The Doctrine of Social Responsibility
04/02/2024 - Gordon Huang, Founder
The following are my own opinions. If you would like to share your opinion or engage in discussion, please reach out.
Nobel Economist Milton Friedman's 1970 essay, titled "The Social Responsibility of Business is to Increase Its Profits," is often cited as one of the fiercest defences of free-market capitalism against the social and political crusades of the post-WWII era. In less than three thousand words, Friedman delivers an impassioned assault on "intellectual forces," those that "have been undermining the [very] basis of a free society." Perhaps the most egregious of all? The Doctrine of Social Responsibility.
Core to Friedman's argument is that senior executives who exercise corporate social responsibility are failing a far more important responsibility - their duty to shareholders. When executives spend more on reducing pollution beyond the amount required by law, they are choosing to reduce profits for shareholders, effectively spending their money. Friedman thus denounces the businessperson as simultaneously legislator, executive, and jurist; someone who decides how much to tax, for what, and spends the proceeds as a civil servant, not a private one. And to many at the time, at no fault of their own, these were compelling arguments that defended the only bottom line they ever knew - profit. Though there were efforts to, say, indoctrinate the public into supporting businesses who were socially underlined, shareholder value maximisation remained the mantra of the business world for the next half-century.
However, it seems these "intellectual forces" have recently become too strong to withstand. For example, Larry Fink's 2019 letter to CEO's marked a monumental shift in the purpose of business from maximising shareholder value to creating value for all stakeholders, which includes those that own stock but also employees, customers, and the community at large. In his letter, the Chief Executive of BlackRock urged businesses to reconsider their purpose; their "fundamental reason for being," and what it does daily to create value for its stakeholders. In recent years, I have definitely seen more companies—in rhetoric or reality—emphasise the fulfilment of their social responsibilities as an equally important objective to financial gain. Certainly, the number of three-letter acronyms (ESG, CSR, SDG) spouted in the name of 'better' business has skyrocketed. Across (at the very least, the PR offices of) the developed world, there seems to be a growing acknowledgement that financial success need not be at the expense, but rather act as a driver of sustainable progress. By Friedman's logic then, our current society must be completely devoid any "basis for freedom"; it must have been eroded by the "doctrine of social responsibility" long ago. Make of that what you will.
Perhaps I am too harsh. Perhaps Friedman held favourable opinions for his time, but failed to envision the emerging truths that one, doing societal good doesn't need to be at a significant cost to financial returns1, and two, even if there was a trade-off, the 'value' proposition for shareholders now extends beyond gains to also include impact2. The meteoric rise of impact investing, often defined as an investment strategy that promises measurable social and environmental impact alongside financial returns, best epitomises these two realisations. And in some symbolic way, impact investing has at least proven to be no short-lived trend, with a report projecting the market to be valued $US6 trillion by 2031 at an average CAGR of 9.5%.
It is an emerging and undeniable truth that Social Responsibility has and will continue to pervade the public, academic, and corporate consciences. In these past fifty years, we have certainly begun to improve our environment whilst continuing to develop our economies, grow our businesses, diversify our workforces and cultures, and so on. However, I conveniently omit those challenges which we still face; climate change, economic inequality, lagging businesses, marginalisation of minorities, the list is regrettably long. Call it Doctrine, Realism, Gospel, whatever; Social Responsibility is certainly a topic worth discussing with someone far less young/ignorant than I and in much greater length than this blog post can allow.
