Franklin University Rethinking Social Responsibility of Business Article Analysis The Social Responsibility of Business The article, Rethinking the Social

Franklin University Rethinking Social Responsibility of Business Article Analysis The Social Responsibility of Business

The article, Rethinking the Social Responsibility of Business, examines the views of Friedman, John Mackey, and Rogers and provides their responses to one another in a debate over the social responsibility of businesses.

Write a 1000 word analysis of the article which:

1. Compare and contrasts the perspectives of each participant

2. Relates each perspective to the models of corporate social responsibility as presented in the book

3. Answers the question–Which participant do you agree with most and why?

Helpful Hints…The purpose of this assignment was to compare/contrast how the three authors view the mission of Corporate Social Responsibility. What ends up happening in every class is that 95% of the students side with one person. I don’t have an issue with this, but it always boils down to them just not liking the other two. Don’t be so quick to judge, there are good and bad arguments to each person. Your job is to dig deeper into what they are saying and the ramifications of their actions.

One more side note…don’t tell me that Whole Foods is better because they treat their customers well. The point of the Fiscal Model of CSR is that you make as much profit as you can. For that to happen you have to treat your customers well by developing great products. Great products will generate sales and make your customers happy. Rethinking the Social Responsibility of Business
A Reason debate featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress
Semiconductor’s T.J. Rodgers.
Putting Customers Ahead of Investors
John Mackey
In 1970 Milton Friedman wrote that “there is one and only one social responsibility of 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.” That’s the
orthodox view among free market economists: that the only social responsibility a law?abiding business
has is to maximize profits for the shareholders.
I strongly disagree. I’m a businessman and a free market libertarian, but I believe that the enlightened
corporation should try to create value for all of its constituencies. From an investor’s perspective, the
purpose of the business is to maximize profits. But that’s not the purpose for other stakeholders??for
customers, employees, suppliers, and the community. Each of those groups will define the purpose of the
business in terms of its own needs and desires, and each perspective is valid and legitimate.
My argument should not be mistaken for a hostility to profit. I believe I know something about creating
shareholder value. When I co?founded Whole Foods Market 27 years ago, we began with $45,000 in
capital; we only had $250,000 in sales our first year. During the last 12 months we had sales of more than
$4.6 billion, net profits of more than $160 million, and a market capitalization over $8 billion.
But we have not achieved our tremendous increase in shareholder value by making shareholder value the
primary purpose of our business. In my marriage, my wife’s happiness is an end in itself, not merely a
means to my own happiness; love leads me to put my wife’s happiness first, but in doing so I also make
myself happier. Similarly, the most successful businesses put the customer first, ahead of the investors.
In the profit?centered business, customer happiness is merely a means to an end: maximizing profits. In
the customer?centered business, customer happiness is an end in itself, and will be pursued with greater
interest, passion, and empathy than the profit?centered business is capable of.
Not that we’re only concerned with customers. At Whole Foods, we measure our success by how much
value we can create for all six of our most important stakeholders: customers, team members
(employees), investors, vendors, communities, and the environment. Our philosophy is graphically
represented in the opposite column.
There is, of course, no magical formula to calculate how much value each stakeholder should receive from
the company. It is a dynamic process that evolves with the competitive marketplace. No stakeholder
remains satisfied for long. It is the function of company leadership to develop solutions that continually
work for the common good.
Many thinking people will readily accept my arguments that caring about customers and employees is
good business. But they might draw the line at believing a company has any responsibility to its
community and environment. To donate time and capital to philanthropy, they will argue, is to steal from
the investors. After all, the corporation’s assets legally belong to the investors, don’t they? Management
has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don’t maximize
shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise
that altruism with your own money, not with the assets of a corporation that doesn’t belong to you.
Rethinking the Social Responsibility of Business
A Reason debate featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress
Semiconductor’s T.J. Rodgers.
This position sounds reasonable. A company’s assets do belong to the investors, and its management does
have a duty to manage those assets responsibly. In my view, the argument is not wrong so much as it is
too narrow.
First, there can be little doubt that a certain amount of corporate philanthropy is simply good business
and works for the long?term benefit of the investors. For example: In addition to the many thousands of
small donations each Whole Foods store makes each year, we also hold five 5% Days throughout the year.
On those days, we donate 5 percent of a store’s total sales to a nonprofit organization. While our stores
select worthwhile organizations to support, they also tend to focus on groups that have large membership
lists, which are contacted and encouraged to shop our store that day to support the organization. This
usually brings hundreds of new or lapsed customers into our stores, many of whom then become regular
shoppers. So a 5% Day not only allows us to support worthwhile causes, but is an excellent marketing
strategy that has benefited Whole Foods investors immensely.
That said, I believe such programs would be completely justifiable even if they produced no profits and
no P.R. This is because I believe the entrepreneurs, not the current investors in a company’s stock, have
the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a
company, who bring all the factors of production together and coordinate it into viable business. It is the
entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the
voluntarily cooperating stakeholders??including the investors. At Whole Foods we “hired” our original
investors. They didn’t hire us.
We first announced that we would donate 5 percent of the company’s net profits to philanthropy when
we drafted our mission statement, back in 1985. Our policy has therefore been in place for over 20 years,
and it predates our IPO by seven years. All seven of the private investors at the time we created the policy
voted for it when they served on our board of directors. When we took in venture capital money back in
1989, none of the venture firms objected to the policy. In addition, in almost 14 years as a publicly traded
company, almost no investors have ever raised objections to the policy. How can Whole Foods’
philanthropy be “theft” from the current investors if the original owners of the company unanimously
approved the policy and all subsequent investors made their investments after the policy was in effect
and well publicized?
The shareholders of a public company own their stock voluntarily. If they don’t agree with the philosophy
of the business, they can always sell their investment, just as the customers and employees can exit their
relationships with the company if they don’t like the terms of trade. If that is unacceptable to them, they
always have the legal right to submit a resolution at our annual shareholders meeting to change the
company’s philanthropic philosophy. A number of our company policies have been changed over the years
through successful shareholder resolutions.
Another objection to the Whole Foods philosophy is where to draw the line. If donating 5 percent of
profits is good, wouldn’t 10 percent be even better? Why not donate 100 percent of our profits to the
betterment of society? But the fact that Whole Foods has responsibilities to our community doesn’t mean
that we don’t have any responsibilities to our investors. It’s a question of finding the appropriate balance
and trying to create value for all of our stakeholders. Is 5 percent the “right amount” to donate to the
community? I don’t think there is a right answer to this question, except that I believe 0 percent is too
Rethinking the Social Responsibility of Business
A Reason debate featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress
Semiconductor’s T.J. Rodgers.
little. It is an arbitrary percentage that the co?founders of the company decided was a reasonable amount
and which was approved by the owners of the company at the time we made the decision. Corporate
philanthropy is a good thing, but it requires the legitimacy of investor approval. In my experience, most
investors understand that it can be beneficial to both the corporation and to the larger society.
That doesn’t answer the question of why we give money to the community stakeholder. For that, you
should turn to one of the fathers of free?market economics, Adam Smith. The Wealth of Nations was a
tremendous achievement, but economists would be well served to read Smith’s other great book, The
Theory of Moral Sentiments. There he explains that human nature isn’t just about self?interest. It also
includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human
behavior, these are at least as important as self?interest. For many people, they are more important.
When we are small children we are egocentric, concerned only about our own needs and desires. As we
mature, most people grow beyond this egocentrism and begin to care about others??their families, friends,
communities, and countries. Our capacity to love can expand even further: to loving people from different
races, religions, and countries??potentially to unlimited love for all people and even for other sentient
creatures. This is our potential as human beings, to take joy in the flourishing of people everywhere.
Whole Foods gives money to our communities because we care about them and feel a responsibility to
help them flourish as well as possible.
The business model that Whole Foods has embraced could represent a new form of capitalism, one that
more consciously works for the common good instead of depending solely on the “invisible hand” to
generate positive results for society. The “brand” of capitalism is in terrible shape throughout the world,
and corporations are widely seen as selfish, greedy, and uncaring.This is both unfortunate and
unnecessary, and could be changed if businesses and economists widely adopted the business model that
I have outlined here.
To extend our love and care beyond our narrow self?interest is antithetical to neither our human nature
nor our financial success. Rather, it leads to the further fulfillment of both. Why do we not encourage this
in our theories of business and economics? Why do we restrict our theories to such a pessimistic and
crabby view of human nature? What are we afraid of?
Making Philanthropy Out of Obscenity
Milton Friedman
By pursuing his own interest [an individual] frequently promotes that of the society more effectually than
when he really intends to promote it. I have never known much good done by those who affected to trade
for the public good.
??Adam Smith, The Wealth of Nations
The differences between John Mackey and me regarding the social responsibility of business are for the
most part rhetorical. Strip off the camouflage, and it turns out we are in essential agreement. Moreover,
his company, Whole Foods Market, behaves in accordance with the principles I spelled out in my 1970
New York Times Magazine article.
Rethinking the Social Responsibility of Business
A Reason debate featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress
Semiconductor’s T.J. Rodgers.
With respect to his company, it could hardly be otherwise. It has done well in a highly competitive
industry. Had it devoted any significant fraction of its resources to exercising a social responsibility
unrelated to the bottom line, it would be out of business by now or would have been taken over.
Here is how Mackey himself describes his firm’s activities:
1) “The most successful businesses put the customer first, instead of the investors” (which clearly means
that this is the way to put the investors first).
2) “There can be little doubt that a certain amount of corporate philanthropy is simply good business and
works for the long?term benefit of the investors.”
Compare this to what I wrote in 1970:
“Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified
on other grounds rather than a reason for those actions.
“To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small
community to devote resources to providing amenities to that community or to improving its
government….
“In each of these…cases, there is a strong temptation to rationalize these actions as an exercise of ‘social
responsibility.’ In the present climate of opinion, with its widespread aversion to ‘capitalism,’ ‘profits,’ the
‘soulless corporation’ and so on, this is one way for a corporation to generate goodwill as a by?product of
expenditures that are entirely justified in its own self?interest.
“It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window?
dressing because it harms the foundations of a free society. That would be to call on them to exercise a
‘social responsibility’! If our institutions and the attitudes of the public make it in their self?interest to
cloak their actions in this way, I cannot summon much indignation to denounce them.”
I believe Mackey’s flat statement that “corporate philanthropy is a good thing” is flatly wrong. Consider
the decision by the founders of Whole Foods to donate 5 percent of net profits to philanthropy. They were
clearly within their rights in doing so. They were spending their own money, using 5 percent of one part
of their wealth to establish, thanks to corporate tax provisions, the equivalent of a 501c(3) charitable
foundation, though with no mission statement, no separate by?laws, and no provision for deciding on the
beneficiaries. But what reason is there to suppose that the stream of profit distributed in this way would
do more good for society than investing that stream of profit in the enterprise itself or paying it out as
dividends and letting the stockholders dispose of it? The practice makes sense only because of our
obscene tax laws, whereby a stockholder can make a larger gift for a given after?tax cost if the corporation
makes the gift on his behalf than if he makes the gift directly. That is a good reason for eliminating the
corporate tax or for eliminating the deductibility of corporate charity, but it is not a justification for
corporate charity.
Rethinking the Social Responsibility of Business
A Reason debate featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress
Semiconductor’s T.J. Rodgers.
Whole Foods Market’s contribution to society??and as a customer I can testify that it is an important one?
?is to enhance the pleasure of shopping for food. Whole Foods has no special competence in deciding how
charity should be distributed. Any funds devoted to the latter would surely have contributed more to
society if they had been devoted to improving still further the former.
Finally, I shall try to explain why my statement that “the social responsibility of business [is] to increase
its profits” and Mackey’s statement that “the enlightened corporation should try to create value for all of
its constituencies” are equivalent.
Note first that I refer to social responsibility, not financial, or accounting, or legal. It is social precisely to
allow for the constituencies to which Mackey refers. Maximizing profits is an end from the private point
of view; it is a means from the social point of view. A system based on private property and free markets
is a sophisticated means of enabling people to cooperate in their economic activities without compulsion;
it enables separated knowledge to assure that each resource is used for its most valued use, and is
combined with other resources in the most efficient way.
Of course, this is abstract and idealized. The world is not ideal. There are all sorts of deviations from the
perfect market??many, if not most, I suspect, due to government interventions. But with all its defects,
the current largely free?market, private?property world seems to me vastly preferable to a world in which
a large fraction of resources is used and distributed by 501c(3)s and their corporate counterparts.
Put Profits First
T.J. Rodgers
John Mackey’s article attacking corporate profit maximization could not have been written by “a free
market libertarian,” as claimed. Indeed, if the examples he cites had not identified him as the author, one
could easily assume the piece was written by Ralph Nader. A more accurate title for his article is “How
Business and Profit Making Fit Into My Overarching Philosophy of Altruism.”
Mackey spouts nonsense about how his company hired his original investors, not vice versa. If Whole
Foods ever falls on persistent hard times??perhaps when the Luddites are no longer able to hold back the
genetic food revolution using junk science and fear??he will quickly find out who has hired whom, as his
investors fire him.
Mackey does make one point that is consistent with, but not supportive of, free market capitalism. He
knows that shareholders own his stock voluntarily. If they don’t like the policies of his company, they can
always vote to change those policies with a shareholder resolution or simply sell the stock and buy that
of another company more aligned with their objectives. Thus, he informs his shareholders of his objectives
and lets them make a choice on which stock to buy. So far, so good.
It is also simply good business for a company to cater to its customers, train and retain its employees,
build long?term positive relationships with its suppliers, and become a good citizen in its community,
including performing some philanthropic activity. When Milton Friedman says a company should stay
“within the rules of the game” and operate “without deception or fraud,” he means it should deal with all
its various constituencies properly in order to maximize long?term shareholder value. He does not mean
Rethinking the Social Responsibility of Business
A Reason debate featuring Milton Friedman, Whole Foods’ John Mackey, and Cypress
Semiconductor’s T.J. Rodgers.
that a company should put every last nickel on the bottom line every quarter, regardless of the long?term
consequences.
My company, Cypress Semiconductor, has won the trophy for the Second Harvest Food Bank competition
for the most food donated per employee in Silicon Valley for the last 13 consecutive years (1 million
pounds of food in 2004). The contest creates competition among our divisions, leading to employee
involvement, company food drives, internal social events with admissions “paid for” by food donations,
and so forth. It is a big employee morale builder, a way to attract new employees, good P.R. for the
company, and a significant benefit to the community??all of which makes Cypress a better place to work
and invest in. Indeed, Mackey’s own proud example of Whole Foods’ community involvement programs
also made a profit.
But Mackey’s subordination of his profession as a businessman to altruistic ideals shows up as he attempts
to negate the empirically demonstrated social benefit of “self?interest” by defining it narrowly as
“increasing short?term profits.” Why is it that when Whole Foods gives money to a worthy cause, it serves
a high moral objective, while a company that provides a good return to small investors??who simply put
their money into their own retirement funds or a children’s college fund??is somehow selfish? It’s the
philosophy that is objectionable here, not the specific actions. If Mackey wants to run a hybrid
business/charity whose mission is fully disclosed to his shareholders??and if those shareholder?owners
want to support that mission??so be it. But I balk at the proposition that a company’s “stakeholders” (a
term often used by collectivists to justify unreasonable demands) should be allowed to control the
property of the shareholders. It seems Mackey’s philosophy is more accurately described by Karl Marx:
“From eac…
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