A Tale of Two Friedmans: CSR and Risk

Over the next couple of weeks, we’ve asked our writers (and guests) to respond to the question” What is the Social Responsibility of Business?”  Please comment away or contact us if you’d like to offer an opinion.

By Graham Russell

In September 1970, Milton Friedman wrote his famous paper claiming that the only social responsibility of a corporation is to increase profits for the benefit of its shareholders. Forty years later, his namesake, Thomas, continues to express the hope that business will be a key driving force moving us toward a more sustainable, resource-efficient global economy. It’s interesting to wonder what Milton would say about Thomas’ views if he were still alive today.

The point is, things have changed in 40 years and it makes little sense in 2012 to grumble about Milton’s treatise any longer. He was certainly no Rachel Carson – who was his contemporary and had published her seminal work Silent Spring, just a few years earlier. However, he was a brilliant economist who reflected standards of corporate behavior that were, in fact, accepted in his time.

Acceptable corporate standards have changed because society has forced change, sometimes by demanding increased regulation and sometimes through its buying habits. Is it conceivable that, if the citizens of Cleveland were presented with a proposal to repeal the Clean Water Act (passed in 1972), they would vote for a return to conditions that caused their local river, the Cuyahoga, to catch fire from time to time? What if it guaranteed the return of the tens of thousands of high-paying manufacturing jobs on which the city’s prosperity depended back then? I still don’t think so.

Think about:

  • the public outcry and reputation damage experienced by Nike in the 1990s when it was revealed that its shoes were being manufactured by young children working long hours in “sweatshops” in Cambodia and elsewhere
  • the billions of dollars wiped off Mattel’s market capitalization a few years ago when high lead levels were found in the toys it was importing into the U.S.
  • the fact that BP is still selling off entire chunks of its worldwide operations to pay for the costs associated with the 2010 Deepwater Horizon disaster
  • the fact (inconceivable even 2 or 3 years ago) that even the mighty Apple is openly talking about its efforts to improve working conditions and environmental practices at Foxconn and other companies manufacturing its products in emerging market countries

Most competent senior executives in the world’s major corporations have long recognized that knowingly ignoring the corporate behavior standards that are currently accepted by society is to run an ever-increasing risk that profits and shareholder returns will be reduced, if not devastated. Of course, there remain outspoken advocates for a return to the “bad old days” who still deliberately and openly ignore these standards. For example, there’s little doubt that Don Blankenship, former CEO of Massey Energy, was aware of his company’s miserable mine-safety record when the Upper Big Branch mine blew up in February 2010, killing 29 workers. However, even Blankenship lost his job and his shareholders saw their investment value plummet 45 percent in the next several weeks.

Referring to Milton’s paper of 1970, I note that he describes the responsibility of management 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.” To the extent that laws have changed (because society has demanded change) and ethical custom has changed (we won’t buy products anymore from companies seen to be deliberately flouting currently acceptable employment and environmental standards), if Milton were around in 2012 to update his 1970 treatise, I bet he would acknowledge that acceptable standards of corporate behavior have changed a lot in 40 years and that he’d issue a severe warning to any CEO still stuck in a 1970 mindset.

At its most basic level, therefore, practicing sustainable business is a way to avoid potentially massive financial risk and destruction of enterprise and shareholder value, behavior that Milton would undoubtedly have supported.

Being an intelligent economist, Milton would also have seen that resource constraints accompanied by human and environmental degradation are serious threats to the continued well-being of the global economy. And as an ardent capitalist, he would have agreed with Thomas that the best hope for our future is to leverage the resources and ingenuity of the business community to make more money by addressing these challenges. That’s the opportunity side of sustainability the Friedmans would have agreed upon and the subject of part two of this article.

Graham Russell is Founder & Principal at Trupoint Advisors, which helps companies achieve strategic success through sustainable business initiatives. www.trupointadvisors.com. Russell writes and speaks on the subject of sustainable business and teaches sustainability in the University of Colorado Denver MBA program.

image: Knowsphotos via Flickr cc (some rights reserved)

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