Chapter 9 - Answers to review questions in textbook, page 234
1 Explain Friedman’s main arguments for his view that the purpose of
a corporation is to maximise profits for shareholders. What
criticisms can be made against Friedman’s arguments?
Answer (Sec 9.1.1)
This is called the “agent-principal argument” and the associated “taxation
argument”: The manager is the agent of the individuals who own the
corporation and his [sic] primary responsibility is to them”. Here Friedman
claims that corporate executives are the employees of shareholders and
as such have a primary fiduciary responsibility to protect their interests,
which Friedman claims, is to maximise profits. At the same time, for
Friedman, management’s only responsibility is the protection of
shareholders’ interests: “there is one and only one social responsibility of
business to increase its profits so long as it stays within the rules of the
game”. The claim is that corporate executives who spend the corporation’s
resources on social concerns do not maximise profits for the corporation
(shareholders). Friedman arrives at this claim by arguing that in cases
where an executive spends the corporation’s resources on social
concerns that do not maximise profits for the corporation, the executive “is
in effect imposing taxes, on the one hand [by reducing returns to owners],
and deciding how the tax proceeds shall be spent, on the other [by
lowering wages or adding costs to customers]”. For Friedman this is akin
to stealing from shareholders, unless contributions to charity are done as
a public relations exercise for the purpose of increasing profits. Moreover,
for Friedman, imposing taxes and spending the revenue on social
concerns is a governmental function, not a corporate function and when
corporate officers become involved in community activities and public
policy, they are acting outside their area of competence. These matters,
says Friedman, are best handled through the political process and left to
elected and trained civil servants.
Most people do not find Friedman’s taxation argument against corporate
social responsibility very compelling. This is partly because managers do
not have a responsibility to earn the greatest amount of profit without
regard for the means by which the profit was made and partly because
shareholders may be interested in the social dimensions of their portfolio
investments, as well as their financial returns. The success of ethical
investment portfolios are testament to this. Moreover, there is a growing
body of research evidence that suggests a positive correlation between
corporate social responsibility and corporate financial performance. Also,
rather than viewing socially responsible behaviour as theft, it can be
viewed as a kind of payment for the unpaid social costs of doing business.
1
, There are problems with Friedman’s synonymous use of “primary” and
“only”, his emphasis on “maximisation” of profits and his failure to
acknowledge that “primary” implies that there might be other interests to
be considered. Such interests often require management to forego the
goal of maximum profit, in favour of a good profit, as well as just wages,
safe working conditions, and good environmental practices. Criticisms of
Friedman’s agent-principal and taxation arguments and his free society
argument, have led not only to a broader view of corporate social
responsibility, but also to the view that ethics should be institutionalised
from within corporations. Corporations should be socially responsible, but
there is still much debate about what those responsibilities are. At a
minimum, the broader socio-economic view acknowledges the interests
and rights of multiple stakeholders who need to be protected from harm.
2 What is the “moral minimum” and what is the relevance of
“affirmative duties”?
Answer (Sec 9.1.2)
Some formulations of the socio-economic view include only the moral
minimum - described as the responsibility to make a profit without causing
harm. Simon, Powers and Gunnemann in requiring the moral minimum
from corporations, make the important distinction between negative
injunctions and affirmative duties and argue that both are required by the
standard of a “moral minimum”.
This understanding of the moral minimum for corporations requires not
only that they do no harm, such as “do not pollute” (duties of
nonmaleficence), but also that corporations prevent harm from occurring.
The obligation to prevent harm is not open ended. Simon et al. present the
view that it is limited by the criteria of need, proximity, capability and last
resort. Profitability is included as a function of capability. These criteria
serve to bring direction and coherence to corporate social policy.
3 Explain the socio-economic view of corporate social responsibility
and how it differs from the maximal view of corporate social
responsibility.
Answer (Sec 9.1.2)
The second viewpoint in the corporate social responsibility debate is held
by those who argue that stakeholder interests and expectations should be
more explicitly incorporated in the organisation’s purposes even when
doing so results in reduced profitability - it is referred to as the neo-
classical view or socio-economic view of corporate social responsibility.
Some formulations of the socio-economic view include only the moral
minimum, described as the responsibility to make a profit without causing
2
, harm. However, Simon, Powers and Gunnemann, make the important
distinction between negative injunctions and affirmative duties and argue
that both are required by the standard of a “moral minimum”. This
understanding of the moral minimum for corporations requires not only
that they do no harm, such as “do not pollute” (duties of nonmaleficence),
but also that corporations prevent harm from occurring. BHP Billiton’s
environmental policy provides a good example of affirmative duties. It
states that its policy is to:
Ensure it has management systems to identify, control, and monitor
environmental risks arising from its operations and to conduct research
and establish programmes to conserve resources, minimise waste,
improve processes, and protect the environment.
The obligation to prevent harm is not open ended. Simon et al. present the
view that it is limited by the criteria of need, proximity, capability and last
resort. Profitability is included as a function of capability. These criteria
serve to bring direction and coherence to corporate social policy.
Other formulations of the socio-economic view of corporate social
responsibility recognise issues of rights and justice and how these may
require corporations to forego some profit in the interests of all who have a
stake in a business’s operations. The recognition of stakeholder rights is
central to the concept of stakeholder theory which has become popular
with many business ethics writers today. For example, Johnson identified
a “multiplicity of interests” when he stated that:
A socially responsible firm is one whose managerial staff balances a
multiplicity of interests. Instead of striving only for larger profits for its
stockholders, a responsible enterprise also takes into account employees,
suppliers, dealers, local communities, and the nation.
The stakeholder theory has been justified by appeals to Kant, rights,
justice and utilitarianism. There is also wide support in the literature for the
view that strategically managed firms can and ought to take into account
broad stakeholder-based interests. It is argued that by attending to such
interests, corporations build intangible assets such as goodwill, reputation,
trust, loyalty and opportunities for innovation.
Taking account of the various themes within the socio-economic view of
corporate social responsibility, Bowie and Duska offer a revision of the
classical economic view stating that:
Business has a primary responsibility to make a profit, but in doing so
cannot resort to coercion or fraud, and must respect the rights of all those
who have a stake in the business, treating them justly and fairly,
3
1 Explain Friedman’s main arguments for his view that the purpose of
a corporation is to maximise profits for shareholders. What
criticisms can be made against Friedman’s arguments?
Answer (Sec 9.1.1)
This is called the “agent-principal argument” and the associated “taxation
argument”: The manager is the agent of the individuals who own the
corporation and his [sic] primary responsibility is to them”. Here Friedman
claims that corporate executives are the employees of shareholders and
as such have a primary fiduciary responsibility to protect their interests,
which Friedman claims, is to maximise profits. At the same time, for
Friedman, management’s only responsibility is the protection of
shareholders’ interests: “there is one and only one social responsibility of
business to increase its profits so long as it stays within the rules of the
game”. The claim is that corporate executives who spend the corporation’s
resources on social concerns do not maximise profits for the corporation
(shareholders). Friedman arrives at this claim by arguing that in cases
where an executive spends the corporation’s resources on social
concerns that do not maximise profits for the corporation, the executive “is
in effect imposing taxes, on the one hand [by reducing returns to owners],
and deciding how the tax proceeds shall be spent, on the other [by
lowering wages or adding costs to customers]”. For Friedman this is akin
to stealing from shareholders, unless contributions to charity are done as
a public relations exercise for the purpose of increasing profits. Moreover,
for Friedman, imposing taxes and spending the revenue on social
concerns is a governmental function, not a corporate function and when
corporate officers become involved in community activities and public
policy, they are acting outside their area of competence. These matters,
says Friedman, are best handled through the political process and left to
elected and trained civil servants.
Most people do not find Friedman’s taxation argument against corporate
social responsibility very compelling. This is partly because managers do
not have a responsibility to earn the greatest amount of profit without
regard for the means by which the profit was made and partly because
shareholders may be interested in the social dimensions of their portfolio
investments, as well as their financial returns. The success of ethical
investment portfolios are testament to this. Moreover, there is a growing
body of research evidence that suggests a positive correlation between
corporate social responsibility and corporate financial performance. Also,
rather than viewing socially responsible behaviour as theft, it can be
viewed as a kind of payment for the unpaid social costs of doing business.
1
, There are problems with Friedman’s synonymous use of “primary” and
“only”, his emphasis on “maximisation” of profits and his failure to
acknowledge that “primary” implies that there might be other interests to
be considered. Such interests often require management to forego the
goal of maximum profit, in favour of a good profit, as well as just wages,
safe working conditions, and good environmental practices. Criticisms of
Friedman’s agent-principal and taxation arguments and his free society
argument, have led not only to a broader view of corporate social
responsibility, but also to the view that ethics should be institutionalised
from within corporations. Corporations should be socially responsible, but
there is still much debate about what those responsibilities are. At a
minimum, the broader socio-economic view acknowledges the interests
and rights of multiple stakeholders who need to be protected from harm.
2 What is the “moral minimum” and what is the relevance of
“affirmative duties”?
Answer (Sec 9.1.2)
Some formulations of the socio-economic view include only the moral
minimum - described as the responsibility to make a profit without causing
harm. Simon, Powers and Gunnemann in requiring the moral minimum
from corporations, make the important distinction between negative
injunctions and affirmative duties and argue that both are required by the
standard of a “moral minimum”.
This understanding of the moral minimum for corporations requires not
only that they do no harm, such as “do not pollute” (duties of
nonmaleficence), but also that corporations prevent harm from occurring.
The obligation to prevent harm is not open ended. Simon et al. present the
view that it is limited by the criteria of need, proximity, capability and last
resort. Profitability is included as a function of capability. These criteria
serve to bring direction and coherence to corporate social policy.
3 Explain the socio-economic view of corporate social responsibility
and how it differs from the maximal view of corporate social
responsibility.
Answer (Sec 9.1.2)
The second viewpoint in the corporate social responsibility debate is held
by those who argue that stakeholder interests and expectations should be
more explicitly incorporated in the organisation’s purposes even when
doing so results in reduced profitability - it is referred to as the neo-
classical view or socio-economic view of corporate social responsibility.
Some formulations of the socio-economic view include only the moral
minimum, described as the responsibility to make a profit without causing
2
, harm. However, Simon, Powers and Gunnemann, make the important
distinction between negative injunctions and affirmative duties and argue
that both are required by the standard of a “moral minimum”. This
understanding of the moral minimum for corporations requires not only
that they do no harm, such as “do not pollute” (duties of nonmaleficence),
but also that corporations prevent harm from occurring. BHP Billiton’s
environmental policy provides a good example of affirmative duties. It
states that its policy is to:
Ensure it has management systems to identify, control, and monitor
environmental risks arising from its operations and to conduct research
and establish programmes to conserve resources, minimise waste,
improve processes, and protect the environment.
The obligation to prevent harm is not open ended. Simon et al. present the
view that it is limited by the criteria of need, proximity, capability and last
resort. Profitability is included as a function of capability. These criteria
serve to bring direction and coherence to corporate social policy.
Other formulations of the socio-economic view of corporate social
responsibility recognise issues of rights and justice and how these may
require corporations to forego some profit in the interests of all who have a
stake in a business’s operations. The recognition of stakeholder rights is
central to the concept of stakeholder theory which has become popular
with many business ethics writers today. For example, Johnson identified
a “multiplicity of interests” when he stated that:
A socially responsible firm is one whose managerial staff balances a
multiplicity of interests. Instead of striving only for larger profits for its
stockholders, a responsible enterprise also takes into account employees,
suppliers, dealers, local communities, and the nation.
The stakeholder theory has been justified by appeals to Kant, rights,
justice and utilitarianism. There is also wide support in the literature for the
view that strategically managed firms can and ought to take into account
broad stakeholder-based interests. It is argued that by attending to such
interests, corporations build intangible assets such as goodwill, reputation,
trust, loyalty and opportunities for innovation.
Taking account of the various themes within the socio-economic view of
corporate social responsibility, Bowie and Duska offer a revision of the
classical economic view stating that:
Business has a primary responsibility to make a profit, but in doing so
cannot resort to coercion or fraud, and must respect the rights of all those
who have a stake in the business, treating them justly and fairly,
3
