Reconsidering the Social Responsibility of Businesses

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Reconsidering the Social Responsibility of Businesses

Fifty years ago, in September 1970, economist and Nobel laureate Milton Friedman published a famous essay in the New York Times Magazine arguing that, “The social responsibility of business is to increase its profits.”

Yet despite the unparalleled success of this doctrine in raising the living standards of people around the world,  the idea that business leaders should focus on creating as much value as possible for the owners of their companies rather than on improving outcomes for a broader set of stakeholders like workers, suppliers, and society as a whole, is now under attack.  Meanwhile, the corporations that have publicly moved away from Friedman’s position have inadvertently validated their viability and durability.

That’s not surprising because Friedman’s doctrine is well-grounded in solid economics, common sense, and practical considerations.  With characteristic bluntness, he instructed executives that their responsibility “generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”  As such, the case for shareholder capitalism is simple.  “A corporate executive is an employee of the owners of the business” who has a “direct responsibility” to his employers,” Friedman wrote.  Executives’ have a responsibility to run the business according to the wishes of its owners, which will typically be to “make as much profit as possible.”

However, this is often misunderstood, especially with respect to the role of public policy.  In a speech in July, Democrat presidential nominee Joe Biden said: “It’s way past time we put an end to the era of shareholder capitalism. The idea the only responsibility a corporation has is with shareholders, that’s simply not true. It’s an absolute farce.”  Similarly, the Business Roundtable, an association of chief executives representing many leading U.S. companies, retreated from “shareholder capitalism” a little over a year ago, with a statement signed by 181 CEOs “who commit to lead their companies for the benefit of all stakeholders — customers, employees, suppliers, communities and shareholders.”

The Trends editors argue that this thinking represents the desire of a small elite in corporate America and the government to use their privileged positions to broadly reshape society in a manner based on their values...

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