Monday, August 08, 2005

On Doing Good and the Interests of Business

Business Week online 15 August
“The Debate Over Doing Good:
Some companies are taking a more strategic tack on social responsibility. Should they?”
Brian Grow, Steve Hamm and Louise Lee write:

“Such platitudes, of course, make critics cringe. The Nobel prize-winning economist Milton Friedman, 93, casts a long intellectual shadow over the debate. In a seminal 1970 New York Times Magazine article, he declared social initiatives "fundamentally subversive" because they undermine the profit-seeking purpose of public companies and waste shareholders' money. Even today, Friedman, a senior fellow at Stanford University's Hoover Institution, rails at the idea that managers elected by shareholders to run companies should spend their profits on social causes. "Adam Smith said in 1776: 'I have never known much good done by those who profess to trade for the public good.' It's a good quote," says Friedman.”
Yes, it is a good quote, but it is only a quote and not one directly connected to the issues raised in the debate on ‘doing good’ raised in Business Week.

If shareholders do not want managers of their companies to do other than maximise their profits, they can insist that they do so. But the pressure for ‘doing good’ often comes from shareholders, and ‘doing good’ is open to a wide range of activities. The money also comes from the firm making profits – no profits, no ‘doing good’.

But first, look more closely at Professor Milton Friedman’s quote. It comes from “Wealth of Nations” and it is from a well known paragraph, page 456, quoted here many times, mainly in my complaints of it being misquoted – it contains Smith’s single reference to the invisible hand. Smith is referring to the choice that individuals make between trading in domestic or foreign markets and which course of action promotes domestic annual revenue (GDP the most.

Because individuals prefer to trade nearby where their investments are more easily supervised, they unintentionally promote domestic GDP more than they would if they invested abroad and promoted foreign GDP. They trade locally because they think it is in their best interests and it is in fact so; hence, they do not need to be told to do so or urged to do what their best interests already makes them do anyway.

Now, this is a different proposition from the one under discussion on how firms should spend their profits. If the directors, acting for the shareholders, consider it benefits the firm by sponsoring a public event (a concert, a football match, the Olympics, etc.,) they will do so. How much they spend on these sorts of activities is subject to scrutiny by auditors, shareholders and, in many cases, regulatory bodies. They spend millions on public image marketing for the same ends.

The article goes further and looks at expenditures on such community activities as building children’s playgrounds. Professor Friedman’s views of the appropriate role of profits is shared by most economists; but other people beside economists have influence on the role of profits and how they might be taxed to promote public activities or the general public purse. The conduct of business recently in spectacular cases of fraud, theft and greed has provided recruits for hostile campaigns against business. The recruits have votes and the legislature counts votes and pass laws that apply to businesses.

Some expenditure in counteracting these hostile views might be regarded as appropriate by shareholders – that is the basis of lobbying Congress after all. If that is legitimate expenditure, so are children’s playgrounds in local communities where they would not otherwise be available. It is conceived by those who support these expenditures as in their interests to undertake them and be associated with ‘doing good’.

Charitable donations by corporations are of long standing. Included among such charitable giving are donations by corporations to the nation’s universities, of which the University of Stanford and Stanford Business School in particular have been major beneficiaries for many years. The business arguments for doing so are too obvious to need repeating here.

That there are people outside business who preach that business should spend more of its profits on whatever public ‘good’ they select, is no threat to the message in Smith’s quotation. Business does not need to be dissuaded from doing what is not in its interests to do.

That is true today as Smith noted it to be true in his day.

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