A Response to Friedman on CSR

Milton Friedman would not be happy with how corporate social responsibility (CSR) has grown to the phenomenon, even doctrine, it is today. In 1970, he published a famous article in The New York Times arguing against the practice of “social responsibility” by corporations. I will attempt to respond (mostly disagree) with his arguments and conclusion in the article.

(Of course, I would think there have been many, more detailed and rigorous responses, of which I have not yet the opportunity to read. I do not claim my responses are original or rigorous, such as when it comes to legal and moral concepts of personhood or the basis of moral responsibility.)

Friedman’s main argument is that corporate executives, being employees of the firm and agents of the shareholders, are tasked with, and should thus only fulfil, the stated goal of the company (for simplicity, we’ll turn to the standard one which Friedman also refers to — maximizing profits — which undoubtedly tallies with reality).

Put simply, the business of business is to do business. Other objectives, such as social and environmental responsibilities, are not part of a corporation’s purview.

Who actually can be responsible?

Friedman first attempts an “analytical” approach — or at least, he claims that “the discussions of the ‘social responsibilities of business' are notable for their analytical looseness and lack of rigor.” Friedman counters by claiming that only people can have responsibilities, and a corporation “as a whole” cannot.

Friedman thus seems to be calling for a purely individualistic view of (moral) responsibility. Indeed, he describes a corporation as a “collectivistic means”, which implies it is not a collective per se.

Yet, one can ask why this must be the case. Yes, a corporation is not an individual, and yet, it is comprised of, made by, and acts for, individuals. Friedman concedes that individuals may have responsibilities. We may ask why such responsibilities are shed once these individuals come together to form an institution. Why should an institution, being an extension of individuals, not maintain their responsibilities as well? If I team up with someone to form a group for some purpose, forming what is, in effect, an institution (of the smallest kind — a pair), are we not bound by basic ethical duties and moral responsibility, simply because we are acting as a collective?

Friedman also makes the distinction between a “person” — in the sense of you and I — and an “artificial person”, that of a corporation, which he then claims cannot be said to have such responsibilities.

We may ask what does “artificial” mean here, and whether it should be a meaningful characteristic in terms of differentiating implications? If it means that the entity exists not by “nature”, then would people born from IVF not have responsibilities to society? If we broaden our definition, anyone born with the help of modern scientific equipment could be considered partially “artificial persons” too. Almost all individuals are also shaped by non-natural forces — such as culture, laws and education.

(In using “artificial”, Friedman could also be referring to the fact that corporations are actively created for a particular purpose — as decided by their owners. I address this in “The Alternative of Politics” section.)

In short, Friedman’s distinction between what is “natural” and “artificial”, between the individual and collective, not to mention why and how it should matter for the capacity to have responsibilities, is not clear — both definitionally and in terms of its implication.

A tale of two responsibilities

But Friedman’s main argument is convincing (and have convinced many)— corporate executives and employees should do what they are paid to do; they are “employee[s] of the owners of the business” and “ha[ve] direct responsibility to [their] employers.” Again, following Friedman, let’s assign this responsibility as the common one, of profit or share price maximization, or in his words, “to make as much money as possible”.

There is a strong moral (at least Kantian) force to this argument. If we don’t follow our obligations, no one would believe in obligations anymore. Universalizing the act of not doing what we’re supposed to do undermines the entire institution of corporations, and there would be no such things as agreements and obligations.

One possible response is why does an agent, who acts on behalf of his (I’ll use this masculine pronoun for simplicity and no other reason) principal, does not incur the social obligations or responsibilities of that principal too? If shareholders individually have some responsibilities to society, why do social responsibilities disappear simply when someone else is acting on their behalf?

But the more important point is that the responsibility to shareholders to make money need not be the executive or corporation’s sole, exclusive responsibility. For example, I don’t think many would approve of a hitman agency, where a corporation gets away with killing people even if it could profit from it. Our obligations to achieve something — even if we have undertaken it for others — does not mean we are free to do it in any way we want. Being an agent of some person does not absolve one of the responsibilities and obligations of an ethical person, and of that person.

(Of course, one could make the argument that in the long-term, the negative legal and social consequences make it unprofitable in the long-run, so let’s assume this firm can do its business discreetly, without being caught. But then that means that the only consideration to determine if the firm should engage in the act of killing is the ability to not get caught.)

This is an extreme example, to be sure, but it goes to show that corporations are bound by some basic, at least very bare — ethical considerations. Even if firms have a responsibility to maximize profits, it has other responsibilities and obligations, equal in, if not of overriding, importance. Our social obligations do not end just because we step into a boardroom or act in the name of someone else.

Friedman concedes this. He says that corporations should “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”.

Therefore, the core disagreement between Friedman and CSR advocates is actually a disagreement about what the “ethical custom” dictates or requires (I avoid referring to the law since it varies across jurisdictions, but we can consider law as a codification of our ethical duties, and the argument would apply).

This is especially since the issue arises only when our responsibilities to our principal (shareholders) and our wider social obligations conflict. When Friedman says “[t]he executive is exercising a distinct ‘social responsibility,’ rather than serving as an agent of the stockholders” (emphasis added), he suggests that, at some point or in some circumstances, there is some conflict.

Here, political ideologies and “-isms” abound about what should be considered our social responsibilities. Friedman was a libertarian. In principle, libertarians believe in the fundamental right of individual liberty, and the unfettered markets that go along with it. They call for a minimal-interventionist state, one that only enforces contracts, protect private property from theft and keep the peace. The only government intervention that is justified is that which ensures economic efficiency.

In Friedman’s words, “in an ideal free market… [t]here are no “social” values, no “social” responsibilities in any sense other than the shared values and responsibilities of individuals. Society is a collection of individuals and of the various groups they voluntarily form.” The libertarian ethic fits nicely with Friedman’s claim that employees or executives only have responsibility to their principals, since there are minimal obligations to society — social responsibilities are justified insofar as they ensure individual liberty (and business profit).

But I believe we have responsibilities to society that go beyond that. Here, we may distinguish between positive and negative duties. Friedman seems to support only negative duties — duties not to harm others — but not positive duties: to render assistance to others, beyond what is minimally required, beyond the status quo. I believe we have positive duties as well, at least to help the least advantaged, while ensuring we engage in the most profitable and effective businesses given that obligation (for the strongest philosophical argument for this form of egalitarianism, see Rawls).

At this point, it is difficult, at least for me, to argue that Friedman’s libertarian ethic is inferior to other, more socially-conscious ideologies. I could make claims that humans are social animals and thus we have a responsibility to the common good, or invoke some religious authority or inspiring quote. But these arguments are ultimately based on ethical axioms — you either believe in them or not. Here, neither Friedman nor egalitarians have the ultimate say.

Indeed, when Friedman argues that “the doctrine of “social responsibility” involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses”, he is implicitly revealing his libertarian worldview, suggesting it is the right one, as opposed to the “socialist view”.

But he offers no independent basis for that claim, not that I think is it possible to. Still, for the American audience he is addressing, for whom the word “socialism” is anathema in political culture, that is perhaps enough.

But I would say it is not.

Friedman’s consequentialist concerns

Friedman makes several other arguments of the consequentialist vein that are worth briefly mentioning (despite the fact that he stresses the importance of principle when dismissing the positive consequences of CSR — whatever arguments support your desired conclusion, I guess.)

The first is that financial objectives are easier to measure, and social good is not. This is an important issue plaguing CSR, to be sure, such as the dispute over the methodology of ESG ratings. But this is a practical issue. Clarity or ease of implementation does not imply rightness. What we’re comparing is the good corporations can do versus the counterfactual of no good at all.

The second is that corporations, executives and employees may not know what is the most effective and beneficial way to engage in CSR. Certainly, CSR activities, when done, should be done as efficiently as possible to benefit as many as possible. However, we may ask if there need to be, in principle, a minimum qualification or credential for one to do good. Must one be an exclusive member of a “I Know The Best Way to Do Good” club to do good? If such a standard exist, we are excluding many do-gooders. Again, this is a question of implementation, not motivation or rightness. The answer is to improve the firm’s CSR decision-making and implementation processes, not abolish them entirely.

Another argument is that in the long-run, corporations that do CSR would become less competitive, and executives who engage in CSR would be fired. Fortunately, there is empirical evidence that firms engaging in CSR also improve their firm value, since it is what customers increasingly expect, arbitrary and contingent on this outcome though it is. Firms may survive and even profit because of CSR initiatives.

But what if they don’t generate profits from goodwill? Then we must make CSR not only part of the ethical custom, but enshrined into law, putting all firms on the same footing.

Finally, and perhaps most importantly, Friedman argues that using “the cloak of social responsibilities” ultimately “harms the foundations of a free society in the long run”. Such an attitude, according to Friedman, is detrimental in the long-term, since it “affect[s] the possible survival of business in general". It “strengthens the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces”, which will be done by politicians without the skills and knowledge of the businessman.

Surely this is an outcome to be concerned over. And yet, I would say that no credible or mainstream CSR view argues for the abolishing of business, nor denies the economic good it does.

The alternative of politics

Friedman does not ignore or dismiss the social good entirely. He reminds us of an alternative — the political mechanism and its accompanying taxation and economic transfers. Indeed, it is what government is meant to do. He concedes that under the political mechanism, “[t]he individual must serve more general social interest”, that “[i]t is appropriate for some to require others to contribute to a general social purpose whether they wish to or not”.

Here is where I think the heart of Friedman’s argument against CSR lies: A corporation should do what a corporation is meant to do. Broadly, institutions should do what they are set up for. That is the basis for its existence and the justification of its activities. To misquote the existentialist, “essence precedes existence”.

Similarly, social good should be achieved by the institution which is meant to do precisely that — the government and the political process. Indeed, Brenkert (1992) argues that encouraging CSR is dangerous since it cedes the activities and spirit of the public square to private firms. We absolve ourselves of our responsibility to society by passing the buck to firms.

Thus, for Friedman, “the exercise of social responsibility by businessmen”, though it could be “a quicker and surer way to solve pressing current problems”, “must be rejected on grounds of principle… In a free society, it is hard for “good” people to do “good,” but that is a small price to pay for making it hard for “evil” people to do “evil,” especially since one man’s good is anther’s evil.”

If we fail to do social good, then “those who favor the taxes and expenditures in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures”. (Here, issues of the tyranny of the majority and rationality would be pertinent, but I leave it for now.)

One can’t help but admiring this principled stance which respects processes and institutions. And Friedman is (partially) consistent in recognizing that principle should apply to companies that engage in “CSR” : He characterizes firms which use the doctrine of social responsibility as “a cloak for actions that are justified on other grounds rather than a reason for those actions” as being hypocritical. In the age of greenwashing, we should heed his warning of firms which merely engage in CSR “to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest”, and yet no actual social benefits are achieved.

(Still, Friedman does not call on them to refrain from this practice since it “harms the foundations of a free society”, and that “institutions, and the attitudes of the public make it in their self‐interest to cloak their actions in this way”. Friedman is a principled libertarian to the very end.)

But again, I do not believe this necessarily excludes the role that firms can play in addition to what governments already do. There is no reason why the “scope of the political mechanism” cannot extend to corporations too, as Friedman worries in his concluding paragraph.

Yes, “collectivist ends can be attained without collectivist means” (emphasis added), and yet, it need not be the only path. Similarly, Brenkhart’s concern, while valid, may be an overly false choice.

Certainly there are issues of effectiveness and practicality to be hammered out. Nevertheless, just as the concept of the corporation — its nature and obligations — has evolved through history, it can and should evolve again. Exactly because a firm is an “artificial person”, we can and should actively change what it is meant to be — into an institution that does social good.

What role should corporations play in society?

Ultimately, while I don’t agree with Friedman’s conclusion, he has identified a key point, that corporations only have responsibilities insofar that they must conform to “the rules of the society… embodied in ethical custom”.

And that is the ultimate point. The question we should be asking is what ethical custom we should have; what society should we strive to become? I would propose a society whose ethical custom involves its corporations having the responsibility to help improve the social good, both because it should in and of itself, and because it is a way to reciprocate given the benefits of that society (the minimal state). Economic output and growth is not enough, since that does not deal with the distribution — that practical nuts-and-bolts that gets the benefits in the hands of people — of that output.

In that sense, CSR advocates should be exposed to Friedman’s argument against CSR. It is only by carefully considering and engaging with Friedman’s argument — that corporations are only bound to society’s minimum ethical customs whilst fulfilling their core business activities — that we can we come to give greater legitimacy to CSR. We shouldn’t do CSR because it all the buzz right now, or sounds good. We should do CSR because we consciously choose to engage in CSR, that we assign it as part of firms’ necessary responsibility to society, a society we want to cultivate.

It is risky, to be sure, that people may leave agreeing with Friedman’s conclusion instead. And yet, if corporations should do what they’re supposed to do, it is precisely when we (artificially but intentionally, with meaning) decide to add this social responsibility to the essence of the corporation, will CSR truly survive, in the long run and in principle, not merely when it generates profits from goodwill or when the world is burning.