they”, not just “he”. You can read more about that from our women in leadership here.
First, I do agree the ones who should be held most accountable in a business are those at the top. However, that responsibility shouldn’t only operate as an allegiance to the employer but to all those invested in the company. To all of us at Gravity, that means our team, our independent business owner clients, the communities we work and live in, and society. Not our bottom line.
But, let’s talk about Jack Welch again. When this article was published in the 1970s, it was during a time when executives wanted so badly to believe that shareholder value was the right thing to focus on. With pressures from global competition for the first time in history, they felt the end game was to make the most money possible and destroy anything that got in the way. For some, it worked…for a while.
During his time as CEO of General Electric, Jack Welch was a firm believer in shareholder theory. So much so, that he turned GE from a $14 billion company to a $484 billion company and was named “Manager of the Century” by Fortune magazine.
However, as time wore on, the magic wore off. GE’s stock price fell and they lost around 60 percent of their market capitalization. As Steve Denning said in Forbes, “It turned out that the fabulous returns of GE during the Welch era were obtained in part by the risky financial leverage of GE Capital, which would have collapsed in 2008 if it had not been for a government bailout.”
Ironically, Welch is now one of the biggest advocates against shareholder theory. I mean, that’s why he called Friedman’s theory, “the dumbest idea in the world”.
It’s because Welch realized what is good in the short-term isn’t sustainable for long-term growth. In the time since shareholder theory came out in 1976, executive pay has skyrocketed while company performance has plummeted. Businesses with a social agenda are starting to prove that having a bigger purpose and responsibility for all is way better for the bottom line than focusing on increasing profits alone.
And that’s aligning more and more with what consumers are looking for when purchasing from a company.
As we’ve stated in a previous article, nine out of ten consumers expect companies to do more than make a profit. They must operate responsibly to address social and environmental issues. When companies are driven by a purpose that helps support society and large-scale issues, consumers respond. In fact, 90 percent of global consumers would switch brands to one that is associated with a good cause. More than 93 percent will have more positive image of the company, 90 percent will be more likely to trust that company, and 88 percent will be more loyal by continuing to buy products or services.
As Kenneth Mason, the president of Quaker Oats, said, “Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life’s purpose, one would hope, is somewhat broader and more challenging. Likewise, with business and profit.”
Armed with all those findings, I wonder if Friedman would have argued differently in 2016.
Hayley is on the Marketing team at Gravity Payments.