Business the Beneficent

Corporations today claim that they can do well for their inves­tors by doing good for their cus­tomers, their employees, their com­mun­ity, and even the environment. Managers, says David J. Vogel, a professor of business ethics at the University of California, Berkeley, believe that a socially responsible firm “will face fewer business risks than its less virtuous competitors: It will be more likely to avoid consumer boycotts, be better able to obtain capital at a lower cost, and be in a better position to attract and retain committed employees and loyal customers.”

The relationship between doing good and being profit­able used to be regarded as much more indirect, writes Vogel in California Management Review (Summer 2005). After a court ruled in 1954 against a Standard Oil of New Jersey shareholder who had objected to the firm’s gift of “his” funds to the engineering school of Princeton University, corporate philanthropy came to be widely accepted by large firms. Supporting civic, educational, and cultural activities and giving money to urban affairs programs and the like were seen as “enlightened self-interest,” because businesses had a stake in the well-being of the society that let them make their profits.

But things have changed, according to Vogel. “Increased domestic and international competition, threats of hostile takeovers, the concentration of ownership in the hands of insti­tu­tional investors, and changes in the basis of executive compensation” have forced managers to justify their actions in terms of their contribution to the bottom line, not just to society’s well-being. Yet corporations have continued to expand their efforts to do good. Corporate social responsibility now includes everything from charitable donations, to voluntary expenditures on environmental protection, to paying Third World workers First World wages. And the doctrine that a big business is not bad business has helped make business careers much more inviting to young people.

Whole Foods CEO John Mackey argues that businesses can earn larger profits for their investors by not making that their primary goal. “The most successful businesses put the cus­tomer first, ahead of the investors,” he writes in Reason (Oct. 2005). Indeed, at Whole Foods, the mission is to serve “all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment.”

In a classic article in The New York Times Magazine (Sept. 13, 1970), Nobel Prize–winning economist Milton Friedman argued that the corporate executive’s chief obligation was to investors; as the article’s headline put it, “The Social Responsibility of Business Is to Increase Its Profits.” If “social responsibility” were not mere talk, Friedman said, executives would have to spend money in ways that were not in stockholders’ best interests—by passing over better-qual­ified workers, for instance, to hire hard-core unemployed individuals, with the aim of reducing poverty. That would be a disservice to in­vestors, customers, and employees.

Three and a half decades later, commenting on Mackey’s argument in Reason, the 93-year-old Friedman says that the differences between Mackey and him are mostly “rhetorical.” He points out that, in his original article, he had observed that cor­por­ations often used “social responsibility” as “a cloak” to mask self-interest—a tolerable bit of deception, in his view, given the widespread hostility to business. If the particular socially responsible expenditures actually boost profits, then as a practical matter they’re OK with him.

Friedman doesn’t get it, Mackey says in a rejoinder: Whole Foods, Starbucks, REI, Medtronic, and thousands of other businesses “were created by entrepreneurs with goals beyond maximizing profits”—and those other goals “are intrinsic to the purpose of the business.” They’re not, in Friedman’s phrase, mere “hypocritical window-dressing.” The many stockholders of these corporations don’t seem to feel cheated.

In Stanford Social Innovation Review (Fall 2005), Deborah Doane, a writer who heads a coalition seeking legal reform of the corporation in the United Kingdom, maintains that proponents of corporate social responsibility fail to acknowledge the tradeoffs that must ultimately be made between doing well financially and doing good for society. There’s “little if any empirical evidence,” she observes, that the market can reliably deliver both short-term financial returns and long-term social benefits. And when the two goals conflict, the quest for profits “undoubtedly wins over principles.” She thinks that government should exert more oversight of corporations.

But trying to prove that corporate social responsibility consistently benefits the bottom line would be as pointless as trying to show that advertising does, says Vogel. Moreover, social responsibility may work for some firms but not for their competitors. The market niche for relatively responsible firms may be limited. And a responsible firm’s success isn’t guaranteed to last. Even some celebrated exemplars, such as Ben and Jerry’s and Body Shop International, have run into financial difficulties lately. There’s a place in the business world for socially responsible firms, concludes Vogel, but “this place is at least as precarious and unstable as [that] for any other kind of firm.”