The Corporate Social Responsibility of Business is to Maximize Shareholder Wealth- A Discussion

By Jan Stuebner
Corporate Finance 2011

D11122863 Erasmus Words: 2943 11/29/2011

List of Contents
1. Introduction .......................................................................................................................... 2 2. Discussion.............................................................................................................................. 3 3. My opinion ............................................................................................................................ 6 4. Conclusion ............................................................................................................................ 7 5. References ............................................................................................................................. 7

1. Introduction
The concept of Corporate Social Responsibility (CSR) encompasses the ways in which a business contributes to a better society by actively engaging with and consulting stakeholders, including customers, employees, shareholders and the local community, in a manner that goes beyond the company's financial and legal obligations. Through CSR, companies are working voluntarily to integrate social and environmental concerns into their everyday business operations. In recent years it became popular for corporations to be involved in corporate social responsibility. Especially through some crises within the last decade corporations drifted away from their traditional purpose of only maximizing shareholder value. There are different positions among the economists on this issue. In this essay I will point out the differences between Milton Friedmans and Porter and Kramers opinions. At the end I will summarize my results and give my own opinion about corporations social responsibilities. In 1970 Milton Friedman published a famous article, The Social Responsibility of Business is to Increase its Profits, deriding the idea that a business had any responsibility other than to maximise its profits within legally and ethically acceptable margins, arguing that a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society. Milton Friedman takes the position that corporations cannot be socially responsible, only people can have responsibilities. Other economists like Porter and Kramer think corporations should use money for corporate philanthropy, if not for the public welfare than for its own benefit. They believe that corporate donation can provide competitive advantage. In Friedmans belief SCR is only the cloak for actions based on totally different purposes. A company might donate money to improve its image. For example, the tobacco industry spends billions of dollars for cancer prevention and marketing just to change its image away from being unhealthy. It is pure self-interest when corporation spend money for social purposes. By doing so both, the non-profit organisation and the corporation, benefit. As Adam Smith already sad: If two people pursue their own objectives, the society will benefit. Even nowadays capitalism has such a bad reputation, if Marlboro spends millions for cancer prevention, it is still good- no matter which reason they might have.

2. Discussion
To maximize shareholder wealth is the only "social responsibility of business in a freeenterprise system". For Friedman it is pure socialism when businessmen declaim that business is not just concerned "merely" with profit but also with promoting desirable "social" ends. For him it can never be the firms objective to be responsible for providing employment, eliminating discrimination, avoiding pollution and so on. If a firm would do so, it would undermine the basics of a free society. In a free-enterprise system a corporate executive is an employee of the owners and for that he is directly responsible to them, which mostly means to make as much money as he can. According to Friedman, if there are social responsibilities, they are social responsibilities of individuals but not of business. Well, if the corporation has no social responsibilities a corporate executive might have. By taking responsibility for social issues the manager would spend out the stakeholders money and he would not act in their best interest. Insofar his social expenditures would reduce the returns to stakeholders. For example , that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire "hardcore" unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty. That might sounds good, but the corporate executive acts as an agent for the shareholders (Principals) and thus he has to maximize their profit. Friedmans understanding is that it is better if the stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. If they spend their own money they are acting as principals and in this case they can spend out the money for whatever they want. It is the same for a proprietor, if he spends out his tax proceeds it is his own money and he is acting as a principal. That is why shareholders dont want the company to be involved in corporate social responsibility.

Porter sees corporate social responsibility as a result of the continuing battle between shareholders, who want management to pursue short-term profits and the critics who pursue more corporate social responsibility (Porter & Kramer 2002). He points out those companies are philanthropic because they want get along with their critics and use it as a part of their public relations and create a competitive advantage. He figured out that cause-related spending highly increased. According to the pyramid of corporate social responsibility (Carrol, Archie B. 1991) Milton Friedman it is obviously that Milton Friedman supports all business responsibilities mentioned in the pyramid segment except for philanthropic responsibilities. He says in his article that businesses have the duty the maximize shareholder value and its against if a corporation does corporate philanthropy. For Friedman, a corporate executive is exercising a distinct "social responsibility, if he spends the money in a different way than the stakeholders would have spent it. In this case he is imposing taxes and decides how the tax proceeds are being spent. That is where the problem begins. Normally, the imposition of taxes and their expenditure are governmental functions, which are, in this case, taken over by the corporate executive. If we allow the executive to decide whom to tax by and for what purpose he is to be the simultaneously legislator, executive and jurist. The justification for the election of a corporate executive is to serve as an agent. When he imposes taxes and reduces the stakeholders returns he gives up his justification. In effect, he becomes a public employee but without being elected by a political process. He stays on private grounds but deals with public money. This is the basic reason why the doctrine of "social responsibility" involves the acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources to alternative uses. Just in case the executive could get away with spending out the stakeholders money, would he be able to see the consequences. For example he wants to fight the inflation by holding down the prices of his products. For sure he is an expert for sales and managing but not for inflation. How is he supposed to know how much he can spend and for what purposes and how much dividends will he pay afterwards?! And as a matter of fact the shareholder would fire him. The difficulty of exercising "social responsibility" illustrates, of course, the great virtue of private competitive enterpriseit forces people to be responsible for their own actions and makes it difficult for them to "exploit" other people for either selfish or unselfish purposes. They can do goodbut only at their own expense. Therefore, for Friedman, corporates just cannot have SCR. Porter argues that most individuals will not have the time to spend their money efficiently due a lack of diligence. Corporation are far more experts to undertake the required research if their philanthropy is connected to their business. Furthermore a big donor which is made public can attract other to donate for the most efficient non-profit foundation.

Social responsibility is often a cloak for increasing long term return. For example, it is might be reasonable to devote resources to amenities, free kinder garden and company cars, to his employees to attract high potentials. To avoid the image of a soulless corporation 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. The majority of corporate contribution programs are diffuse and unfocused. Most consist of numerous small cash donations given to aid local civic causes or provide general operating support to universities or national charities. Friedman makes to implicit assumptions. The first is that social and economic objectives are separate and distinct; so that a corporations social spending comes at the expense of its economic results. The second is the assumption that corporations, when they address social objectives, provide no greater benefit than is provided by individual donors. Porter and Kramer contradict both assumptions. In their view these assumption are just right, if the corporate contribution is unfocused, as it is typically today. The more strategically way of think that corporation use their charitable efforts to improve the quality of their business environment and to bring social and economic objectives in alignment. In addition, addressing context enables a company not only to give money but also to leverage its capabilities and relationships in support of charitable causes. That produces social benefits far exceeding those provided by individual donors. They go even further. Philanthropy can often be the most cost-effective way and sometimes the only way to improve competitive context. Contributing to a university for example, may be a far less expensive way to strengthen a local base of advanced skills in a companys field than developing training in-house. The big difference between the two approaches is the following: According to Friedman social responsibility should be done by individuals; Porter and Kramer ague that it should be done by businesses to secure a competitive environment. For Mr Friedman it is a "fundamentally subversive doctrine" in a free society, and have, "there is one and only one social responsibility of businessto use it 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." For Porter increasing involvements in SCR within a society which is highly knowledge-based and has an increasing demand for sustainability, it is the only way guarantee, in the long term, the survival of the firm.

3. My opinion
In my opinion Friedman and Porter both have good arguments about, what a corporation should do in terms of social responsibility. Friedman is right by arguing that corporations money is actually shareholder money and therefore just be used to maximize their value. If a corporate executive decides to donate money, he is spending somebody elses money and is might not acting in their best interests. The way profits are increased is irrelevant as long as executives act in the interest of the owners. Porter is also right because social and economic objects can go hand in hand. By creating a competitive advantage through the fulfilment of social goals it can help the company strengthen their market share and help increase their corporate image. Both approaches are very important. First a corporate executive has to act in the owners interests, but also should take the chance to create a long term increase of goodwill by corporate social responsibility. To specify that a little bit more. Companies should combine business and social responsibility in order to make their environment better. By making it public the can push their image and the might get the high potentials cause of their good reputation. For example there is a recent shift in demand for sustainable products therefore a company has to change its supply chain. Nobody wants to wear clothes produced by little emaciated kids in China. By paying higher wages a corporation can increase its sales and make the world a better place. According to Adam Smith Everybody is pursuing its own interests and the society benefits from it. As I already mentioned above things have changed. The recent financial crises created a shift from short-term to longer term thinking. If shareholders invest in a corporation they want more security and are willing to accept lower returns. Therefore companies should get involved in corporate social responsibility both out of self-interest and external pressures. Especially banks suffer a bad reputation and could increase the industrys image by accepting their social responsibility. If a firm does well tit should give something back to the society, already in its own interest. Corporate social responsibility can help corporations overcome the reputation damage and put the company in a brighter light. I think this is the main reason corporations participate in social projects. And I support Porters opinion in this. This is what Porter described as a business creating a win-win situation in which economic goals and social goals are achieved at the same time. Corporate social responsibility is not a direct way of increasing profits, but one that can help the company gain the sympathy of the public.

4. Conclusion
We have discussed two totally different perspectives by Friedman and Porter about The Corporate Social Responsibility of Business. Friedmans rejection of SCR is a little bit too narrow for me. Just as a personal opinion, I think Porter is more up-to-date because economic goals can be reached through social measures. There is no inherent contradiction between improving competitive context and making a commitment to better society. I dont agree with Friedman that corporate social responsibility is irresponsible. Porters example clearly showed that social objectives can be a very responsible business objective; it strengthens the position of the company, which helps to make the business more sustainable. Furthermore, Porter has shown the more closely a companys philanthropy is linked to its competitive context, the greater the companys contribution to society is. Ccontext focused philanthropy can offer companies a new set of competitive tools that well justifies the investment of resources. At the same time, it can unlock a vastly more powerful way to make the world a better place.

5. References
Carrol, Archie B. (1991). The Pyramid of Corporate Social Responsibiiity: Toward the Moral Management of Organizational Stakeholders. Friedman, Milton. (1970). The Social Responsibility of Business is to Increase its Profits. The New York Times Magazine Porter, Michael E. & Kramer, Mark R. (2002). The Competitive Advantage of Corporate Philanthropy. Boston: Harvard Business School Publication Corporation. Smith, Adam (2008). An Inquiry into the Nature and Causes of the Wealth of Nations. London: Management Laboratory Press