Critical Analysis of "The Social Responsibility of Business" from Milton Friedman

In this essay I evaluate Milton Friedman’s essay: “The Social Responsibility of Business Is to Increase Its Profits” in 1970, on the Social Responsibility of a business and his theory, which is called the “Efficiency Perspective”. In every article and book that I have read about social responsibility, Friedman’s “Efficiency Perspective is placed centrally. During my research I found that Friedman is often criticised for being too classical. Friedman believes that manager’s foremost objective or even moral obligation to the firm should be to maximise profits always. There is however one condition that makes his perspective more complicated, not only for me, but also for several well-known authors. According to Friedman, the managers obligations should be carried out: “…while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom”. This leads to one of the main questions of my essay: To what extent does Friedman’s “Efficiency Perspective” give foundation for responsible and moral international management behaviour? And need we any concern if it fails to do so? To fully answer the questions, I first need to explain the two different parts of the first question: responsible international management behaviour and moral international management behaviour. In businesses nowadays they combine these two parts, respectively responsible and moral becomes social responsibility in international management. The second question anticipates the other theories and models we need to consider when Friedman’s efficiency perspective does not give foundation for social responsibility in international management.

However before I go in further detail to answer these questions, I first explain more about the concept social responsibility. After this I explain Friedman’s full theory, and how it related to these different models of social responsibility, and finally I will draw a conclusion.

“Business ethics compromises moral principles and standards that guide behaviour in the world of business” (Ferrell & Fraedrich). Individuals or groups of individuals evaluate this specific behaviour. The judgement of this evaluation can be right or wrong, ethical or unethical, internal or external from the firm. The outcomes of these judgements influence the society’s acceptance or rejection of activities within the business. “Social responsibility refers to a firm’s obligation to maximise its positive impact on society and to minimise its negative impact” (Ferrell &Fraedrich). As we are talking about ‘international’ management behaviour, A. K. Sundaram and J. S. Black add to this definition: “across national borders”.

There are four kinds of social responsibility (Figure 1): economic, legal, ethical, and philanthropic. Ethics as part of social responsibility has its focus on the firm’s duty to maximise its positive impact on society and minimise its negative impact. Business ethics and social responsibility are closely linked. The first part of social responsibility is economic; it relates to how resources for the production of goods and services are distributed within a social system. Two parts within the economic dimension of social responsibility are regarded the foundation of social responsibility: the impact of the economy and competition. When relating social responsibility to economy, it looks at how the economy is affected by competition, stockholders, customers, employees, communities and the physical environment. Competition in social responsibility arises when businesses rival for customers and profits. Issues in social responsibility and law arise when businesses compete unfairly to obtain these customers and profits.

The legal dimension of social responsibility relates to obeying the law and standards that are written by governments to set a minimum of responsible behaviour. Society (including consumers, interest groups, competitors, and legislators) believes that business can not deal with social responsibility, such as environmental and consumer protection. Therefore laws establish the basic ground rules for responsible business activities.

The ethical dimension of social responsibility concerns operations and behaviours that are expected or restricted by members of an organisation, its community and society, although these operations and behaviours are not put into laws. Social responsibilities that involves ethics reflect a concern of major stakeholders, including shareholders consumers, employees, and the community. Their concern involves what is right with respect or protection of the stakeholders’ moral rights. The fourth dimension of social responsibility is the philanthropic dimension. The philanthropic dimension of social responsibility refers to the expectation that businesses also contribute resources to the community and improve quality of life. Consumers want business to act environmental responsible, they want sophisticated communication systems, good working conditions and times to improve their quality of life, and so on. The economic and legal dimensions are found as the most important elements of performance: “If this is well done, “ say classical theorists, “profits are maximised more or less continuously and firms carry out their major responsibilities to society.” Ferrell & Fraedrich say: “Some economist believe that if firms take care of economic and legal issues, they are satisfying the demands of society and that trying to anticipate and meet ethical and philanthropic needs would be almost impossible.” The execution of corporate strategy is influenced by the value systems of the corporation and its stakeholders. Common business criticism says the role of ethics in business strategy has been time and again ignored. According to Ferrel & Fraedrich if we accept these two statements: “Business strategy must reflect an understanding of the values of organisational members and stakeholders” and secondly “Business strategy must reflect an understanding of the ethical nature of strategic choice”, then ethics becomes a core decision in business strategy. Friedman has been quoted saying that: “the basic mission of business [is] thus to produce goods and services at a profit, and in doing this, business [is] making it maximum contribution to society and in fact, being socially responsible.” Friedman presents his efficiency perspective of social responsibility clear and simple, according to Friedman the business of business is business. His perspective is based on a free market environment. In Friedman’s essay his first argument states that a corporate executive is an employee of the owners of the business. The separation of ownership (shareholders) and the control of the organisation (managers) characterise the corporate form of an organisation. Above all, his primary responsibility is to the owner’s of the business. Friedman: “…the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them”. However Friedman does anticipate that providing charity to local communities may serve the greater purpose of easing recruitment problems or improving behaviour at work.

Such actions, though, are “one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest”, despite it is “approaching fraud”, to disguise social responsibility “clearly harms the foundations of a free society”. This strategic approach to environmental performance attempts to maximise stockholder’s returns by using an environmental strategy that creates a sustainable competitive advantage. Businesses should therefore not make social responsibility a consideration, they are the job of the government and managers have already a responsibility towards the shareholders. Adam Smith was one of the first economists who presented this approach. Smith reasoned that to place resources in the hands of the individuals and to allow the market forces effectively allocate these scarce resources, this would satisfy the demands of the society. If society thinks that it is important for products to have certain environmental and safety standards, the manager would improve its profits if he acted according to those needs.

In his essay Friedman describes managers who misuses corporate resources to exercise a distinct social responsibility, are actually imposing tax on the stockholders. Moreover Ronald Green said in his evaluation: “But actually his argument is really far more pointed. Ordinarily, we call a person who appropriates others’ goods without permission a thief ”.

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