Ethix Forum – Issue 16

What responsibilities, if any, should corporations have to their communities? How should these be balanced with accountability to their shareholders?

What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities but “business” as a whole cannot be said to have responsibilities, even in thus vague sense . . .

What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers …

[In] my book Capitalism and Freedom I have called it a “fundamentally subversive doctrine” in a free society, and have said that in such a society, “there is one and only one social responsibility of business — to use its 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.”
(from “The Social Responsibility of Business is to Increase its Profits” by Milton Friedman, The New York Times Magazine, September 13, 1970)
Milton Friedman
Emeritus Professor of Economics
University of Chicago

Corporations have responsibilities to many constituencies including the communities where their employees live, work and raise their families. Other constituencies, to name a few, are their employees, customers and shareholders. We should be careful not to play one against the other or to ask which is the most important. Each constituency is important in its own way and is essential for a corporation to “be successful.” If a company falls short in one area, all areas suffer.

Research shows that a corporation’s image and reputation influence buying and retention decisions. The public judges the character and core values of a company as expressed through actions, including contributions and volunteerism. Active involvement in the community must start at the top, then others will follow. A recent study at UCLA revealed that employee morale is three times greater in companies with strong community relations, including volunteerism, partnerships in the community and philanthropy.

Responsible employees, involved in their communities, serve their customers better, that in turn increases sales and profits, and this enhances shareholder value.
Roger Eigsti

There are many aspects of responsibility, including human rights, environmental issues, social issues and interactions with stakeholders, including employees, customers, and members of the community where a firm operates. How much local investment and support for education, arts, the sciences or does the firm want to provide to communities in which it operates?

These are difficult questions to answer. The personal nature of ethics dictates that disagreement is likely even at the upper-most level that sets the direction of a company. Various stakeholders may answer the question differently, e.g., creditors and shareholders may place profitability ahead of generosity.

Indices are being set up now in United States (and some foreign) markets to define what is “ethical” and certify companies and funds. Many of these indices were launched in response to growing investor demands that companies be socially responsible. These indices will set some common standards for what to do on human rights, environmental issues, and social issues. Hopefully, a common definition of responsibility can be established.

There is tremendous pressure on many funds to remove support from companies that violate human rights (e.g. through child or slave labor production) or who are socially irresponsible (e.g. though manufacture of “bad” products such as cigarettes or drug paraphernalia). Many funds are anxious for certification as “socially responsible.” These funds, representing huge investment dollars in capital markets, will invest in companies in the indices as long as the companies meet their other financial criteria.

At some point, the market takes over: a firm cannot operate if people do not want to do business with them. It cannot operate if lenders or shareholders do not want to invest. Some individuals and funds that do not place a high priority on ethical activity will invest in companies shunned by others.

However, other firms that have ignored social responsibility will be forced to improve in order to retain employees and customers, and find lenders and investors. Otherwise they will operate at a less competitive level, bidding up the cost of doing business in order to attract a shrinking pool of employees, customers, and investors. Such a company is likely to go out of business.
Tanya Beder
Managing Director & Head of Strategic Quantitative Investments
Caxton Corporation
New York NY