Corporations need a social conscience

The late economist Milton Friedman in 1970 belittled talk of corporate social responsibility as 'pure and unadulterated socialism.' But the world — and companies' influence — has changed since then.

LA Times, By Michael Hiltzik, November 6, 2011

Eminent economist Milton Friedman, who died in 2006, maintained that
society  would benefit as a whole only if managements focused on increasing
profits “within  the rules of the game,” which meant without deception or fraud.
(Robert Durell, Los Angeles Times / June 22, 2006)

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American corporations plainly are smarting from the accusation that they've abandoned their sense of social responsibility in pursuit of higher profits.

You can tell that by the defensive indignation with which the business community has greeted President Obama's rhetorical attacks on "millionaires and billionaires." And by Bank of America's defensiveness in spinning the cancellation of its $5 debit card fee as rather an act of consumer altruism. ("We have listened to our customers very closely," a spokesman said.)

Then there are the CEO statements collected by Harvard Business Review for an online forum titled The CEO's Role in Fixing the System, some of which carry the whiff of the heebie-jeebies experienced by ancien regime dandies facing down a torch-bearing mob of Jacobins.

For example, Raymond Gilmartin, the former chairman and CEO of Merck, acknowledged in the forum that corporate behavior in the economic slump had "deepened a widespread public distrust of corporations and capitalism." He proposed that CEOs and boards start acting "as agents of society, rather than shareholders." Starbucks founder Howard Schultz used the same forum to promote his public campaign urging CEOs to step up job creation efforts across the board.

There are many reasons why corporate social responsibility is on the table these days. One is that the sharp rise in business profits since the 2008 crash hasn't produced a commensurately sharp rise in hiring. Occupy Wall Street and its coast-to-coast offspring have catalyzed public disaffection with the gulf between the banking industry's health and its millions of home foreclosures.

Philanthropy experts say corporate giving has ticked up recently, possibly in response to signs of public discontent. One in four major companies surveyed by the Committee Encouraging Corporate Philanthropy, which has current or former top executives from 22 major companies on its board, have increased their giving by 25% or more since 2007. (On the other hand, 21% of the surveyed companies cut their giving by 25% or more.)

"We're seeing a whole new approach in corporate responsibility," Charles Moore, the committee's executive director, told me. Corporations are integrating philanthropy into their business strategies, say, by supporting charitable programs serving their suppliers, customers or markets — PepsiCo paying to train the Mexican farmers who provide it with its corn syrup or Novartis delivering health education in rural India to residents who might end up buying its drugs.

The question always is whether companies undertake these ventures because they're the right thing to do or because they want to look altruistic for marketing purposes. In other words, are improved profits a collateral benefit or the main point?

Some might say that it doesn't matter, as long as you end up with less penurious farmers or healthier peasants. But the danger is that if it's seen chiefly as a PR device, then corporate giving — currently a minuscule one-tenth of 1% ofrevenue among major corporations, according to the committee's latest survey — will be first on the chopping block in economic downturns.

Moreover, the giving-for-giving's-sake model always runs up against the notion that the only constituency that counts in corporate management is the shareholder. The modern dean of this school was the late eminent economist Milton Friedman, who in a 1970 article belittled talk of corporate social responsibility as "pure and unadulterated socialism."

Friedman called corporate social responsibility a "fundamentally subversive doctrine." He conceded that some putatively socially beneficial actions such as improving local schools might have indirect benefits for a corporation — make it easier to recruit employees, for instance — but for the most part he scorned that rationale as "hypocritical window dressing."

Friedman maintained that society would benefit as a whole only if managements focused on increasing profits "within the rules of the game," which meant without deception or fraud.

That would provide customers with the best products and prices, workers with sustainable employment, and shareholders with plenty of money to spend on their own choice of good works, if they so wished. In other words, take care of profits, and the free market will take care of everything else.

Friedman, who died in 2006, wasn't shooting random mortar shells into the sky. He was responding to a public debate on the corporation's role in society launched in the late '60s that sounds very much like the direct forebear of Occupy Wall Street.

Dissident shareholders at Bank of America, AT&T and dozens of other companies freaked out managements by questioning not their financial results but the "social impact" of their activities, and disrupted annual meetings with demands for proxy votes on such issues as their company's role in the Vietnam War, its record on minority hiring and its contribution to pollution.

Today's issues tilt more toward corporations' responsibility for the financial meltdown (obviously the focus of Wall Street protesters) and how income inequality comes from endowing CEOs with lavish pay while laying off rank-and-file employees by the brigade and hammering flat the wages, health benefits and retirement plans of those who are left.

That's just one way the world has changed since Friedman fired his broadside. Corporations today influence their communities and society at large in ways Friedman could not have conceived, and of which he might not have approved.

It's not only the multibillion-dollar lobbying war chests of major industries. What would Friedman have made of the Supreme Court's 2010 Citizens United decision, which granted rich corporations the same free speech rights as individuals — including the right to make unlimited political contributions? Here's what he wrote in that 1970 essay: "What does it mean to say that 'business' has responsibilities? Only people can have responsibilities."

Friedman argued that business leaders should keep their eyes on business and their hands off socially responsible programs because they were more likely to be "clear-headed" in the former and "muddle-headed" in the latter.

Yet his vision of the perfect market doesn't have much to do with our recent experience, in which the clear-headed pursuit of short-term profits trashed the world economy. Let's not forget that the flow of corporate wealth to CEOs and shareholders has helped drive the middle class into income stagnation and debt, impoverishing corporate America's customer base.

So much of the debate today about corporate social responsibility misses the point. Viewing the entirety of social responsibility as the pursuit of profit "within the rules of the game" damaged millions of lives because the rules of the game didn't leave room for a social conscience.

Social conscience is what tells a CEO that long-term growth is more important than short-term profit. But the former can be achieved only by serving, not merely exploiting, your customer base. Friedman wasn't wrong, but his definition of "social responsibility" was surely too narrow and his faith in the market too naive. In this post-meltdown world we know better, don't we?

Michael Hiltzik's column appears Sundays and Wednesdays. His latest book is "The New Deal: A Modern History." Reach him at mhiltzik@latimes.com, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.

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