Ashland Oil Company
How do companies grow from advocates of corporate responsibility to businesses with systems of accountability and governance? Professions of “good intentions” or “social responsibility” are obviously not enough. The recent proliferation of ethical controversies underscores the need for more verifiable ethical paradigms.
It might be constructive to venture into territory that those who fashion themselves as progressive business thinkers might think taboo – the writings of Milton Friedman, who is often caricatured as a “right-wing” capitalist. In a now classic analysis, Friedman endorsed a limited concept of corporate social responsibility. He concluded that businesses that act in the best interest of shareholders maximise the benefits to all stakeholders:
“There is one and only one social responsibility of business – to 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 … By pursuing [a person’s] own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”
Friedman’s cynicism about “trading for the public good” paraphrased Adam Smith’s argument that those who trade by the “invisible hand” may contribute more to the public weal than those who claim altruistic motives. Under this thesis, corporate social responsibility is fulfilled by the moral constraints of maintaining open competition, establishing a framework for the rule of law, avoiding deception and exemplifying fair play.
“The only entities who can have responsibilities are individuals; a business cannot have responsibilities,” wrote Friedman. “So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no, they do not.”
This view has been mischaracterised as endorsing roguish corporate behaviour in the service of enriching stockholders. Not true. Friedman acknowledged the ripple effect of a successful business such as increased community wealth, rising educational standards and an improved environment – all positive social consequences of progressive business. He notes that when Henry Ford built the Model T he realised that the long-term success of the automobile industry rested with creating a mass market for his products. Committed to making his new car affordable to even his own workers, Ford Motor paid wages twice the going rate. Although he was viciously criticised by the business community for such “generosity” and successfully sued by outraged stockholders, Ford proved prescient. He made enormous profits, the industry moved to his standards, and the automobile was transformed from a luxury to an affordable staple. He charged an “integrity premium” for his higher quality and more responsible products and eager consumers willingly paid it.
Key to Friedman’s beliefs and integral to the concept of the integrity premium is the idea that doing good can add competitive value to products or services and should not [next page]