Social Responsibility & Profits

1. “THE SOCIAL
RESPONSIBILITY OF
BUSINESS IS TO INCREASE
ITS PROFITS” –
MILTON FRIEDMAN, 1970 –
A CRITICAL ANALYSIS
by
• Cheryl Mayers-Goddard
• Claire Sargeant
• Lisa Haynes
Group 3 of the Durham Caribbean MBA

2. CONTEXT OF STATEMENT
THE STATEMENT:
 “The social responsibility of a business is to
increase its profits.” (Friedman)
THE CONTEXT:
 Who When Where Why

3. Social Responsibility + Profit
Definition of Social Responsibility as it relates to Profit
 Taking into account “the interests and concerns of a community rather
than just its shareholders” (Sloman et al, 2010);
 “a business‟ obligation, beyond that required by law and economics, to
pursue long-term goals that are good for society” (Robbins et al, 2005);
2 views of the Responsibilties of Corporations in a Social Context:
 Classical: A company is committed solely to increasing the wealth of its
shareholders
 Socioeconomic: a company must also consider others and society into
its allocation of resources
 Reindhartd et al (2008) queried whether firms:
 Can do this within their scope as laid out by shareholders
 Have the wherewithal to sustain such an activity over time

4. Friedman‟s Hypothesis
Supporting arguments used by Friedman:
 “A corporation is an artificial person and
therefore cannot be socially responsible.”
 “Social responsibility concerns the proprietors
and corporate executives.”
 “If social responsibility is exercised it is acting
against the shareholders, owners of the
business.”

5. Our Position
VIEW: A business has a responsibility to increase its
profits and to be socially responsible towards its external
environment. Adopting a synergistic approach vs. a
singular approach, will benefit both the stakeholders and
the corporation.
 A business should engage in socially responsible projects
but under certain conditions:
 Criteria:
 Create Future benefit to the business – direct or indirect
 Advance the corporation‟s goals
 Be justifiable to shareholders

6. Pros & Cons of
Friedman‟s Statement
 Points of Agreement:  Points of Disagreement:
 Reduced profits in short run  Lost opportunities to build
equity and goodwill
 Possibility of discord with
shareholders  Hurt corporate image in public‟s
eye
 Increased cost of products
 Exclude entire segment of
socially conscious investors
 Good corporate citizens
perform equally well in market.
 Business are interdependent
on elements in its ecosystem.
 Sound business sense not to
alienate stakeholders.
 Creates cognitive problems/
conflict within managers‟
personal value system (agency
problem)

7. ECOSYSTEM IN WHICH
A BUSINESS EXISTS
A business does not exist in isolation: “The organisation
cannot operate in
isolation from the
environment of which
it is a part...The
Financial Social & Governmental
economic efficiency of
organisations is
affected by
governmental, social,
technical and cultural
THE
CORPORATION variables.
Organisations make a
contribution
to the quality of life
and to the well-being
of the community”
The Environment Moral + Ethical (Mullins, 2005)

8. Examples
Examples of companies and scenarios where Friedman‟s
recommendations were practiced (pure capitalism, free
enterprise, free market system) and failed
 Enron, US Housing Market Crash, US Banking System, Stanford
Financial Group, Bernard Madoff – Ponzi Scheme
Examples of companies where a balanced synergy of
profit seeking and social responsibility are being
achieved successfully
 Starbucks, IBM, Google, Nike, Gap Inc., Hallmark, Dell

9. A Synergistic Approach (cont‟d)
FINANCIAL –
Synergistic Approach is Optimal
 Supernormal Profits (Friedman‟s Model is
unsustainable)
 Unsustainable in long run, can negatively impact
bottom line
 Unsustainable and result in a loss in long run
 Law of Diminishing Returns
 Returns to Scale
 Financial Loss

10. A Synergistic Approach (cont‟d)
2007 – 2010 Financial Donations: Employee Participation 2008 - 2010 Financial donations and volunteerism:
Total employee contribution
Financial Year 2010 2009 2008 2007
Dividends paid per share: $0.40 $0.34 $0.34 $0.32
Earnings per share: $1.88 $1.58 $1.34 1.05

11. A Synergistic Approach (cont‟d)
SOCIAL & GOVERNMENTAL – (e.g: communities, workers,
labour unions, trade unions)
Social Partnership: Two entities need each other to survive.
Businesses help share the social burden with government
Government/Society Benefits from Businesses:
Societal: Opportunities for Social Advancement with Incomes Earned, Educate staff, Solve
unemployment concerns, Pay health care costs for workers, cheaper products for consumer –
pass savings on to consumer
Governmental: Help stimulate economy by expansion of operations, job Creation with tax savings vs.
pocket all the profit, add capital in joint venture projects – affordable housing, charitable donations
to meet needs in society, „Creative Capital‟ ( Bill Gates, Microsoft)
Business Benefits from Government:
Financial/Regulatory Assistance: Tax concessions, Tax exemptions, Trade
protection, Subsidies, Provision of statutory and regulatory bodies

12. A Synergistic Approach (cont‟d)
MORAL & ETHICAL – (e.g suppliers, workers,
communities)
 Utilitarian Ethics (Mill)
 greatest good for greatest number of people
 Virtue Ethics (Plato)
 do what is morally advisable
 Universal Maxims/Natural Universal Laws &
Principles
 Balance + Equilibrium
 Reciprocity
 Homeostasis