Social Responsibility: The story so far.

Way back in Module 1, we discussed a pair of views. One view, that of Milton Friedman, argues that businesses have only one social obligation: to increase profits to the benefit of shareholders. The other, from Ed Freeman, argues that businesses have a responsibility to many parties (stakeholders) in society, and so they cannot focus only on increasing profits. Let's take a moment to remind ourselves what these two arguments were before we move on to another pair of arguments which address the idea of corporate social responsibility in different ways. 

Milton Friedman's Stockholder Theory

In his argument, Friedman emphasizes the place of the business within the structures of society, and the job of the CEO. The main claim is that a CEO is an employee of a business, and that business is beholden to the stockholders. Social responsibilities generally refer to obligations that the business would owe to the society. Friedman denies that there are any obligations like these (aside from making more money for stockholders) because the stockholders are the source of a business's money and this obligates the business to act in their interests.  In fact, Friedman argues that it would be illicit for the CEO of a business to to use his stockholder's money to address any social obligations that are not aimed at increasing profits. They have given the business that money for the express purpose of increasing their wealth. When the CEO does not act according to these wishes, they are liable to be replaced in the same way that any other employee would be for the same transgression. A related claim is that when a CEO uses his financier's money in the general social interest he is spending someone else's money in ways that they have not approved. If those financiers had wanted to spend money on social interests then they would have done so. 

Businesses, and its leaders, are intended to make profits. Their skills are better used toward this end than they would be toward the end of solving social problems. He argues that the CEO is not a civil servant, and that the CEO is not any sort of expert on how to do things like lower the unemployment rate or keep inflation down. These things are in the realm of the civil servant, and should be left to those officials. The CEO is best suited to the realm of business, and that is the area in which they have an obligation to their shareholders. 

Friedman's argument looks at two things: (1) what business is particularly suited for and (2) to whom businesses owe direct obligations. The answer to (1) is "making money," and the answer to (2) is "the stockholders." This has an intuitive appeal because it looks pretty simple. The manager of a business is supposed to use stockholder's money to grow the business because this will make more money for stockholders. All they need to be concerned with are the rules of the game, and this makes the game much easier to play. 

Ed Freeman's Stakeholder Theory

Stakeholder theory starts from the opposite side. Instead of looking at the strengths of the business to decide what it ought to do, it looks at the world in which the business is situated. That world is a complicated one where the rules aren't nearly as "simple" as following the rules set out by the law and society. The world that every business exists in is home to lots of people and entities who all have a stake in the business's activities. 

These stakeholders are those people who interact with the business directly (customers, suppliers, employees, stockholders, and communities) or indirectly (governments, competitors, consumer advocate groups, special interest groups, the media). Each of these groups is impacted in some way by some of the business's decisions, and this gives them each some moral claim on the actions of the business. This "moral claim" on the actions of the business is an inexact measurement. It isn't meant to give all of these competing interests power over the actions of the corporation, but it does mean that the corporation should not act without considering the impact that their actions will have on others. 

One way to think about this is to say that the purpose of the corporation is to maximize a collective bottom line. This bottom line is the sum of the effects of a business's decision upon all stakeholders. Consider a case in which the decision before the firm is whether or not they should build a paper mill in a location that makes it convenient to discharge their waste materials into the river. In such a case, the first likely consideration is whether this location would maximize the firm's profits and minimize their expenditures. They cannot stop here, however. Their bottom line must also include the ways that this decision will impact the stakeholders in the business's decision. Once this combined bottom line is figured out, the decision can be made in a way that is maximally beneficial. 

This is a pretty complicated mechanism, because it requires the firm to weigh all of these (often competing) interests against one another. This might look like a strike against the theory because it makes doing business a complicated venture, but it might just be that doing business in a way which impacts a large number of people (or groups of people) should be complicated. In this way, the stakeholder theory limits a business's ability to profit through harming other persons or groups. Of course, it might be the case that people sometimes trade off harms for greater benefits. Perhaps the mill will add waste products to the river which will affect the quality of the community's drinking water. It may well be that the mill would also provide enough jobs to the community that they would be willing to endure the lowered quality of their drinking water. This sort of balancing act would be required by the stakeholder theory, but that is not necessarily a bad quality. 

It seems that this view is a more accurate picture of the business environment than the stockholder view. Businesses do not act alone, and they cannot survive for long on their own. As Freeman points out using the Responsibility Principle businesses and persons ought to be accountable when their actions affect others, and this view of the business community seems to account for that.