Corporate Social Responsibility And Profitability: A Refutation Of Milton Friedman’s Views

Understanding Corporate Social Responsibility

Question:

Milton Friedman classically argued that the purpose of a private firm is to make money for its shareholders. Any attempt to impose more payments on the firm by way of social responsibility is an additional cost and should be avoided. Do you agree with this statement? Discuss briefly.

I totally disagree with the statement of Milton Friedman that a company’s purpose is only to earn profits for the sake of the shareholders and that the cost of social responsibility is a burden for the company that should be avoided. As we all know, that the primary reason for running a business is earning profit. However, it is not possible to survive in the long run if it only aims at earning profits. It is equally important to fulfil the responsibilities towards the society(Agarwal, 2008).

Milton Friedman is of the view that they should focus on maximising the return of the investors rather that incurring additional cost on fulfilling the social responsibilities. He is of the thought that such activities distorts the economic freedom of the company and also that the investors have invested their funds to earn higher returns and not perform charitable activities (Baxi & Prasad, 2006). These charitable activities will not increase the revenues of the company in any manner. He thinks of economic benefits prior to the ethical needs of the company. According to him, it is the sole responsibility of the company to think of ways by which it can maximise profits and all these activities are wasteful expenditures.

In order to explain my view point clearly and precisely, it is first important to understand the meaning of corporate social responsibilities and its importance. Corporate social responsibility is the responsibility of the business towards the social welfare and the environment. It is the social responsibilities of the companies in existence to maintain a balance between the profits and the activities that has certain benefits to the society. There are large numbers of companies that have adopted various approaches to avoid any kind of harm to the environment (Chandrasekaran., 2011). However, the shareholders will never demand profits by keeping stake on the societies needs as they also are a part of the society.

A company can successfully run only when it maintains a good reputation in the market. The reputation of the company is not build in a day. We can also say that the goodwill of the company is formed only by performing activities benefits the society in a day or other. It is build over time when the society observes the activities carried out by them (Chatterji, n.d.). One of the main reasons for my disagreement with his statement is that a company needs resources to carry out its operations smoothly and these resources finally belong to the society. The society has provided license to the companies to use these resource. So, it is the duty of the business enterprises to look after the betterment of the society and fulfil the social obligations.

Disagreement with Milton Friedman’s View

According to the Iron Law of Responsibility, the society can revoke the license anytime when it feels that a company is not capable of fulfilling the social needs of the society. Hence, it is impossible for the company to survive for a longer period of time.

The investors not only demands higher return on their investment but also want the company to behave in an ethical manner. It is a known fact that a company cannot grow and improve its performance over the years if it does not work efficiently and ethically. The investors would never like to invest in a company that behaves unethically because it becomes difficult for them to trust with their hard earned money. Now, let’s talk from the point of view of the customer. Every business needs to increase sales in order to generate revenue (Crane et al., 2008). Indirectly, the business requires a huge number of people in order to survive in the competitive market. It is important to attract new customers as well as to retain the old ones. It is a loss of reputation for the company if the old customers lose their faith in the company. All the customers before buying the product see the environmental impacts that it had while getting processed because normally these additional cost are included in the price of the product which results s a burden on the customers. Therefore, we can conclude from this that along with the investors customers are also an essential part and so their needs and desires should also be given equal importance(Katamba, 2012). Friedman was of the view that performing social responsibilities may prove to be detrimental for the companies and as a result of this the stakeholders may lose their interest in the company. They neglected the fact that being ethical is also one of the marketing strategies as it helps to win over the confidence of people (Kotler & Lee, 2005).

Freidman does not say that the directors should do anything in order to maximise profits but he is against doing any kind of charitable activities. He neglects the benefits that it would have in the long run from the aspect of the business. He thinks that it is absolutely foolish to spend such large amounts on these things and that too when these funds finally belongs to the shareholders of the company (KHANKA, 2014). Friedman thinks that meeting the expectations of the shareholder is the only way by which it can fulfil its moral responsibilities.

Why Companies Should Behave Ethically

In order to explain Friedman’s view in more depth, let me take an example. Once there was a electric company that disconnected electricity of a person because of the non payment of the bill. The person died as a consequence of some unwanted happening during that time. Friedman in this case gives his opinion that the directors of the company did what was thought to be ethical as it is their sole duty to think about the corporation. The survival of the company should be the most important and by safeguarding it the directors are performing their social obligations (Moon, n.d.).

Apart from earning profits, ‘value creation’ is the most important. Value creation can be defined as the increase in the goods, services and the business itself. Value creation does not only means earning huge profits but various other aspects has also to be seen such as maximising return on equity. For example, there may be two companies one whose shareholders equity is 20000 and the other whose shareholders equity is 1000 only. The first company earns a profit of 1000 whereas the second company earns a profit of 100 only. If these raw information is available then people may think of investing in the first company but on comparing the return on equity they would prefer the second company. As the return on equity of the first company is 5% whereas of the second company is 10%. Therefore, only raising huge funds from the shareholders is not enough proper allocation and optimum utilisation must be done (Perrini et al., 2006).

Saving cost should be the motive of all the companies. However, saving money by not performing social duties is incorrect. A company has various many other factors where it could reduce cost. A company should analyse properly before taking make or buy decision. It should calculate the incremental cost or differential cost before taking up an order. Incremental cost here means the additional cost a company has to incur on producing an additional unit of product. Differential cost is the gap between the two important economic decisions at different levels of output.

In support of my answer, I would like to conclude that Friedman thought that it was unethical or wrong to invest shareholders fund in a place that could not generate direct wealth to them. However, the shareholders never wanted the company to run away from performing its social duties. The shareholders are also a part of the society and they will never demand dividend at the cost of the fulfilment of the needs of the society (Ravichandran, n.d.). If the company is behaving in an ethical manner then it will not only benefit the society but also the shareholders and the business also. There will be an automatic growth of the company with the growth of reputation in the market. So, it is absolutely incorrect to think that the expenses involved in performing corporate social responsibility is an additional cost. If the companies accept Friedman’s opinion then there will be no investors that would like to invest in such companies. Therefore, all the reasons for my disagreement with his view have been stated clearly (Sacconi et al., 2011).

References:

Agarwal, S. (2008) Corporate social responsibility in India,.

Baxi, C. and Prasad, A. (2006) Corporate social responsibility, New Delhi, Excel Books.

Chandrasekaran. (2011) Corporate governance and social responsability, [Place of publication not identified], Prentice-Hall Of India Pv.

Chatterji, M. (n.d.) Corporate social responsibility,.

Crane, A., Matten, D. and Spencer, L. (2008) Corporate social responsability, Abingdon, Routledge.

Katamba, D. (2012) Principles of corporate social responsibility (CSR), Houston, Tex., Strategic Book Publishing and Rights.

KHANKA, D. (2014) BUSINESS ETHICS AND CORPORATE SOCIAL RESPONSIBILITY, [S.l.], S CHAND & CO LTD.

Kotler, P. and Lee, N. (2005) Corporate social responsibility, Hoboken, N.J., Wiley.

Moon, J. (n.d.) Corporate social responsibility,.

Perrini, F., Pogutz, S. and Tencati, A. (2006) Developing corporate social responsibility, Cheltenham, UK, Edward Elgar.

Ravichandran, K. (n.d.) Corporate social responsibility,.

Sacconi, L., Antoni, G. and Frey, B. (2011) Social Capital, Corporate Social Responsibility, Economic Behaviour and Performance, Houndmills, Basingstoke, Hampshire, Palgrave Macmillan.