Does Friedman Get A Bad Rap?

There remains a strong widely-held belief among businessmen, entrepreneurs, and business students that the primary goal of a business is to maximise its profit.

Milton Friedman is often cited as the source of this view but they do a disservice to his 1970 paper “The Social Responsibility of Business is to Increase its Profits”.

First, the context. In the 1960s it had become popular for companies to support a range of charities – what was then termed Corporate Social Responsibility (CSR). Friedman argued that spending money on social causes unrelated to the core business was wrong and that instead the funds should be paid to shareholders as dividends who could then support charities of their choice, should they wish to. He was against such Corporate Philanthropy.

Perhaps CEOS thought they were following in the footsteps of great business philanthropists, such as Getty, Rockefeller, and Guinness. But mostly, these gentlemen gave away the money they had generated for themselves, their own money. Just as Bill Gates today gives away his own wealth and not Microsoft’s.

As Friedman says, in the article: “The situation of the individual proprietor is somewhat different. If he acts to reduce the returns of his enterprise in order to exercise his ‘social responsibility’, he is spending his own money, not someone else’s.”

Second, let’s look at the full quotation: “… 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.”

How many CEOs, who rely on this quote to justify their pursuit of profits, do so in “open and free competition without deception or fraud”? Certainly not the US and European financial institutions who led the world into the Global Financial Crisis nor the Australian ones whose behaviour was severely criticised by the Hayne Royal Commission.

As Andrew Cornell, writing in ANZ Blue Notes, states: “Critically, it is the ‘rules’ of the game which are complex and, long term, rely on a social licence as well as black-letter regulation. Understood more broadly, the ‘rules of the game’ are not just black letter law but those principles which govern behaviour – they are set by society, by providers of capital, by staff, by customers.”

Modern businesses are not engaging in CSR (first make a profit and then give some back to society) and are world’s apart from the corporate philanthropists of the 1960s. They start with a clear consumer (or societal) purpose.

• Danone – to bring health through food to as many people as possible
• GSK – to help people do more, feel better, live longer
• Philips – to make the world healthier and more sustainable through innovation

These and others are embedding environmentally-friendly and sustainable practices into their day-to-day operations as described in a recently-published book.

“All In: The future of Business Leadership” by D Grayson, C Coulter & M LeePublisher: Greenleaf 2018.

Should be required reading for all C-suite executives!