Milton Friedman states that in a free society »[…] there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits […]« Sure thing? Let's have a short review on this aspect.
Multinational corporations (MNCs) search for reliable and cheap suppliers in emerging countries in order to cut costs of production and to stay competitive. This cost competitive advantage approach has its side effects on labor standards as activists all over the world argue that MNCs have to have a corporate social responsibility to protect the employees of their contractors from bad working conditions. They argue, that MNCs have the responsibility to protect the employees of their subcontractors due to the fact that they also belong to their supply chain. Broadly speaking, they are a vital part of MNCs and labor standards such as working hours, safety and health, child labor or compensation should be regulated by the MNCs as well.
But not just MNCs try to compete with each other by cutting wages and labor standards of workers to reduce costs. Emerging countries face the fact that MNCs move the production of their goods to countries where the wages are the lowest and workers have the fewest rights. Emerging countries such as Bangladesh therefore intentionally deregulate their business environments in order to attract economic investments of MNCs in their countries. Impunity, especially observed in Bangladesh, e.g. no punishments because of extraordinary long working hours, bad housing and working conditions, employing under-aged workers, leads to less attention to social and environmental agreements as there will be no consequences with regards to interstate competition. Whereas governments are concerned about diplomatic issues, local manufacturers are concerned about the costs leading them to dismiss labor standards. Local manufacturers do not want to be the sole bearer of costs they have to face in the course of establishing labor standards.
Multinational companies are discredited having no sense of responsibility for enforcing labor standards such as a safe working environment, fair working hours and wages. Actually MNCs consider not to be responsible for establishing such standards. One reason for this attitude is that MNCs consider their subcontractors being solely responsible for their employees.
Milton Friedman states that in a free society »
[…] there is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits […]« . From Friedman’s economic perspective as an economist as well as from his normative analysis on social responsibility, a corporation and its executives’ primary responsibility is to maximize profits. There is no other particular responsibility from a libertarian economic point of view. In an economist world I would agree. With respects to reality and the government's loss of information monopoly thanks to the internet I wouldn't agree. Although Friedman’s first part of the statement focuses on plain economist issues in a perfect economist world, Friedman’s acknowledgement of moral motivation could be seen in the second part of his statement where a corporation can »
[…] increase its profits as long as it stays within the rules of the game.«
What could be meant by the statement? If corporations do not have a responsibility for labor standards, it should be asked whether governments or customers are better providers of social justice than corporations. Judgments on social issues is the role of governments and not corporations. With the presence of rule of law and a consistent realization governments can subsequently improve labor standards and overall working conditions for employees in their respective countries. But in a complex global business reality of supply and demand, corporations and markets are unavoidably confronted with moral considerations. These considerations may be developed by political mechanisms such as rule of law or circumstance like the disaster at Rana Plaza in Bangladesh. Providing a safe and healthy work place for example, these political mechanisms are based on conformity and in charge of democratically elected officials and would therefore be an appropriate framework for setting up labor standards that hold a corporation responsible for better working conditions while maximizing profits. That could be understood as staying »
within the rules of the game« and therefore behaving morally within the presence of rule of law and subsequent regulations of the government.
But social responsibility is not totally captured by law and better working standards can't be accomplished only by the government. With e.g. Nike and the disaster at Rana Plaza in Bangladesh the rule of law was disregarded due to corruption, lack of implementation or by intention. In quite many emerging countries the absence of rule of law and the subsequent failure of the governments has led to poor working conditions and disasters such as in Bangladesh. In my opinion, where bad working standards still occur, the failure is ultimately in law rather than corporate social responsibility because only legal constraints are sustainable under competition while good will mostly is not.
Therefore, I consider that customers have ethical responsibilities and ethical expectations that go beyond political and legal regulations thus enforcing corporations to act responsibly. Political mechanisms change slowly, they need political will and mostly it takes years to change things for the better. But also due to the internet, things are different nowadays. Customers seek actively for information on corporations and products, they are more aware of their purchasing power and geographical distances have become virtual in a globalized economy. Customers nowadays are more aware of a corporation’s social responsibility than customers were in the 1970s of Milton Friedman. And they need to take responsibility of the fact that their consumer behavior contributes a lot to the overall working conditions of the workers. If they continue to pay less the workers’ conditions remain unchanged. Corporations will either count on consumers back home to ignore the working conditions or they play an important part in the delivery of social objectives. If a social objective is that all people have safety in all aspects then customers need to have an understanding of the conditions that their goods are produced in. Therefore, changing customer behavior through responsible buying practices and awareness of supply chains would be a possible way to take responsibility for labor standards as a customer.
Friedman states that there is a political principle that underlies the market mechanism: unanimity. In a free economy there are no social responsibilities in any sense other than the shared values and responsibilities of individuals and that a society is a collection of individuals and of the various groups they voluntarily form. The political principle behind is conformity where all contribute to a general social purpose whether they wish to or not . I think that corporations are a proper device for acting collectively and therefore expressing political will through social purpose. Corporations who reflect on customer expectations without ignoring moral motivations are faster than political mechanisms of governments and can therefore represent political will through consumption to produce social good. Corporations appearing to be socially responsible and therefore setting up better working conditions enhance their ability to increase profitability by taking care of their customers’ expectations.
On the other hand, if corporations ignore customer expectations and moral dispositions and only concentrate on making profits alone, then they will threaten by a modern market economy based on customer expectations with moral motivations behind thus resulting in boycotts, enormous reputation loss and finally decreased profitability. As CNN stated in its article »Stop cashing in on Bangladeshi workers« by Sajjad Hussein »
[…] the impression in the West that workers are maltreated at factories may turn out to be disastrous. Consumers are getting aware and might not want to buy products in future which are tagged »«. Well implemented CSR strategies save costs of bad (brand) reputation and therefore play an important role on the profitability of multinational corporations.
Made in Bangladesh
In conclusion and taking the realities of multinational corporations such as Nike or Apple into account, corporations do have a social responsibility that extends beyond making profits due to acting as political agents in relation to governments and customer expectations. And they have to work together with a common objective of social change. Through meeting customer expectations, corporations can enhance their moral dispositions, e.g. implementing code of conducts for better working conditions while at the same time increasing their profitability. I therefore fail to see a conflict between maximizing profitability while behaving morally and/or obeying the law. Doing business can do good but doing good is good for business.
- The Social Responsibility of Business is to Increase its Profits by Milton Friedman. The New York Times Magazine, September 13, 1970.
- loc. cit.
- Stop cashing in on Bangladeshi workers. By Sajjad Hussein, Special for CNN, May 9, 2013.