Online Extra: Social Responsibility: 'Fundamentally Subversive'?

Economist Milton Friedman explains how companies are just serving their own interests when they serve the community

[for Home Depot CEO Robert Nardelli's opposing view, see "Social Responsibility: Do the Right Thing"]

Q: Your 1970 article on social responsibility is entitled "The Social Responsibility of Business Is to Increase Its Profits." Does that belief still apply today?


Yes, I still hold fully with that article. I haven't seen any reason to change or add anything to it.

Q: So nothing has changed in the operating environment that might make companies need to engage with the community more today than in the past?


It's covered in that article. I point out that a company that is playing a large part in a community may want, for its own purposes and profit, to maintain good relations with the community and to engage in community activity. In doing so, it would be pursuing its own profit. But, of course, it may believe that it will be better public relations if it labels its actions an act of social responsibility. I believe most of the claims of social responsibility are pure public relations.

Q: How have the 24-hour news cycle, the Internet, and active nongovernmental organizations changed the social responsibility of companies?


It depends on what you mean by engage socially. There is only one basic question: Are companies spending money for a purpose other than increasing their profits? How they label it -- whether they call is social engagement or social responsibility -- is not the real issue.

Q: Companies like Home Depot (HD ) say they generate a return on investment from social projects in areas such as increased employee productivity. Is that logical to you?


Of course, the secret to successful companies is it gets its workers to be productive. How does a company pay its workers? It has cash payments. But it has all sorts of add-ons like medical care.

Is it doing that for social responsibility? No, of course not. But because the government treats medical care as tax-exempt when it is provided by the employer, it is in the self interest of the company and the employee to have the employer provide it. That's not a social responsibility. That's simply providing something the employees like that makes the job more attractive to them.

In the same way, it may be that Home Depot employees get satisfaction out of building playgrounds and that makes them more loyal to Home Depot and makes them more productive. Moreover, it may be that building playgrounds is a good way to show off, advertise some of Home Depot's best-selling products. Come to the bottom line: Is Home Depot spending directly or indirectly any substantial fraction of its profits on such social activities? If so, it would get competed out of existence.

Q: Among U.S. corporations, are we moving toward more of a stakeholder model of governance, in your opinion?


No. I think we are moving toward more of a stakeholder language. I do not believe there has been any change. It's just the talk that has changed. Somebody produced the concept of stakeholders -- an ancient concept, of course. It's clear that you have a division of responsibility.

The owners of the corporation are shareholders. The managers of the corporation are employees of the owners, supposedly controlled by the board of directors. Corporations are big things. There are lots of so-called stakeholders. Here's something that Adam Smith said in 1776, "I have never known much good done by those who profess to trade for the public good." It's a good quote.

Q: Take this example: Coca-Cola (KO ) faces challenges from environmental activists in India and labor activists in Colombia. Their calls for a boycott of Coca-Cola reverberate on U.S. college campuses where students are voting to, in some cases, oust the product. Should Coke consider those activists as stakeholders who need to be addressed?


No. They should not consider those activists as stakeholders. They should consider them as problems for running the business. They have to be counted, and it's perfectly sensible for Coca-Cola to spend money on trying to reduce the influence of such groups. It may be that the most efficient way to do that is by pretending that they are stakeholders. But they aren't stakeholders.

Q: In your book Capitalism and Freedom, you called the doctrine of social responsibility "fundamentally subversive." Is it still?


Absolutely. It is just as subversive as it ever was. The idea that the resources of a company should be distributed by people on some basis other than ownership and by people who are not elected for that purpose -- surely, that is a socialist concept.

Q: What do you think of General Electric's (GE ) mantra that it must "do good to do great"?


It's good public relations. Look, I have no objection to companies using good public relations slogans. But they should not kid themselves into thinking that in the process they are doing something other.

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