Business of business is business

Written by YRK Reddy | Updated: Nov 25 2006, 06:05am hrs
Milton Friedmans contribution to laissez faire capitalism and the Monetarist School of economic thought is well known, as is the honour he won with the Bank of Sweden prize for economic sciences in memory of Alfred Nobel. His contribution to, and influence on, the thinking of a whole generation of business leaders and management students needs equal recognition and debate. He is remembered in management circles especially for the debate he raised on social responsibility of business and also for his famous statement that the business of business is business. He is also credited for promoting the concept that there is no free lunch. Probably, he even increased the attention to shareholder value, pursuit of profit, dynamics of managerial contracts, etc to a higher level than management science would have done by itself.

His essay in The New York Times magazine( September 13, 1970) created unending debate on the conduct of business and its relation to society. His essay The Social Responsibility of Business is to Increase its Profits was written against the backdrop of rising interest in socialist thinking. He criticised the tendency of businessmen talking about social responsibilities and social conscience.

A firm believer in the free enterprise system, private property and corporate growth, he strongly believed that corporations should not be levied with social responsibilities such as increasing employment, eliminating discrimination and avoiding pollution. It was the governments job, in his view. He put down businessmen who were eloquent about social responsibilities by saying: In fact they areor would be if they or any one else took them seriouslypreaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.

He believed that businesses do not have responsibilitiesonly individuals do. Executives must owe their duty to their employers i.e., the shareholders and not to society, he asserted. If executives pursued social responsibility, they would be imposing taxes on one set (shareholders) and spending them on another set which indeed are the functions of the State.

Interestingly, however, he did not find it necessary to denounce the ploy of corporations to use community work or tax deductible charitable work for gaining specific advantages for the shareholderseven if such acts were claimed as social responsibility.

His views influenced management education in many leading institutions, so much that ethics and CSR were not part of the curricula for a long time. Instead, they promoted a winner takes it all attitude and profits by whatever means as justified. In most firms, soft aspects of values, ethics, conscience, professional conduct, etc have been relegated or used only as spin to gain some other material advantage. His views ignited protests and a new segment of stakeholder theorists who want corporations to be responsible and give what they owe to society.

Much has changed in recent years. Shareholders being also consumers, employees and community dwellers, are demanding responsibility and accountability from companies. Institutional investors as well as boards of directors are being forced to keep in mind their fiduciary duties which would bring in elements of due care and diligence by not merely protecting shareholder money, but also preventing other adverse consequences of corporate action.

Greater activism by civil society organisations has also had its impact. There are demands for environmental impact assessments and triple bottom-line accounting. Many multinationals have started community work as part of their employee training and responsibilities. There is a great wave of giving awayBill Gates, Warren Buffet joining the band. Some like Amartya Sen have recognised the limitations of market forces and the need for attention to social issues.

Despite the stakeholder theorists, the debate on corporate social responsibility that Milton Friedman ignited is far from settleda majority of entrepreneurs and short-term investors would still feel privileged to carry his thinking forward with great conviction and fervour.