Are Profits the Only Business of Business?

Here's an essay that I wrote in college, around April 20th 2006. It is about the social responsibility of corporations.

In the wake of the scandals that have rocked the corporate world, an issue that has been brought to the forefront, debated widely in newspapers and has everybody’s attention is, “are profits the only business of business.” The articles provided for this discussion have the distinguished Milton Friedman, 1976 Nobel Memorial Prize winner for economic science arguing that profits are the only business of business and Robert Almeder, Professor in Philosophy at the Georgia State University arguing that there is a social responsibility of business that goes beyond profits seeking. From the outset of this argument, the undeniable fact is that the primary business of business is to make profits and be profitable. The point of contention is whether making profits is the “only” business of business.

“There is also one and only one social responsibility of a 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.” –Milton Friedman.

Does this famous assertion, made by Milton Friedman more than three decades ago, hold true today? Was Mr. Friedman assuming human morality as a given when he set the rules of the game, i.e. without deception or fraud. Maybe this assumption stemmed from his belief in Adam Smith’s laissez faire and the invisible hand that regulates the market. While the answers to most of these questions could only be speculated upon, the one question that requires a definitive answer is if in the 21st century economy there is a social responsibility of business that extends beyond generating profits, a responsibility to the society that involves moral, ethical and charitable considerations.

Let us first take a closer look at the “rules of the game” and see if we can show that this does not hold true in at least one instance. Mr. Friedman describes the rules of the game as open and free competition without deception or fraud. So the question then is, can a company engage in activities that are legal and yet immoral? He puts forth the argument that morality is subjective, what is moral to you can be immoral to me. For that reason, let us use Mr. Almeder’s example of “murder for profit.” Hopefully, we all agree that killing for money is immoral for the simple fact that it is impossible and more importantly immoral to place a monetary value on the life of a human being. The infamous Cost-Benefit Analysis of Ford Motor Company in rationalizing the decision to not recall the defective Ford Pinto is a perfect example of how one corporation decided the monetary value of a human life.

One of the tools that Ford used to argue for the delay was a "cost-benefit analysis" of altering the fuel tanks. According to Ford's estimates, the unsafe tanks would cause 180 burn deaths, 180 serious burn injuries, and 2,100 burned vehicles each year. It calculated that it would have to pay $200,000 per death, $67,000 per injury, and $700 per vehicle, for a total of $49.5 million. However, the cost of saving lives and injuries ran even higher: alterations would cost $11 per car or truck, which added up to $137 million per year. Essentially, Ford argued before the government that it would be cheaper just to let their customers burn! (Engineering.com)

In this case Ford Motor Company was within legal limits because it was willing to pay the fines yet was undeniably unethical. We can therefore logically conclude that a business has a social responsibility that is an amalgam of profit and moral considerations.

In addition to moral concerns, let us investigate the possibility that there could also be an obligation for corporations to be charitable. Mr. Friedman does not believe that a corporate executive has a social responsibility in his capacity as a businessman to be charitable. According to him, a corporate executive has only one business and that is to perpetuate the interests of his owners, the stockholders, or in layman’s terms, make the stockholders richer. In a purely capitalistic world this would be true but in the real world, which is the world we live in, capitalism does not exist in its truest form because history has shown that there is a need for market regulation through government intervention. As a result of living in a society that has a portion of socialism thrown into the mix, there arises the need for a business to be charitable.

Let us look at Wal-Mart, a pioneer in the discount retail industry, efficient, innovative, tremendously successful and highly profitable. It has obviously attained its primary goal to be profitable, however, does it have an obligation to be charitable? According to Fortune 500, Wal-Mart posted a profit of more than 11 billion in 2005 yet over half of its 1.6 million employees cannot afford or are ineligible for medical insurance and have their healthcare subsidized by their states (walmartwatch.com). According to Milton Friedman, the CEO Lee Scott has carried out his responsibility of increasing the wealth of his stockholders. He however has failed as an employer to look after the interests of his employees, which has resulted in lawsuits and petitions in many states to create laws to protect the interests of the employees. Government intervention in the economy is the antithesis of the capitalistic ideology but cannot be prevented if corporations do not look after their employees. It is the employees who elect their representatives to form the government; hence pure and unrestricted capitalism is surely the high road to a socialist or authoritarian society. The only way capitalism can survive is if it includes socialism in its capitalist practices. Wal-Mart has had to learn it the hard way. Months of bad publicity have finally forced it to make its practices more humane.

Wal-Mart, the world's largest retailer, has been urged by some of its own shareholders to clean up its act. It follows a series of embarrassing incidents such as its recent fine for employing illegal immigrants and a class action sex discrimination suit. Some of its largest investors have written an open letter to the US group demanding action, saying its employment practices are hurting its shares. (BBC news)

Eventually Wal-Mart gave in and came up with the value plan which aims to:

Reduce the waiting period by half for part-time associates. All Wal-Mart associates – both part-time and full-time – can enroll in company plans after no more than 12 months of work; and Offer health coverage for children of all eligible Wal-Mart full-time and part-time associates. (Walmartfacts.com)

An article in the Wall Street Journal, on the 18th of this month, highlighted the story of Dr. McGuire, CEO of United Health Group Inc., one of the nation’s largest health-care companies. According to the same article, 46 million people lack medical insurance because they cannot afford the high premiums companies like United Health Group Inc. charge yet Dr. McGuire draws $8 million a year in salary plus bonus, enjoying perks such as personal use of the company jet. He also has amassed one of the largest stock-options fortunes of all time. Unrealized gains on Dr. McGuire's options totaled $1.6 billion, according to United Health’s proxy statement released this month. Even celebrated CEOs such as General Electric Co.'s Jack Welch or International Business Machines Corp.'s Louis Gerstner never were granted so much during their time at the top. The company is under investigation by the Securities and Exchange Commission to see if the executives used any unethical means to get rich. (WJS.)

In the modern society the social responsibility of business goes beyond mere profits. Consumer awareness has forced companies to make their practices more transparent. What is amazing is that today a corporation’s profitability hinges on the public’s perception of its ethical values. In a survey by The Conference Board, roughly 46 percent of Americans say they have either purchased from or spoken out in favor of a company that they considered socially responsible in the past year. Consumers are slightly more likely to dis a business if it scores low on social causes: 49 percent say they've avoided buying a firm's products or spoken critically of a company in the past year because of negative perceptions. The U.S. survey is part of a larger worldwide poll of public opinion on the changing role of companies. More than 20,000 interviews were conducted in 20 countries, including China, Russia, and South Africa. Globally, more than one in five respondents say they've taken some action because of a corporation's dismal social performance. What matters most to U.S. consumers when they're judging companies? Collectively, roughly 56 percent cite a corporation's social responsibilities, such as labor practices, business ethics, and environmental issues (American Demographics.)

A large number of corporations make donations to various charities every year and this is a growing trend.

Then there is the Bill and Melinda Gates foundation. Bill Gates and his wife, Melinda, have endowed a foundation with more than $28.8 billion (as of January 2005) to support philanthropic initiatives in the areas of global health and learning, with the hope that in the 21st century, advances in these critical areas will be available for all people. The Bill and Melinda Gates Foundation has committed more than $3.6 billion to organizations working in global health; more than $2 billion to improve learning opportunities, including the Gates Library Initiative to bring computers, Internet Access and training to public libraries in low-income communities in the United States and Canada; more than $477 million to community projects in the Pacific Northwest; and more than $488 million to special projects and annual giving campaigns. (Microsoft.com/billgates)

In conclusion, social responsibility is a necessity if capitalism is to survive. Companies like Goggle, Home Depot, Pfizer, Starbucks and even Nike are changing the way businesses do business. Social responsibility is no longer an obligation instead it is has become a credo for many a successful corporation. So where does one draw the line as to how much charity is enough charity? Who decides morality and where does social responsibility begin? This is the debate of the 21st century corporate community and as some of them like Enron are finding out, morality and ethics are far more clearly defined than are made out to be. My prediction is that this century belongs to the corporations that are not just driven by the bottom line but are living to make a few sacrifices for the greater good of the society and as many will find out the hard way, in the betterment of their fellowmen lies their best interests and their profits as well. Robert Almeder perfectly summarized these issues in a rather succinct statement he made in his paper, “morality in the marketplace,” “Indeed if what I have been suggesting is correct, the only kind of enduring capitalism is humane capitalism, one that is at least as socially responsible as the society needs.”