Fifty years ago, Nobel prize-winning economist Milton Friedman published an article in The New York Times which analysed the relationship between business and corporate social responsibility. The commentary was driven by the principles outlined in his book ‘Capitalism and Freedom’, which famously stated that the sole responsibility of business was “to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
As we begin a new decade, and a new era in corporate social responsibility, it is worth considering whether the principles of Friedman’s theory still stand the test of time.
In his article, Friedman assessed the responsibility of corporate executives, who he claimed had “direct responsibility” to their employees. This meant conducting “business in accordance with their desires, which generally will be to make as much money as possible.” It seems that nearly half a century later, employee expectations have somewhat changed. LinkedIn’s Workplace Culture Trends finds that “71% of professionals say they would be willing to take a pay cut to work for a company that has a mission they believe in and shared values.”
Friedman also argued that shareholders, customers and employees were individually responsible for doing good and it was ultimately “only at their expense.” He claimed that it was not the role of corporate executives or businesses to act as champions of good – they did not have the power to allocate capital for social causes. Fast forward to present day and over the last 12 months we have seen organisations, from the Bank of England to supermarket chain Iceland, speak out on a variety of sustainability issues, and big brands like Patagonia raising vast sums for environmental causes. Yet, according to Deloitte’s Global Millennial Survey 2019, only 37% of respondents believed that business leaders make a positive impact on the world. Clearly, bosses still have more to do to convince future generations of their contribution.
Whilst some might argue that Friedman’s outlook on corporate social responsibility is now outdated, he does cover themes that are still relevant in today’s modern world.
Firstly, Friedman recognises the challenges created by the “cloak of social responsibility.” He points out “the nonsense spoken in its [social responsibility] name by influential and prestigious businessmen” which sounds very similar to the modern term, ‘greenwashing’. Greenwashing and “the cloak of social responsibility” is still a major issue, but we should take comfort that the industry is trying to provide a viable solution. The recent discussions led by the EU Sustainable Finance Taxonomy suggest that leaders are actively trying to clamp down on false claims and encourage transparency.
Secondly, the article highlights the tendency for short-termism within business which prevents companies from recognising, and adapting to, long-term external business risks. For Friedman, by failing to consider a long-term time horizon, companies offer a “muddle-headed” response to social responsibility. Over the last few years, we have seen a dramatic shift in how companies view new challenges such as climate change. No longer are companies adopting a short-term approach to such issues, instead as demonstrated by frameworks like the Task Force on Climate-related Financial Disclosures, they are being forced to consider how to identify and adapt to emerging risks to reassure stakeholders that they have resilient, future-proof businesses. Whilst these frameworks are still relatively nascent, they will encourage companies to view sustainability issues from a long-term perspective and importantly offer clarity, hopefully avoiding a “muddle-headed” response.
Finally, Friedman touches on the importance of trust and reputation. He claims that customers and employers would “desert” corporate executives for their investment in social responsibility. Thankfully, the tide has changed and instead, it’s clear that these audiences are more inclined to desert brands who don’t demonstrate their social credentials. Research from Accenture found that 63% of global consumers prefer to purchase products and services from companies that stand for a purpose that reflects their own values and beliefs.
It’s clear that much has changed since Friedman wrote his article in the 1970s. We’ve experienced environmental crises, seen huge social change as well as reforms to regulation and governance standards. But we’ve still got much more to do over the next 50 years. Perhaps, when we celebrate the 100th anniversary of Friedman’s article, the disconnect between business and corporate social responsibility will finally be something of the past.
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