The only responsibility of business is to increase its profits free essay sample

Milton Friedman was an American economist, statistician and writer, who had a massive impact on the research agenda of the economics profession. His famous words â€Å"the only responsibility of business is to increase its profits† (Friedman, Milton. 1970) led to many controversial debates on whether businesses should have ethics or if profit should be their main goal. Corporate social responsibility has many definitions, as its interpretation is quite loose, so I have chosen one that relates the most to this essay, given by the World Business Council for Sustainable Development, in 2000: â€Å"Corporate social responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as the local community and society at large† (Dahlsrud, A.2006). In Milton Friedman’s article The Social Responsibility of Business Is to Increase Its Profits, Friedman’s central message is that the main responsibility for a business is to create wealth; and that the corporation is an instrument of maximising profit and that their priorities should be to maximise shareholder value, have a high competitive advantage and use whatever means, as long as it remains legal, to increase their sales and profitability. In this essay I will be arguing to what extent I agree with Milton Friedman’s claim â€Å"the only responsibility of business is to increase its profits†(Friedman, Milton. 1970) and then I will reach a conclusion in which I will give my own point of view on the topic. On one hand, I agree with certain concepts related to Friedman’s claim. Firstly, and most importantly, any executive of a big corporation has direct responsibilities to its owners, which would be its stockholders. Friedman argues that â€Å"to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of society, both those embodied in law and those embodied in ethical custom (Friedman, Milton. 1970). Shareholder’s main role is to hire executives, that they will then expect to act as their agent. Therefore if they go against their will, by performing actions that do not comply with their main objectives, would be in itself unethical, as it would go against their freedom of choice. Friedman argues that executives should not be spending a company’s resources on social causes the shareholders would not support, because it is effectively like imposing taxes on the stockholders and would provide lower profits (Cosans. C, 2008). Friedman proposes as examples that abstaining from a price increase to help prevent inflation, reducing pollution by more than it needs to be, to the point where it conflicts with the interests of the corporation and at the expense of corporate profits, to help improve the environment could go against the stockholders goals (Mulligan, T.1886). Consequently, executives spending corporate resources on social causes, that are not compatible with stockholder’s objectives, simply because the executives has his own personal ethical agenda, is a violation of trust, as the executive is not doing what he has been hired to do in the first place. Secondly, Friedman argues that spending money and resources on social interest should be the function of the government, through taxation and not of the executives in a company (Mulligan, T. 1886). For example if a company decides that it wants to lower its CO2 emission, to support the fight against global warming and that subsequently it leads to an increase in price of their product, it can be argued that this is like an indirect tax for consumers: â€Å"He is in effect imposing taxes, on the one hand, and deciding how the tax proceeds shall be spent. † (Friedman, Milton. 1970). This is unfair since it constitutes taxation without representation. Furthermore, it is unconstitutional that executives act as civil servants, without having been elected through a political process. Since, if anyone should have the power to impose taxes and make expenditures to promote social objectives, it shouldn’t be corporations but the government, as they have the resources and knowledge to make these kinds of decisions that could potentially have an impact on all our lives. Friedman argues, â€Å"Business professionals have neither the power nor possibly even the knowledge necessary to address larger societal problems, even if they wanted to† (Friedman, Milton. 1970). An example he refers to is the fact that business professionals are not in a position to fight inflation, where factors, such  as money supply and aggregate demand need to be considered. Overall it is investing governmental power in a person who has no general mandate to govern and why should we allow unelected companies to determine our social values and to take over the role of elected government. Thirdly, the process is undemocratic, as there are no checks and balances to monitor these corporations and the major decisions that they are making, that are going to impact our society, also the decision process is very much kept behind ‘closed doors’, unlike how the government operates. This leaves more opportunity for corruption and illegal behavior. Even though there are organizations, such as the World trade Organization and the Office of Fair Trading, loopholes always seem to be found. For example, a recent report by Members of Parliament, last year claimed that the Office of Fair Trading had failed to stop money lenders ripping off customers, and this mistake cost borrowers ? 450 million a year (The Mirror, 2013). The fact that businesses are able to persuade law makers â€Å"to pass laws that allows them to do an activity that would otherwise not be allowed†(Cosans, C.2008), for the purpose of increasing businesses profits, raises doubt on whether the corporation will only act in a ethical manner for their own purposes and won’t be able to anticipate the social consequences of their actions. An example to show how corporations could act in a socially responsible way for their own benefit would be, if a firm implemented tougher environmental standards, simply to eliminate smaller firms that could not afford the same stricter standards (Johnson, K. R. 2010). Corporations are not representative of society at large, but merely a small, narrow political constituency. As G. E. Moore once said: â€Å"to act with perfect certainty, we would need to know all the events which will be in any way affected by our action throughout an infinite future(Moore, G. E. 1903). In his essay, Milton Friedman emphasises that corporations should â€Å"use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud†(Friedman, Milton.1970). Therefore, it is more beneficial for companies to concentrate on making profit, as long as it remains in a legal manner and letting the government be in charge of imposing taxes and keeping the businesses in check, since corporate social responsibility ‘‘asks corporations to work against their natural genetic makeup and managers and employees to work at cross-purposes’’(Friedman, Milton. 1970). On the other hand, it can be argued that corporate social responsibility brings many benefits to society and corporations themselves and therefore there are some flaws with Friedman’s stance on the main objectives for businesses. For enterprises to fully meet their social responsibilities, they â€Å"should have in place a process to integrate social, environmental, ethical human rights and consumer concerns into their business operations and core strategy in close collaboration with their stakeholders†. (European Commission, 2011). It is essential that corporations follow rules beyond the ones that are codified into laws (Friedman, J. 2013). Firstly, and most importantly, a company that is not socially responsible, and does not include it within their main goals can have detrimental consequences on people; society and I would go as far as to say the world. Kant’s second formulation of the categorical imperative ‘‘act so that you treat humanity, whether in your own person or in that of another, always as an end and never as a means only’’ (Kant, I. 1785, p.46) comes to mind as an ethic that more businesses should possess. There have been multiple occurrences, where corporations have acted in ways that go against corporate social responsibility, to the extent where lives have been lost or put in danger, for the mere reason to increase their profit. An example of this, in 1984, more than 40 tons of methyl isocyanate gas leaked from a pesticide plant in Bhopal, India, which lead to the immediate death of 3,800 people and caused significant morbidity and premature death for many more. The company, Union Carbide Corporations, involved in what became renown as the worst industrial accident in history, tried to dissociate itself from legal responsibility and eventually settled a payment of $470 million in compensation, which did in no way cover the negative externalities it had caused, such as the long-term health consequences. (Broughton, E. 2005). Furthermore there are still many issues where corporations use their monetary resources to influence the law, in ways, which will mostly benefit them. For example, in 1996, health insurance companies’ successfully lobbied Congress to drop a bill that had passed the Senate that required them to offer the same coverage for mental and physical health (Lueck, S. 2008). Even though it could be argued from Friedman’s perspective that it was ethical for the companies to increase their profits by not covering mental health since it wasn’t illegal, it led to health insurance companies acting in unethical way that left citizens having to deal with higher health costs, which is something that all citizens have to pay. This can be related to the Stakeholder theory (1930), which states that â€Å"in making decisions, management should calculate the implications on all parties that the business is affecting or that is affected by, such as the Stakeholders, and act to advance the greater interest† (Stanwick and Stanwick, 2009,) Secondly, while it is normal for any business to have profit as one of their priorities, as it wouldn’t be sustainable otherwise, there is also a need for them to consider non-monetary factors in their decision-making. Firstly for the company’s stockholders, since they wouldn’t want their company to make money by producing a product that they believed to be unethical or potentially harmful. â€Å"Hence, the executive must exercise judgment to determine when an action would displease the typical stockholder despite its profitability†(Cosans, C. 2008). Since shareholders are also human beings, they wouldn’t want basic ethical principles to be broken. For example, Enron Corporation lied about its profits and concealed their debts so they didnt show up in the companys accounts, to increase the value of their stocks. This was clearly deceitful to the stockholders, as Enron lost their money by lying to them and making them invest more (Barry and Shaw, 2001, p. 212). This can also be seen in a more recent story, where many Walmart shareholders voted against the current CEO because of their handling of bribery charges and working conditions in factories in the companys supply chain. Thirdly, if a company treats its employees in an unethical manner, there is always the chance that they will then do the same and start becoming dishonest. For example, they could try to go against their own company and help competing firms. Furthermore employees nowadays expect more than just a paycheck, they want to feel that they are working for a company that is doing ‘good’ for the community and therefore having good ethics can also  help motivate the workers to do well and be more involved in the business, it has been shown that employees who work for enlightened organizations tend to exhibit increased job satisfaction (Cosans, C. 2008). Hence, it could be suggested that it may be profitable for a company to spend resources in an ethical way, which could be helping with certain world problems or even the community, as they will attract employees who have high morals and work ethic themselves. Fourthly, consumers nowadays tend to prefer products, which possess certain attributes, such as quality, safety, and value. Not only consumers, but also communities often want companies to do more than what is required. Thus having a good set of ethics could lead to a company having higher sales, customer loyalty, a better reputation, more efficient operations, cooperation from local communities and even more (Cosans, C. 2008). Corporations can identify and respond to the demands of the marketplace, whilst making their activities socially responsible as its long-term profits can be negatively or positively influenced by its ethical stance or its attitude towards its social responsibility. A firm which exploits cheap labour in the Least Developed Countries, such as Nike and its sweatshops, may find that it loses part of its customer-base, it may also find it harder to get governments’ contracts or support, and may have problems recruiting new employees, all of which will have a dampening impact on long- term profitability. There are always social constraints on how far a firm can go in persisting profits and it is part of the implicit contract between society and the firm, where we the government and community provide a legal and economic framework in which you can operate but in return we expect certain standards of behaviour to be followed. Businesses are important in different ways, â€Å"such as creating wealth, providing goods and services in an efficient and fair way, at the same time respecting the dignity and the inalienable and fundamental rights of the individual. † (Mele, D. 2002). In conclusion, if one adopts a narrow interpretation of social responsibility, of the costs of producing goods and services, ignoring social costs and only considering the short-term perspective on the drive for profits then Friedman may be right. However businesses have a responsibility to adapt their behaviours accordingly if it wishes to survive in the long-term. Friedman wrote his essay 40 years ago, and since then many factors have changed in fundamental ways and nowadays people expect more of businesses to be corporately socially responsible (Friedman, J. 2013). And even though any business, that wants to be sustained over time, must maximize its profits, it should be done in a manner that meets the needs of the stakeholders. Corporations are very powerful and some are worth more than the economies of whole countries, they can develop innovative technologies that will meet the demands of the marketplace better than governments. They can get themselves involved with new and experimental social programs that might meet societal needs, such as the development of organic products (Johnson, K. R. 2010). A quote, which represents this very accurately: â€Å"The social responsibilities of businessmen arise from the amount of social power that they have Whoever does not use his social power responsibly will lose it. In the long run those who do not use power in a manner which society considers responsible will tend to lose it because other groups eventually will step in to assume those responsibilities. ’’ (Davis, K. 1960). Generally it is always better to remember Francis Hutcheson’s maxim, which resembles the principle of utility in that: â€Å"Action is best, which procures the greatest Happiness for the greatest Numbers; and that, worst, which, in like manner, occasions Misery.