The title of this post echoes a famous Milton Friedman article written in 1970. Peter Drucker, however, argued that while profit is the first responsibility of a corporation, it is not the only one. Forty–plus years later, this exchange is still relevant in the arena of ESG investment.
The first responsibility—or the only responsibility?
Milton Friedman—Nobel Laureate and one of the most influential economists of the 20th century—was in feisty mood in his widely–quoted 1970 New York Times Magazine article “The Social Responsibility of Business is to Increase its Profits.” The main point of the article is obvious enough from its title, but Friedman goes on to talk of “unwitting puppets of the intellectual forces that have been undermining the basis of a free society” and “acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate way to determine the allocation of scarce resources.” Friedman’s is a clear and simple argument with no hint of fence sitting, apart from an acknowledgement of the need to conform “to the basic rules of the society, both those embedded in law and those embedded in ethical custom.”
The sense that this argument may be too clear and simple is not a modern development. Indeed, Friedman’s contemporary, the also–highly–influential management thinker, Peter Drucker, penned what is, in effect, a response in his 1973 book “Management: Tasks, Responsibilities, Practices.” He wrote that a manager’s first duty is indeed to fulfill the purpose of the corporation—making money. He then continues:
“But this is not enough. Any institution exists for the sake of society and within a community. It, therefore, has to have impacts; and one is responsible for one’s impacts. In the society of institutions of the developed countries, the leadership groups, that is, the managers of the various institutions, also have to take social responsibility, have to think through the values, the beliefs, the commitments of their society, and have to assume leadership responsibility beyond the discharge of the specific and limited mission of their institutions.”1
Still relevant forty years on
It’s not difficult to see the parallel between this exchange and the current high-profile debate over Mylan’s sharp price increases for its EpiPen.
And it’s there, too, for investors considering their responsibilities regarding sustainable/ESG investing.
But it would be a mistake to think that the question is whether you agree with Friedman or Drucker. Attitudes toward social responsibility lie, in fact, on a spectrum.
Even Friedman gave a nod not only to the law but also to the vague notion of “ethical custom”; there are those who—waving their well–worn copies of Atlas Shrugged—would dismiss that concession as a sell–out. And among those who embrace Drucker’s argument for responsibility “beyond the discharge of the specific and limited mission,” there is huge variation in attitudes toward how far beyond they should go. This variation is hardly a surprise, just as it’s not news that readers of this blog vary in how far out of your way you’d go to recycle your newspapers or to save $10.
This is the concept—about which I have written previously—of bounded responsibility: “many individuals and many institutions do care about some aspect of sustainability/ESG, either because they see it as impacting the risk or the return potential of an investment, or because it is a core value… There is, however, a bound to their commitment: they care—but only up to a point.”
This has ramifications for investors considering their ESG policies, and indeed for investment firms considering the product offerings they should be bringing to market. But that’s a subject for another day…