*This essay was written for the subject, Issues in Professional and Applied Ethics, in the University of Melbourne. It includes professor's observations.
QUESTION: In his article “The Social Responsibility of Business is to Increase its Profits”, Milton Friedman argues that executives of share-holder owned companies have no right to make decisions about company policy based on their personal moral views, where such decisions will reduce the profits the company would otherwise make.
Is he right?
ABSTRACT: In this essay I will try to answer this question supporting that Friedman is not right. Even more, I will argue that executives must make decisions about company policy in regards to their personal moral views to respond to their role in the best way possible as should be expected by shareholders, others stakeholders and the society as whole. For this purpose I will narrow the issue by exploring what aspects I will not consider as part of the answer to this question. Then, I will address business as a social activity and its morals implications. In third place, I will review implications for businesses considering they can have a broader purpose, and will discuss on the consequences for executives considering the need of Ethical Leadership. As a conclusion, a summary of the main ideas and a reference to the latest tendencies in management theory that put moral in the centre of businesses will de addressed
1. Discerning between what I will be consider and what I will not consider
1.1. Aspects being considered
This essay is an attempt to enlighten a moral perspective of businesses. More specifically, to demonstrate that executives have a moral and practical duty to consider personal moral view as business’ leaders.
One first distinction is about what to consider “personal moral views” and just moral views. De George (1986) considered the moral views those that are held by the whole society (Objective morality), generally translated to laws and its principles. Personal moral considerations (subjective morality) represent individual’s own beliefs about what is right and wrong to do, and take shape in the way of conscience. (De George, 1986) In this essay I’m talking about subjective morality that affect business, management, and decisions taken for individuals in executives roles.
The scope of the answer is focused in the process of leading and managing businesses shared-holder owned companies by executives, and the elements they take into account to produce strategies, policies, and practices to accomplish the purpose of their function.
1.2. Aspects I will not consider
The first thing that we are not talking about is what executives tend to do with the money earned by the business at the bottom line, after all discounts including taxes. This money belongs without any doubt to the owners of the company, in the way of stockholder.
In a similar vein, we could ask about the justification of money spend in the name of Corporate Social Responsibility (CSR) policy occurring trough the business process in activities such as employee volunteers programs, community helps, or even philanthropy. Although there could be a discussion about the pertinence of this initiatives in regards to the core business and profit maximization, I will assume that like other actions taken in the business process, these are developed under board members knowledge and approval. Therefore, that they considered those initiatives may produce in some way strategic value for the company (brand value, license to operate, employee engagement, etc.), so we should not regard them as executive’s policy based on their own personal moral views.
The second thing that I’m not taking as CSR policy are policies oriented toward the solution of social problems that enterprises realise acting directly in the way government should, instead of generating profit. Building and managing a public hospital, for example. That kind of initiatives represents more a philanthropist action by natural people. As I will do later, it is pertinent to discuss how Business Corporation can produce other kind of values for others stakeholders beyond profit or economic value for stockholders, but this essay will not put into discussion if companies should shift their core business in a way that competes with state.
Third, I’m taking the question without considering the possibility of its exact opposite: asking executives to maximize profits through unethical or immoral practices. Friedman himself describes the limits of an executive´s domain; in his article he refers to “make much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom”. (Friedman, 2007)
2. Businesses’ social nature and its implications
2.1. Business as a social activity has to have moral considerations
Given that business is a human activity, realised among humans and for humans (in different ways), it is logical to request from individuals leading them to act according to moral considerations in its acts (Bowie & Bowie, 1999; Handy, 2002; Sandel, 2011) . Considering this issue there is are a series of practices that companies can adopt. Deeper levels of democracy, allowing employees to participate in decisions that could affect their personal purpose or their quality of life; different ways of sharing profits that reflect everyone’s contribution; and community’s engagement initiatives, are just three of the most usual practices, but are not usually adopted by the majority of companies.
Following Bowie (1999) in his application of Kant’s moral philosophy to businesses, executives as the moral agents leading business corporations, should treat the humanity of the several stakeholders as ends, and not merely as means. Human beings as moral agents: free, rational, autonomous, self-determined, and responsible, cannot be used or taken just as a resource for the accomplishment of the ends of others. Given that, human’s beings cannot be treated as land, money, or machines, because given they have dignity (Bowie & Bowie, 1999) .
But further than moral dignity of stakeholders to take into account, there are Business Corporation’s operation impact and needs.. It’s impossible for businesses to avoid the fact that their operation has consequences for different stakeholders, including the environment, and that they need these stakeholders to survive, as well. That is why what was in the past called negative externalities are now the challenges of CSR corporate’s departments (Freeman, 2010). In positive terms, businesses must participate in society in an ethically symbiotic way. Businesses need society to exist, and the society needs business growth to go forward.(Joyner & Payne, 2002) This symbiotic relationship has a number of practical consequences. One of the most important is profit expectation. Given that different stakeholders have different expectations as well, short-term profit expectations of speculators should not be commanding business activity (Stout, 2012). As shown in Firms of Endearment (Sisodia, Wolfe, & Sheth, 2007) , purposeful companies need patient stockholders that respect the company’s social’s cycle of businesses in order to maintain loyalty with their closest stakeholders in hard times.
In other cases this symbiotic linkage between businesses and society comes in the way of business strategy. As Porter and Kramer propose in Share Value Proposition (Porter & Kramer, 2011a) , there is a big opportunity for business to play a role in solving social problems. Because Capitalism is under siege as a model to satisfy human needs, and because businesses are the only organizations that generate profits, business should play a different social role. The authors stand for companies finding business’s opportunities solving social problems as: healthcare, water management, housing, nutrition, clean energy, etc.
In this perspective, Shared Value is created through three different ways: new products and markets, redefining value in the value chain, and facilitating local cluster development (Porter & Kramer, 2011b) .
There are more emergent practices reflecting moral considerations in business, but it would be extensive to describe all of them. Some of them: implementing sustainable frameworks and reports as GRI (Hussey, Kirsop, & Meissen, 2001) and ISO 26000 (Pojasek, 2011), with a CSR or Community Management department, or adopting a new corporate’s nature definition by law, as a B-Corporation, pursuing to be the best company for the world rather than the best in the world.
As a conclusion, we find that executives should include moral considerations and responsibility toward different stakeholders in their decision process. everyday. In the name of business and considering the desirable imperative of generating profits, and attending the core human and social nature of its activity, are compelled to take moral considerations to execute their role, like they do in other circumstances of their lives. I can think of no plausible reasons to ask them to leave moral away of business or to suspend it while they are working, as some authors advise (Carr, 1968). With this I’m not talking about sacrificing profits in the name of moral. Moral considerations are good intrinsically, not because of the consequences for business they may bring, in the mid and the long term (Reiman, 2012; Robert C Solomon, 1997; Sisodia et al., 2007).
2.2. Moral beyond the respect of rights
As many authors in the field, I’m bearing in mind ethics and moral as interchangeable terms, being aware that underneath there is a huge and extended discussion. As well, I understand ethics as the standard of behaviour for individuals living in a community, including beliefs of what is right and wrong to do. But, as some authors like Michael Sandel, I’m taking into account the character we shape through our behaviour and the decisions we take, and the pursue of the common good as part of the moral conduct. (Sandel, 2011) This means putting moral beyond utilitarian and liberal ethical perspectives.
Both the objective and subjective moral considerations of individuals leading businesses should go beyond duties imposed by law, and respect different kind of stakeholders affected by business’s operation. Following the idea of a wider moral scope, it seems logical to expect that companies should pursue both higher moral values along with economical value in the way of profit. Even from a practical perspective, we should expect more from businesses if we agree that companies are one of the most important social organizations and work is one of the most important human activities.
Executives should both respect other people´s rights and at the same time look for the higher purpose the company they lead stands for and making important efforts to translate this purpose in meaningful jobs for employees. (Bartlett & Ghoshal, 1994) We should expect business’s purpose toward the common good (Robert C Solomon, 1997) and at the same time, we should expect companies contributing to society at the same time that they are making as much money as they can. This becomes even more prominent considering that there is important evidence showing that companies that put moral considerations in the centre of their business philosophy have much better results (Sisodia et al., 2007).
For all these business purpose and performance reasons, asking executives to ignore their personal moral views is detrimental. As we can take from the several studies presented by Mary Gentile in her book, Given Voice to Values, it looks like companies have the challenge to hire and develop executives that has a clear vision of which are the values they stand for. Executives with their own ethical framework, hypothetical strategies to put their personal moral views into practice, and the clearest possible concept of their ideal ethical vision of themselves, teamwork, organizations, communities, and the whole society (Gentile, 2010). Even more, maybe is not an exaggeration that one of the major and toughest leaders task is about managing values (Peters & Waterman, 2004) .
Once we agreed on this broader moral purpose we should advocate for companies that believe in ethics and profit at the same time and for executives who also embody this belief strongly. As Gentile states, there is much more possibilities for executives and anyone of us in any position, to voice our values and put them in practice if we are strongly connected with them, if we build a clear own ethical framework, and even more, if we define and declare a personal and professional purpose linked with that framework (Gentile, 2010).
2.3. Is Friedman asking for moral neutrality?
This point could have been the first of all. Considering that the essays question refers to objective morality or moral neutrality, it is pertinent to try to answer what it means and how should it be applied, if it’s possible. In practical sense, is it available for executives not to take their personal moral views and act with moral neutrality?
One approach could be related with public debate. John Rawls, in defence of a liberal conception, states that people should leave away their personal moral and religious principle at the moment of thinking about public affairs and stick to their identity as citizens. Standing for a reasonable pluralism and tolerance need, Rawls thinks that it is not logical to expect that people from different moral and religious origins arrive to the same conclusion of public matters (Rawls, 1993).
Rawls proposes that individuals should not include their personal convictions about rights and justice, because that would mean that they are imposing their particular convictions to the rest. The way out is keeping us within the limits of liberal public reason. What does this mean? Rawls says following a test that looks like Kantians’ categorical imperative: “how would our argument strike us presented in the form as a supreme court opinion?” (Rawls, 1993) . We should leave away our moral and religious convictions and think in a way that all citizens probable will accept (Sandel, 2011).
It’s clear that tolerance is a value and a condition to build life in a community. But, should we achieve it with moral neutrality or with tolerance in consideration and attendance to our deep moral beliefs? In my perspective and agreeing with Sandel, it is even impossible to decide about rights and justice without taking into account essential moral questions. Even if that could be possible, it may not be desirable (Sandel, 2011).
Given these two perspectives, I stand for executives that are fully aware of moral sensitive issues in the whole business activity, from initial motivation for existence to the last detail in the simplest process. I would expect executives to lead based on their personal moral views, and companies hiring them precisely because of these moral views, which should fit in some way with Rawls’ condition. Some way, means asking for tolerance and the conviction that imposes beliefs and postures is not available for anyone. At the same time, we should expect strong moral principles for individuals orienting their decisions and behaviours, as a previous condition to have the conversation of the society we pursue.
Once again and just to reduce the possibility of a potential misunderstanding, I’m standing by executives mindfully connected with their own moral principles with the ability to put them in practice in the exercise of leading outstanding profitable businesses. Moral companies are not necessarily NGO’s, but just companies doing what is right.
3. Business purposes and its impact in executives role
3.1. The game has changed: maximizing profits along with pursuing higher moral purposes
Following Aristotle’s teleological principle, purpose defines entities nature and practices (Singer, 1993). Therefore, while we are defining business purpose, we are defining ends and means for executive role, as well.
There is not one shared definition of business’s purpose in the world, not even within each country. It is clear that business corporations are meant to generate profit, but not if it is the only and final purpose. But is not under discussion that to get a clear and more or less shared idea of business’ purpose is a social need, insofar businesses are one of the most important organization in our society.
First because they provide services and products to satisfy different kinds of people’s needs. Also, because Michael Porter says, businesses are the only organization that generates profit (Porter & Kramer, 2011a) . Third, because most people work in companies, developing their talents in the best case, or at least spending a huge amount of time working on them. That even mentioning religious’ considerations, like protestant and their search for sanctity through work (Weber, Baehr, & Wells, 2002) .
Given this relevance of businesses for our societies and the ethical implications that I have presented, it is why I stand for a double purpose for companies. Generate and maximize profits, and to pursue higher moral values for the different stakeholders engaged or involved in different ways. (Bartlett & Ghoshal, 1994; Freeman, 2010; Handy, 2002; Kanungo & Mendonca, 1996; Mackey, Sisodia, & George, 2013; Mintzberg, 2004; Sandel, 2011; Sisodia et al., 2007; Solomon, 1992; Stout, 2012) . And I think that this double purpose means that there have to be no choice between one or another. It should be profit and moral in the core business of companies.
Some could reasonably ask: What happens when the two goals come into conflict – don’t we need to know which has priority? In my perspective there is no such a conflict, because having a moral purpose starts with the way the company pursues profit. Respecting employees and not considering them merely as means, taking care of the environment, promoting trust and integration with suppliers, engaging communities touched by its operation, and respecting the law. To honour this way of doing business is a good enough moral action.
An additional way of company’s moral purpose would be the definition of a purpose beyond profits toward the common good and virtues development. It doesn´t mean, as Friedman believed that companies should be closer to philanthropy or act with purposes that resemble government. It’s about the driver and big goals that gives sense of existence to the business, its processes and the people involved: employees, shareholders, clients, suppliers, neighbours, etc. So, could a company be forced to choose between profit and moral? In my perspective, it could not.
To get a more clear idea of this stands, I will take the article of the business philosopher Charles Handy, What is a business for?, as a framework of arguments of why should we have to ask something more than profits to businesses. Using Handy’s outline along with others authors, here are the main detailed arguments of the extent of this double purpose:
- Nature of businesses has changed. Investment has replaced ownership, and intellectual capital (talent, culture, brand, knowledge, patents) has replaced buildings and machineries as the most important asset (Handy, 2002; Ridderstråle & Nordström, 2000) .
- Investors don’t have neither the proud nor the accountability that owners have. In fact they are just for the money in the shorter term as possible (Handy, 2002; Stout, 2012).
- To think that an investor’s needs are the purpose of the company is a logical confusion, taking a necessary condition as a sufficient one (Handy, 2002).
- For many people, corporations are amoral entities, since they looks like pursuing just their own satisfaction (Bartlett & Ghoshal, 1994; Handy, 2002; Mintzberg, 2004; Porter & Kramer, 2011a) .
- A good company is a community with a purpose, and a community is not something to own (Bartlett & Ghoshal, 1994; Handy, 2002) .
- Several stakeholders participating and investing money, talent and time, invite us to see businesses as human communities where only one of their purposes is to maximize profit (Stout, 2012; Freeman 2008; Mintzberg, 2004).
- Different recent corporative scandals and world threats (climate change, energy, food, etc.), put the role of business corporation as a profit oriented institution “under siege”. (Handy, 2002; Porter & Kramer, 2011a)
As a conclusion, it is safe to say that we are living new times for businesses and their purposes. Social expectations and new conditions (positives as technological progresses and negatives as social inequalities and climate change) are pushing for a broader sense and driver for companies, together with new ways of conceive business nature as purposeful communities of people.
3.2. Ethical Leadership
I have presented that business corporations has moral duties insofar they are a social activity. Also, I considered a wider moral perspective: respect others rights, character development through virtue practices, and pursuing the common good. Thirdly, the imperative for businesses to pursue profit generation and higher moral values. What remains is to take a look to the practices of what we can now call Ethical Leadership.
The argument that I uphold is that, if we do not approach the question from the business’s characteristics perspective, but from the leadership nature perspective, we would have arrived to the same conclusion. That Friedman is not right in his statement.
This is one of those situations when going back to the basics brings us a good quota of clearness: leading is leading people. In some cases it is easy to start talking about business’ leadership as if we were talking about management of human-less activities, acting by themselves for themselves. Reality is that even if executive take decisions regarding money, machineries, or technologies, human beings are involved in the decision-making and implementation process, and are impacted by its consequences.
We can consider that Kant supported this perspective saying “act so that you treat humanity whether, in your own person or in that of another, always as an end and never as a means only” (Bowie & Bowie, 1999) . As I presented before, this second formulation of the categorical imperative goes beyond the mere respect of human beings. Place a special duty for people leading people, of develop them and not just using them for the sake of others ends as the generation of products, services, and profits at last. Again, that doesn’t mean necessarily to put people purposes, in business case, employees, over profit and products or services delivery. It means to put together both objectives and embody them in business’s purpose and management process. For example, like is showing with the simple sign of go beyond the traditional call of Human Resources management to People management.
Ethical Leadership helps build ethical corporations, while its impossible to split business activity and leadership activity, as well as leadership and ethics. These are some elements to take into consideration:
- Leadership is the process of engaging, directing, and coordinating people toward the achievements of common objectives (Ciulla, 2004).
- Ethics is about the standard of behaviour, the way we find to live in community, and the character we develop through our acts (Sandel, 2011) .
- Ethical Leadership is the one that puts values in practice with corporative goals (Wood, 2009)
- It’s about ethics and business, not ethics or business (Solomon, 1992; Wood, 2009).
- Corporations could not ask executives to let their ethics principles away from their activity. There is not an individual split possibility, but even more, it is not desirable (Bowie & Bowie, 1999; Robert C Solomon, 1997; Sandel, 2011; Solomon, 1992) .
- Leadership is one of the key elements for business continuity, and that leadership’s quality rests in its moral strength (Bamard, 1938).
In summary, as we approach to business activity as the one of people in executives positions leading other people appears the need to take into discussion the call for Ethical Leadership. Given that, considering different elements that constituted Ethical Leadership, should not be people in business expecting to manage businesses ignoring in their behaviour (while not in their purposes) the human dimension and moral nature of business activity. Given our social dimension we need leadership, and given that leadership phenomena we need ethics.
“U.S. corporate leaders have begun articulating a new philosophy: that business is part of the total society and has an obligation to attack a broad range of social problems if need be in ways that temporarily retard profits. The new mood reflects much genuine altruism”
(Time magazine, 1970)
As this forty years old cite from an Time article, in this essay I tried to argument that Friedman is not right stating that executives must set away their personal moral views, even when it could implicates generate less profits. I developed the idea based on moral business imperative as a social activity, a broader moral scope toward virtues and common good, and implications and weaknesses of moral neutrality. Closer to the practice of executive role in business, I reviewed business’ purpose and its impact leadership performance in the way of ethical leadership.
As I mentioned at the beginning of this work, I considered out of question if executives could incur in philanthropist initiatives with money that don’t belong to them. In a similar line, I left away the discussion about money spend in CSR initiatives approved by companies’ boards. In third place, I didn’t consider as part of legitimate CSR, activities that seems to replaced government or state duties. Although, in this last case I’m aware that distinction is not clear in many cases. Fourth and last, I took the question without consider the possibility of the opposite: to ask executives to maximize profits through unethical or immoral practices. Friedman stood his own statement in accordance with ethics standards, explicitly.
I think is important to remark that there are new tendencies in business and management that reflect this posture of moral purposes further than profit at the centre of the corporative activity. Conscious Capitalism as the last extension of a stakeholder strategy (Freeman, 2010; Kofman, 2008; Mackey et al., 2013; Sisodia et al., 2007), Shared Value, proposed by Michael Porter, one of the gurus of business and management theory (Porter & Kramer, 2011a) , and B-Corporations, are maybe the most remarkable.
Finally, is useful to consider what Barlett and Goshal think about the famous statement of Friedman saying, “the only social responsibility of business is to increase their profits” (1973). For them is minimalist, passive, self-serving, and “grossly” understates reality. Its clear for them, that the purpose is the embodiment that the business corporation is interdependent with its’ different stakeholders. (Bartlett & Ghoshal, 1994) Hence, leading Business Corporation is leading a moral purpose through business activity.
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