This study will argue against the neoclassical view of Milton Friedman on Corporate Social Responsibility (CSR). First of all it is essential to familiarise with the concept of CSR, this includes background information on the topic, than discuss the transformation of CSR over the years and the reasons for the changes. Than defining the concept as it is seen now. Additionally to familiarise with the literature used, two sources used in this study were evaluated under origins, values and limitations.
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Later the study will introduce the main argument of the study on the CSR, which will be separated into two parts. First part will analyse the traditional view of Milton Friedman and other economists and try to find out if the main responsibility of the company is to maximize profits. The second part will talk about the traditional view of the CSR which is opposing the neoclassical view.
In conclusion I will try to argue Milton Friedman’s case of neoliberal position on CSR.
Background on Corporate Social Responsibility
The concept of social responsibility was traced back to the ancient times. The first stage of the CSR development happened thousand years BC where authorities introduced different rules and regulations where the workers were severely punished for being careless and injured someone during their work. Or “In Ancient Rome senators grumbled about the failure of businesses to contribute sufficient taxes to fund their military campaigns.”(History of Corporate Social Responsibility and Sustainability) During the industrial revolution the concept grew to a whole new level and the significance of business in society started to increase exponentially. By the 1920s the new stage began that social responsibility was not seen as an ethic but became a whole new concept, however the magnitude of the concept was undervalued. As Dean of Harvard Business School Wallace B. Donham: “Business has not learned how to handle these changes, nor does it recognise the magnitude of its responsibilities for the future of civilisation.”(History of Corporate Social Responsibility and Sustainability)
The ideology of corporate social responsibility (CSR) has emerged as a response to pressure from the business side of growing leftist sentiment and the trade union movement in the last third of the XIX century. Incurred if the institutions of civil society demanded from businesses providing social guarantees to the workers and to ensure protection of their labour and the decline of trade unions in the mid XX century for business owners updated the task of preserving and maintaining the loyalty of motivation of subordinates, which again forced them to turn to CSR. It was then that the concept has become firmly established in the theory and practice of corporate governance in the U.S.
However the effect of globalization cannot be under estimated as it played a significant role in CSR, which forced companies to look for more creative ways of positioning information in a crowded world. Thus, CSR was the result of deep transformation of relations of private business and society in a post-industrial economy.
Searching for the most precise definition in the least amount of text, the definition by Lord Holme and Richard Watts in “The World Business Council for Sustainable Development in its publication Making Good Business Sense” (Baker 2004) they defined Corporate Social Responsibility as:
“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 of the local community and society at large” (Baker 2004)
In essence CSR is a concept that reflects the company’s voluntary decision to participate in the improvement.
An important remark to make before defining CSR is that it is a very broad topic with no clear-cut definition; this creates a lot of uncertainty. In order to reduce some uncertainty it is essential to divide CSR into two different parts and look at it in a more detailed manner. First part that will be looked at is the internal CSR, which is limited by the scope of the company, it deals with social policies of the employees. The second part is the external CSR, which is responsible for the outside framework and therefore deals with a much broader spectrum than the internal, as it takes into the account all the social and environmental factors, in some cases it helps eliminate the failures of the authorities in the social sphere, shifting a significant share of burden to the corporations.
Additionally there are different principles of the CSR that will be mentioned later in the study including: Transparency this deals with publicity and the reliability of the company, significance deals with the scale and the effectiveness of the policies and prevention of conflicts among other parties.
Evaluation of Sources
In order to examine the two sides in more depth sources with different views and opinions were used. For a more critical evaluation two books have different perspectives on the case of CSR which helps the study answer the question from different viewpoints.
First book, The Debate over Corporate Social Responsibility,” by Steve May, George Cheney, and Juliet Roper answers the question in a theoretical and practical perspectives on Corporate Social Responsibility. The book’s value lies in the fact that this book is based primary on facts and is independent from views, which is perfect for this study. Another important aspect to mention is the relevance of the book to the current situation in business as it was published 5 years ago which is relatively recent.
The Second book Corporate Responsibility and Financial Performance: The Paradox of Social Cost by Moses L. Pava and Joshua Krausz. This book is very different from the first one as it focuses more on the performance of the company based on CSR. It contains empirical studies on the correlation between the CSR and performance that will be used further in the study. The limitation of this book is that it was published in the 1995 and the concept of CSR changed since then.
Currently the concept of Corporate Social Responsibility is a subject of debate and criticism. Defenders argue that it has a solid business case, and corporations receive many benefits because they work for a broader and more long-term than their own short-term gain momentary. Critics argue that social responsibility moves away from the fundamental economic role of businesses, and distracts the company form its main goal.
Thus, there are two main approaches to the study of corporate social responsibility. On one hand we have the notion of M. Friedman, who relies on formal rationality. On the other hand, we have representatives of the second approach, the liber idea of CSR. The researchers are relying on objective research. They recognize that the social responsibility of business is complex and cannot be reduced to the bare economic interest of profit maximization.
In analysing both views this study will find out to what extend does Milton Friedman’s traditional view of the CSR increase financial profits of the company.
Before we elaborate on these two opposite approaches to the study of corporate responsibility, it should be noted that the leaders and managers of today’s companies are increasingly aware of the positive impact of socially responsible behaviour to achieve not only strategic but also financial goals of the business.
Milton Friedman’s view on Responsibility of Corporations
Nobel Prize winner, a supporter of the policy of monetarist Milton Friedman in his book Capitalism and Freedom published in 1962
“there is one and only one social responsibility of business-to use it 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.”.
Similarly, the social responsibility of labor leaders is to serve the interests of the members of theirunions. It is the social responsibility of the rest of us to establish a framework of law such that an individual in pursuing his own interest is, to quote Adam Smith again, “led by an invisible hand to promote an end which was no part of his intention” (Friedman & Friedman, 1982, p. 133)
The essence of this argument is that the direction of the profits for social goals reduces the volume of profit, which violates the principle of profit maximization, which is fundamental to the business. Note that in the short term deductions from profits related realization of a social responsibility goal in business does reduce profits.
Additionally if, for example the price of a company’s products would be reduced, this would really cheer the consumers who can buy more for lower price thus increase purchasing power; it will have the same effect on the shareholders if the value of dividends grow. Therefore, installation of additional environmental equipment, of course, is a positive impact on the environment and the society; however who will have to pay for this? Eventually, the consumers as the improvements will increase the cost of production and consequently, the prices of goods and services, reducing the purchasing power of the consumer.
Milton Friedman backed his arguments with a number of arguments. For example he used the concept of comparative advantage in order to argument the fact that social programs should not be implemented by the managers as they do not have the comparative advantage and the know-how in that field, instead they should be engaged in maximizing profits for the company. Friedman’s argument was based on one of the most influential classical economists David Richardo who argued that the flow of goods should not be interrupted by the government and should flow freely across the country and the boarders and therefore will be most efficient.
In the book by Friedman makes a strong argument stating that corporate responsibility was initialised by leftists and socialists and any sign in directing the business in socially responsible direction will be seen as destruction of capitalism because evidently:
“the manager who reduces profit for social ends such as reducing pollution or hiring members of disadvantaged groups takes over the functions of government because he is in effect imposing taxes and deciding how to spend the proceeds. The corporate executive thus becomes a civil servant, a public employee. The result is thus full blown socialism, the rejection of the market mechanisms in favor of political mechanism” (Aune, 2007, p. 212)
Moreover Friedman’s financial statement analyst criteria characterises companies investments in the social field as “inferior investments” (Aune, 2007, p. 212) due to that
Friedman increased his influence in the 1975, after the decline of support in Keynesian economics and increase in Milton Friedman’s monetarist movement in the field of inflation and unemployment. This improved his position in the battle against CSR. And increased support from other economists including Henderson who backed Friedman on his arguments against CSR and based on his principles wanted to implement Friedman’s idea to the new globalized economy. In addition many organizations were created in order to oppose the traditional idea of CSR. Here are some examples of the organizations mentioned above: “Competitive Enterprise Institute” or the “Free Enterprise Action Fund”. These organizations based on Friedman’s arguments try to prove that CSR is a smokescreen for socialists and collectivist theme. (Aune, 2007, p. 208) which was a very strong argument after the Cold War bringing up the idea of Soviet Collectivisation policies.
As mentioned before, Friedman was not the only advocate of the neoliberal view on CSR. Also people like J. Roberts argue that “the corporation is an idea, an imaginary, without substance or sensibility and therefore incapable of anything like responsibility. Instead, corporate responsibility will always depend upon people using their frail and vital sentience and following the path that this assigns.” (Christensen, 2007, p. 449)
Or Greider states that business should be making money otherwise they will be less efficient if they will engage in CSR and take society’s interest into consideration. Not only because of the opportunity cost of investing that money into something more profitable but also because they are no specialized in the area and therefore will waste the resources due to inefficiency.
Furthermore presents Hawley’s study in 1991 where he conducted a survey from 22 business textbooks to find out what is goal of the corporation his finds came to a common conclusion that “The typical Introductory Corporate Finance course begins with the instructorposing the following question to the students: “What is the primary objectiveof financial managers and the corporation?” The answer, of course, is that corporate managers should seek to maximize the wealth of owners by maximizing the price of the shares. That any government or corporate interference with the natural workings of the market prevents resources from flowing to their most valued uses. Government intervention, beyond punishing fraud, introduces unnecessary friction into the natural and smooth workings of the market.” (Pava & Krausz, 1995, p. 17)
In summary the first part of the study presents the main arguments of the neoclassical view on the Corporate Social Responsibility and on how the corporations should operate in order to be prosperous. First of all Milton Friedman argued that the only thing that should be of concern to the corporation and its managers are the profits. His arguments were based on the fact that the managers were hired by the shareholders to maximize profits and not to take over government’s role and act like civil servants. In essence everyone has their own role in the society and everyone should do their role as best as possible as they are most efficient in doing that role and when someone from society tries to do the role that they are not designed to do than the denial of capital market mechanism occurs and what Friedman refers to this as is leftism and socialism. Further in the essay in order to validate the arguments presented by Friedman, other economists like J. Richards argued his notion on corporations as being an idea and therefore not able to have responsibilities. Moreover Greiders and Hawleys counter CSR arguments were included in order to show the full scope of arguments against CSR.
Limitations of Milton Friedman’s Arguments
There are many critics of the neoclassical view on CSR and Friedman’s arguments. Number one is that Friedman’s arguments are very subjective and are based on assumptions without any scientific facts or evidence that back his argumentation. This is a big disadvantage for his side as the lack of information and evidence that would act like a backbone and strengthen his position acts against him. As a result questions like “does CSR really reduce the performance of the corporation?” arise.
Moreover, according to Friedman if corporations with money do not invest into the improvement of society and its employees, than who will? The main disagreement here between the two sides is that Friedman refuses to admit the fact that the economy, society, environment and the government are all interlinked between each other especially in the globalised economy, and you cannot view economy on its own without considering the other 3 factors. Friedman and many other economists tend to use of various economic theoretical models in order to illustrate their theories, however the models that apply to the economy usually do not apply to the real world as they tend to ignore many other factors like the government. In consequence he sees economy isolated from the society.
Friedman stated that the corporation is doing well as long as they are conducting their business legally and are operating at profit maximizing level. The author in the book makes a very strong argument against Friedman’s position as he states that his account on CSR in 1970 does not take the changing preferences of consumers and shareholders into account. What if the company is operating legally and maximizing profits indirectly with an enemy state during wartime? For example number of biggest U.S. Companies traded with Iran, North Korea, Sudan and Libya, due to the sanctions set by the Government they exported the goods to Dubai that were further re-exported the goods to Iran, North Korea, Sudan and Libya. (Aune, 2007, p. 215)
Michael Scherer conducted a research on a number of US companies, he found out that for example: That the Canadian GE works on four new hydroelectric power generators at the Kurun River dam that will benefit the Iranian oil sector. Additionally they provide the Iranian oil sector with the latest equipment including pipelines, compressors and turbines. However the trade is not done directly, as they have an Italian company called Nuovo Pignone that acts like a middle man. Or another example: one of the largest oilfield companies Halliburton’s subsidy helped building in one of the largest fertilizer plants near Iraq. They also provide Iranian National Oil Co. with $226 million drilling equipment, the CEO of Halliburton Richard Cheney also stated that “U.S. the sanctions against Iran and Libya hurt business and failed to stop terrorism”. There are number of other examples of the world’s largest companies including ConocoPhillips or ExxonMobil that at the end of the day trade with the “Axis of Evil” (Aune, 2007, p. 215)
According to Friedman and his idea of corporate capitalism as it should be all the companies that were listed above in the example are doing nothing wrong, as at the end of the day they first, maximizing profits for the shareholders and second, they are doing nothing illegal. (Aune, 2007, p. 216)
Therefore, according to Friedman all that matters is profit maximization, even over consumer interest and the public. Friedman’s logic is irrational; as we have seen from the example some profit-maximizing actions might threaten the security of the society which is far more important than the prosperity than any corporation.
Summarizing the limitations of Milton Friedman’s with globalisation developing the role of corporations changed since the time Friedman was studying economics, now with globalization it is far more integrated into the society and both of them have to work together in order to prosper as a whole, because a business will never be successful if the employers are unhappy and vice versa. Moreover, as specified above Friedman’s arguments are based on assumptions and as in James Aune states the “opponents of CSR [should] argue for their assumptions as well as their conclusions” (Aune, 2007, p. 216)
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Or his assumption that Market capitalism working by managers of corporations doing their role of satisfying the shareholders by creating profits. However at the same time he discounts the fact that “social justice as an essential part of the utility many consumers or shareholders may wish to maximize” (Aune, 2007, p. 213), again assuming that all shareholders do not wish to maximize utility but instead want to make profits.
Traditional View of Corporate Social Responsibility
Expectedly not everyone agrees with the views of M. Friedman on CSR among scientists, and entrepreneurs. In recent years, the social responsibility of business is seen as “social advantage” of the company. This idea was first suggested a professor at Harvard Business School, author of the theory of competitive advantage by Michael Porter in his article in the Harvard Business Review «New issue of philanthropy – the creation of value” in 1999
Porter points out that social programs are now used mainly by companies as a form of «public relations» or promotional purposes. For example, the tobacco digging Philip Morris (USA) in 1999, has spent $ 75 million to various donations, and then spent another $ 100 million on their advertising campaign.
However, there is another way in the implementation of socially responsible business: companies can also strengthen their competitive position by improving the quality of the business environment in the places where their activities are unfolding. As noted by M. Porter, using philanthropy as a competitive advantage of the company allows you to link social and economic goals and improve the long-term prospects of its development.
Corporate Social Responsibility and Performance
Friedman argues in his essay that companies are better off when they are maximize their profits, however this is not always the case.
The image of a socially responsible company – an investment in its business reputation. In fact, all other things being equal, people are more willing to go to work in a socially responsible than a socially irresponsible company, will buy its products, services, or actions. Suppliers and business partners will also be more interested in cooperation with the firm, which has a high reputation. Thus, in the long term, when various groups, ensure the correct behaviour of the company, it is likely to increase its income.
As written before, economy is interlinked not only with the society but also with the government and the fact that companies that behave in a socially responsible economic manner, not only improves the society, but also has some other benefits, such as, participation in the implementation of government orders.
Additionally, due to growing environmental and social problems CSR will always be a big topic, therefore more and more enforced regulations will be implemented like for example production standards or service quality or pollution quota, companies that are more socially responsible will therefore be prepared and would not need radical structural changes like the companies that did not engage in socially responsibility.
Finally, company that is socially responsible towards its employees will benefit from the favourable working climate and higher motivation that will further increase efficiency and output of the company. Moreover many texts argue that companies, especially large MNC have the financial resources to be more socially responsible. However in my opinion this argument is flawed as the availability of the financial resources does not necessary indicate the incentive to spend them.
Finally an example where CSR and Performance are positively correlated is in an article on Corporate Social Responsibility (Todd, Kristin, Baylor Business Review) Hollender CEO of Seventh Generation who was voted the best Social CEO of the year talks about transparency of the companies as the main stepping-stone towards social responsibility, he says that “Greater transparency is just the first step towards taking greater responsibility for the future that all of us are creating” and What’s true of transparency is likewise true of Seventh Generation’s effort to not onlysucceed in the marketplace and contribute to society, but to influence others to contributeas well,” he writes. “It’s a challenging, sometimes even bewildering odyssey that tests thespirit and will of each and every one of us.” (Todd, 2009)
There are limitations with defining CSR and there is no specific line that can be drawn to separate socially responsible and non-socially responsible companies, and the extent to how socially responsible the companies are. Therefore it is very difficult to see the effect of CSR on the performance on the company. Table 2.1 (Corporate Social Responsibility and Traditional Financial Performance: Summary of 21Empirical Studies — Principal Findings) (Pava & Krausz, 1995, p. 21) below, however, tries to demonstrate the effect of CSR on the financial performance. A study of 21 companies was conducted to see the correlation, if there is any, between CSR and financial performance.
Ullmann ( 1985)â€
From the following the main observation that is visible is that from the 21 one studies conducted more than half, 12 studies showed a positive association between CSR and financial performance, only 1 showed a negative association and 8 showed no correlation between the two. From this table we can conclude that CSR Firms do not perform worse than non-CSR this already goes again Milton Friedman’s theory that firms maximizing profits would do better than firms engaged in CSR. As he argues that any action that benefits the company cannot be socially responsible.
However we have a different view from a professor of University of California in his article: “CSR Doesn’t Pay,” he looks at we have previously discussed in the essay, the correlation between CSR and performance of the corporation. He writes that “The good news is that firms with superior CSR performance have notperformed any worse than their less virtuous competitors. But the disappointing news isthat neither have they done any better. For most firms, most of the time, CSR is largelyirrelevant to their financial performance.” Vogel gives Starbucks as an example. “Starbucks provides an example of the limitedimportance of CSR to financial performance,” he writes. “The firm enjoys a strong CSRreputation due to its generous labor policies and its commitment to improve the earningsand environmental practices of coffee growers in developing countries. Yet, since thebeginning of 2008, its shares have recently declined nearly 50 percent.” (Todd, 2009)
,”To assume that the business environment has fundamentally changed and that we areentering a new world in which CSR has become critical to the success of all or even mostfirms is misinformed. The market has many virtues, but reconciling corporate goals andpublic purposes is unfortunately not among them.” (Todd, 2009)
What Vogel says in this example is that CSR is completely irrelevant with the performance of the company and has no effect on the stock performance.
Finally Vogel states that there is no karma in business and “that good things will not happen to those who do good Managers should try to act more responsibly. But they should not expect the market tonecessarily reward them- or punish their less responsible competitors.” (Todd, 2009)
Summarizing the part performance and CSR, first the study talked about the positive aspects of the CSR and how it could help the corporations improve. Second part presented a study that demonstrated that companies involved in CSR do not do worse than companies that maximize profits. Finally the third part shows Vogel’s interpretations of CSR in terms of financial performance and that showed us that there is no correspondence with between the two. (Todd, 2009)
Social changes in society are successful when they consciously and responsibly involved the most significant force. Interaction of political, social and economic subjects, based on the principles of social partnership, ensures stable and gradual development of the state. With the increasing importance of non-financial factors of sustainable development, such as social stability, environmental safety, updated theoretical and practical aspects of social responsibility.
Relevance of research associated with the processes of globalization, reinforcing the role of large companies in the economic development. Nation-states are gradually yielding to pressure multinational corporations and economic independence, and social policy. Counter this trend is to be co-ordinated action, ensuring the achievement of indicators of social responsibility, which comply with international standards and principles of sustainable development.
Market globalization, the transformation of the national in the world, identifies the need for an economic entity of innovation in engineering, technology, labor and management, based on the use and application of science and best practices. At the center of all these phenomena is the intellectual capital – the quality of the labor force and motivation. The lack of comprehensive scientific developments in the field of modern management, social technologies complicates the interaction of domestic enterprises, government and society. In the implementation of socially responsible policy, the role of corporate governance, ensuring the achievement of social, economic and environmental goals of the enterprise. Science-based decision management problems can provide an enabling social and psychological conditions of the enterprise, to influence the development of relations with stakeholders in a timely manner to prevent social tensions, without violating the principles of economic efficiency.
Social responsibility is also manifested in the implementation of commitments made at the level of functional units of the organization, especially top management. Develop procedures for social policy, social programs, the performance criteria must comply with the rules and principles of public law. One way of forming objective information about the social impact of the company is to evaluate the effectiveness of non-financial risks, including – social. Actual development of common approaches to assessing the effectiveness of the implementation of socially responsible policies. Evaluation of the quality management affects the position of the company in the financial markets, maintaining a conflict-existence of society, sustainable development.
(CSR)Vogel says,”To assume that the business environment has fundamentally changed and that we areentering a new world in which CSR has become critical to the success of all or even mostfirms is misinformed.
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