Doing Well or Doing Good?

Brokers trading at the New York Stock Exchange
New York Stock Exchange

Corporate scandals over the last two decades, followed by the crash of the economy in 2008, have brought about widespread skepticism toward America’s corporate leaders. Almost daily there are calls for new legal and regulatory reforms directed at businesses, especially banks and investment firms. Some corporations have even begun to reassess their own business practices. The skeptical position can be summed up in two large questions: (1) Have business and corporate leaders forgotten their fiduciary duty to their customers, owners and employees—a duty prescribed by law or by generally accepted professional codes of conduct? And (2) Have they forgotten their civic duties, their responsibilities within the fabric of society, their commitment to the principles of democracy, their obligations to the public welfare, and their respect for high standards of business ethics that go beyond their legal responsibilities?

The first question can have only one answer: Legal responsibilities must not only be taught and understood but also enforced. The rule of law must be respected. Professional codes of conduct also deserve respect and should be enforced by peer sanction and public disclosure. Public confidence cannot be restored otherwise.

The second question, however, raises a more interesting prior question: What exactly is the social responsibility of business? Or, to put it in slightly different terms, Does the corporation have any responsibility other than to maximize profit according to the rule of law, the dictates of its shareholders, the requirements of contract, and the ethical norms of general practice?

In 1970, Milton Friedman wrote an article for The New York Times Magazine entitled “The Social Responsibility of Business is to Increase Its Profits.” The argument is probably familiar to most of you, but let me try to capture it in a nutshell.

A business, Friedman said, is an artificial person and, as such, can have only artificial responsibilities—those required of it by law, by charter, or by its shareholders. Only human beings can have actual responsibilities. Corporate executives are human beings, and as such they may have responsibilities to family, country, religious community, or conscience. In this regard, we say, they act as principals. When, however, they act as corporate executives—except in the case of sole proprietorship—they are acting as agents of the business’s owners. They then have responsibilities to their employers and must act only in the interests of their employers “while conforming,” Friedman said, “to the basic rules of society, both those embodied in law and those embodied in ethical custom.” Generally, this means that their duty is to make money, though some entities, like schools and hospitals, have other purposes.

According to Friedman, it follows that executive actions lying beyond the scope of the business’s express purposes are illegitimate. In particular, actions taken to further social responsibilities not expressed in the corporate charter are illegitimate, and not in the interest of the business owners. Executives who take such actions—for example, taking measures to help curb inflation, or supporting protests against racism, or contributing to charities that do not serve the business’s express interests—are recklessly spending the company’s money for their own personal reasons, even if those reasons are not selfish. When executives take credit for promoting such social causes, they are violating their corporate duty and being hypocritical, cloaking their real motives behind a deceptive mask of false selflessness. This, in short, is Friedman’s case. He was never one for mincing words.

In the forty-odd years since its publication, Friedman’s article has entered the national psyche, where it has become a force that opposes a much older American ethical principle—the notion of “self-interest rightly understood.” Tocqueville described this principle succinctly in Democracy in America: “It is held as a truth that man serves himself in serving his fellow-creatures, and that his private interest is to do good.” You may recognize this as a modified version of the golden rule’s “Do unto others as you would have them do unto you,” and it’s not a bad rule for conduct, especially if you continue to believe it after suffering from a few experiences that seem to deny the principle.

It appears that the principle of self-interest rightly understood is reasserting itself in the corporate realm. A new emphasis on what is called Corporate Social Responsibility (CSR) has been growing steadily in recent years: the number of U.S. businesses that published CSR reports detailing their positive contributions to society and the environment increased from 70 companies in 2007 to more than 540 companies in 2012. There is now much talk in the business world about  “doing well by doing good,” as can be seen by a simple Google search of the phrase. The idea is now even a subject of instruction in graduate school; an example is a course called “Business in Society: Doing Well by Doing Good?” taught by Geoffrey Heal at Columbia’s Business School. And in the investing world, the concept of “impact investing”—putting one’s capital to work both for profit and to influence positive social change—is growing at a substantial rate.

Surely the growing loss of public confidence in corporate behavior has something to do with the resurgence of the older ethical principle. But just as surely, it must be the case that more and more people are beginning to question Friedman’s argument. Perhaps they are reflecting on their own experience of dealing with people who act purely out of self-interest, and wondering whether any such person—even an artificial one—can be a reliable partner in a lasting relationship. Maybe they are beginning to become suspicious of establishing connections with businesses that declare their intention to engage only in what Aristotle called “friendships of utility”—relationships that are merely useful. Such relationships are very insecure, since either party will try to extricate itself from the relationship if it no longer serves their self-interest.

Perhaps this erosion of public confidence indicates a growing recognition that a corporation owes its very existence to a society that understands it to be serving a public good. While this public service surely includes the responsibilities of operating at a profit, growing, employing members of society at a reasonable wage, and providing goods for society’s benefit, the corporation’s success and public standing nonetheless depends on its acknowledgment that it has a responsibility to ensure the health of the society that has licensed it. When instead, it seems that a corporation is serving only its owners, its efforts to justify its behavior as somehow contributing to the public interest seem cynical, and the corporation risks losing both the moral high ground and its popular support.

Now that society is asking in what respect and to what degree a corporation may be a person, it seems only natural that it should also ask some other age-old human questions about corporations, namely, To what extent does the public good rest upon private virtue? and To what extent is the public good served by focusing on private interest? and finally, How, and to what extent, can corporate leadership embrace both private virtue and private interest?