2022IFCII | Duoguang Bei & Shuo Qin: Both profits and impact. Is Milton Friedman wrong about corporate social responsibility?

Guests INFO:

Duoguang Bei: Secretary General of the International Forum for China Impact Investment (IFCII) and President of Chinese Academy of Financial Inclusion (CAFI)

Shuo Qin: Co-director, Business Civilization Research Center of China

Duoguang Bei:

Today, we will talk about "Both Profits and Impact. Is Milton Friedman Wrong about Corporate Social Responsibility?"

Milton Friedman, a renowned American economist who received the 1976 Nobel Memorial Prize in Economic Sciences, published an article titled "The Social Responsibility of Business Is to Increase Its Profits" in the New York Times in 1970. In this article, he pointed out that there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits , and making profits is the exercise of social responsibility. It reflects some of Friedman's fundamental ideas in economics, which were regarded as golden rules in business at that time and influenced several generations.

However, about 50 years later, 181 CEOs of America's largest enterprises signed a statement in 2019, taking a firm stand in rejecting Friedman's views. The statement declares that enterprises should serve not only their shareholders, but also deliver value to their customers, invest in employees, deal fairly with suppliers and support the communities in which they operate.

With the lapse of time, CEOs have changed their minds, and one question arises, is Friedman wrong? The CEO of Salesforce held that Friedman was just wrong. What has profit-pursuing brought us? Increasing income inequality, racial inequality, and the imminent climate catastrophe. In addition, many young people are disappointed with the current business mechanisms, which has led to protests like "Occupy Wall Street" (OWS) from the United States to Europe.

Will the current business mechanism lead us to an inclusive and sustainable future? This is the paradoxical scenario that we hope to discuss today. Prof. Qin, I've been reading some articles in Chin@Moments. I found that you have a deep understanding of Chinese enterprises and have done a lot of research, including comparative studies on international enterprises. So, what's your opinion on this question?

Shuo Qin: 

President Bei, thanks for inviting me to discuss such a historically profound and relevant issue of the time, which I think has not really been discussed much before. First, we need to understand the essence of the classic article written by Friedman, the 1976 Nobel laureate. After the publication of this article in 1970, Friedman has become the face of the idea that the only social responsibility of the business is to generate profits for shareholders. I have read this article many times, and I found that although the idea was not technically wrong, the process has been often overlooked.

Here is how Friedman proposed such an idea. Friedman is a firm believer in the market, and opposes government intervention and all socialist allocation mechanisms in his day. According to Friedman, there are two kinds of enterprises: first, businesses that are owned and managed by the individual proprietor and they are usually small; second, businesses that are managed by hired agents. The agent may be a corporate executive or a manager, both of which work for the employer.

First, let's talk about the agents of large enterprises. In the eyes of Friedman, agent is expected to devote their time and energy to serve their employers within their mandate. And the employer usually looks for maximizing profits while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.  It's not that Friedman doesn't have socially-oriented observations, but he thinks as long as one conforms to the basic rules of the society, either embodied in law or ethical custom, the agent should make maximizing profits as their responsibility.

Agents may have many social responsibilities that he recognizes or assumes voluntarily, but they have to spend the time or energy he has contracted to create value for their employers. During non-working hours, they can take on some social responsibilities, but during work, their responsibility is to help the employer make money.

Agents can have social emotions and values but they should not undermine the agents' responsibility toward their employers. For instance, as a CEO, one should not refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation. Similarly, one should not make expenditures on reducing pollution beyond that is required by law in order to contribute to the social objective of improving the environment. Or that, one should not hire refugees instead of better qualified available workmen to contribute to the social objective of helping refugees.

In short, for professional agents of large enterprises, their responsibility is not to spend someone else's money to exercise their social responsibility, or in other words, to spend shareholder's money to meet one's own social responsibility.

For the other type, the "agent" is also the owner of the enterprise, who can allocate all the resources of the enterprise at his/her disposal. However, in Friedman's opinion, if you are utilizing these resources to serve a certain community such as doing some public services or donating some money with the purposes of building a better presence in this community, attracting more and better employees, and expanding the market. In Friedman's opinion, such a practice seemingly is donating for philanthropy, but is hypocritical window dressing, as it is actually a marketing investment for commercial benefits.

Today, many entrepreneurs around the world, including those in the United States, strongly disagree with Friedman's views. Around 2005, John Mackey, founder of Whole Foods had a heated debate with the 93-year-old Friedman, who still wrote articles from time to time. That was probably one of Friedman's last major pieces on these issues, such as stakeholders and social contract theory. Although Friedman's views are widely criticized, there is much in this article that is self-consistent and still relevant today.

Duoguang Bei:

I think his theoretical framework is self-consistent indeed. He defined the responsibilities of enterprises, which should not include social ones. The responsibilities of entrepreneurs should be to create profits and jobs, thus creating value for society. However, in our recent research on socially responsible investing (SRI), we found that there are some managers and entrepreneurs who are socially responsible while making money; they donate a small portion of their profits to charity or exercise other social responsibilities. You can see that making profits and fulfilling social responsibilities are two different stories. Some companies make money but they may pollute the environment; others may increase their prices, but they may also require their employees to fulfill social responsibilities.

Anyway, most companies do good whether because it feels good or due to a sense of social responsibility, or as Friedman said, for window dressing. We are now calling for a change; we hope that entrepreneurs will pay more attention to social responsibilities such as green production and carbon emission reduction when doing their main business, and introduce these practices to their main businesses. Although there may be additional costs in the process, as they will internalize some externalities. But after decades of social and economic development, this kind of practice is better received.

Shuo Qin: 

You're right, President Bei, I totally agree with you. From my perspective, there have been several stages in terms of the relationship between enterprises, social values, and social responsibility over the last 50 years:

The first is about how to internalize the externalities. If there are negative externalities, we need to internalize them by, for example, imposing special taxes on pollution, such as the current carbon tax, etc. In fact, we need to rely on national laws to reflect the social costs in the profit and loss statement (P&L).

As for the second stage, it is about the Stakeholder Theory, which is one of the key words of the 2019 Business Roundtable under the World Economic Forum (WEF). This crucial theory tells that the enterprise is not an instrument for maximizing shareholder's interests, but a comprehensive and balanced product that maximizes the overall interests of stakeholders, which is designed for a better world and future.

The third stage is about enterprises engaging in public services. They first focused on "donation", and later on "aid". How? As a Chinese saying goes, it is more important to show people how to fish than just giving them fish. Then, people such as Bill Gates have set funds to "create" social values through social enterprises, impact investment, and public welfare enterprises.

The fourth stage is about integrating the company's strategic development and social responsibility into its main businesses. The Competitive Strategy proposed by Professor Michael Porter is one of the earliest theories about creating shared value. For instance, if green is a company's core value, then it should use biodegradable materials in its packaging as much as possible. By doing so, the costs may be lower and the business value of the company will be enhanced too.

In recent years, many global enterprises have made ESG one of their most important goals, turning the external social indicators into corporate philosophy, strategy, and practice. For example, When I went to the headquarters of Kao Corporation in Tokyo to learn about its ESG, I found that it had translated its positioning, slogan, and actions into KPIs, and required every BU to fulfill the KPIs: from the materials they use to innovation and to the protection of mothers and children, they have all been turned into KPIs integrated with their social responsibility.

Duoguang Bei: 

Speaking of this, it reminds me that when I started to learn economics in the 1980s, it was indeed all about profit and maximizing shareholder's interest. I should say that, at least in our time, this concept is deep-rooted.

In the 1980s, the world is witnessing a wave of liberalization. At that time, the Reagan administration in the U.S. and the Thatcher administration in the U.K. were both promoting liberal economic policies, and the latter even carried out massive privatization. When studying economics in the 1980s, we received a lot of western economic ideas, which were also the hallmarks of the times.

For our generation, the impact of western economics at that time did have a big impact on liberating our minds. In the 1980s, some mainstream western economic views deeply affected us, and we more or less regarded those ideas as the truth. But now it seems that these ideas may not be all correct. For example, in the late 1990s and early 2000s when China was developing its capital market. At that time, regulators and policymakers all believed that the capital market should be based on the principle of maximizing shareholder's interest.

It is now clear that our generation has been strongly influenced by Friedman's views. Decades later, some of us still hold on to those views, but others, including myself, are changing our thought and taking more consideration of ideas such as inclusive development, and social equity and justice.

It seems that in the 21st century, people start to rethink this process, in my opinion, at least the current thinking is an improvement of understanding of social development. Friedman's views were relevant in his time. But for today, it is clearly not adequate or comprehensive, our thoughts need to evolve with the times.

Mr. Qin, you may also notice that the invisible hand or the free competition of the market economy of Adam Smith was mentioned the most as almost a silver bullet. When talking about Adam Smith, we usually quote his book An Inquiry into the Nature and Causes of the Wealth of Nations. However, we tend to overlook the other great work of his, The Theory of Moral Sentiments. If we have an in-depth study of Adam Smith, we will find that even the pioneers in economics or those great thinkers in the old days, did not believe that profits were everything; instead, they placed a lot of emphasis on moral sentiments, compassion, and altruism as early as over 200 years ago.

Shuo Qin: 

You're right, Adam Smith not only emphasizes the invisible hand, but also places great emphasis on compassion and empathy in The Theory of Moral Sentiments. Today, especially after the financial crisis in the United States in 2008 and the European debt crisis in 2010, even capitalists have been revisiting Friedman's views of unlimited expansion, and some books have been published, such as Saving Capitalism from the Capitalists.

So, what trends have they seen? First, there is a conflict between maximizing global profits and local value. It is because when capital is maximized in global markets, through various tax arrangements and facilitations brought by globalization, it may not create much value to some places. Therefore, the International Monetary Fund (IMF) called for rational distribution of local value instead of the maximum global aggregate value.

Second, back in Friedman's time in the 1970s, people did not pay much attention to global connections. But in the 1980s, after the emergence of neoliberalism of Reagan and Thatcher's administrations, global expansion of capital gained big momentum. As the world becomes more and more interconnected, you may find those intricacies in the connections. For example, the carbon emission in one place may lead to the rise of global sea level, or a local war, like the one between Russia and Ukraine, may cause an increase of refugees in Africa. So, in recent years, the ideas such as inclusion, reciprocity, and inclusive growth become increasingly popular.

Specifically, I think Chinese enterprises, especially private ones, failed to do both. First, under a classic capitalist framework or the free economy framework, some companies have problems with compliance, integrity, and trustworthiness. Therefore, quite a few enterprises collapsed scandalously, including Kangmei Pharmaceutical and Kangde Xin Composite Material Group (KDX), which robbed public interests. Such enterprises failed to take social responsibility, not to say comply with basic business ethics and laws.

Second, some enterprises exercise their social responsibility in an unfathomable way. For example, many real estate developers on the one hand used a lot of human and financial resources to help the poor, but on the other hand, they failed to pay their suppliers. So, I think the China context is more complex than the Friedman context.

Duoguang Bei: 

I happened to find a comment by Friedman on Adam Smith's The Wealth of Nations. The gist is that one does not understand what self-interest means until he reads The Wealth of Nations, and one does not understand that altruism serves self-interest with a clear conscience after reading The Theory of Moral Sentiments. What Friedman points out is a dialectical relationship between self-interest and altruism. So, Friedman's theory is self-consistent, but the reality is that the practices of some companies are rather paradoxical. In my opinion, those real estate developers doing all these public services were not out of compassion, but for the purpose of brand building, and ultimately for profits; such behaviors fit Friedman's comment.

Friedman believes that companies should make profits and the government should regulate to make sure they comply with these rules. Companies are not in the position to make rules or promote social justice. However, it seems that opinions have changed. Mr. Qin, in your study, have you seen business involvement in rule-making, or do you see there is some role business can play in this process?

Shuo Qin: 

You're right. Friedman believes that there are many problems in society, which can be solved by the government and the bureaucratic system with the taxes paid by businesses. Nowadays, I think there is a consensus that governments, civil society, businesses, non-profit organizations, media, academia, etc. should work together to solve social problems with their respective strengths. In fact, the government has its share of problems, such as efficiency and performance review. But it can learn lean management from the business sector, and focus more on feedback and efficiency, etc. On the other hand, businesses can actively participate in social affairs, including some emergencies and public services, which is not only beneficial to the community, but also conducive to the long-term development of the businesses themselves.

That is why China's platform companies, such as Tencent and Alibaba spent so much effort on social affairs in the past few years. This is not just the result of rectification by the government. The traffic dividends in China can hardly grow anymore. At present, there are more than 1 billion Internet users in China, and platforms such as QQ, WeChat, Alipay, and WeChat Pay already have about 1 billion users. Therefore, it is difficult to attract new users.

Under such circumstances, what should the platform economy do for further development? From a business perspective, those who were not target users should be in the next step. For example, Tencent pays close attention to the elderly, and up to now its investment in this group has not generated any profits yet. It conducts research in a laboratory and helps the elderly in some nursing homes with technical means. Such as using infrared devices and wearable devices that can send an alert in real-time when someone falls. By exercising social responsibility, it can also help to attract some elderly people as new users. In this sense, social responsibilities can be aligned with commercial interests in the long run. For example, how to help the elderly take the subway and bus in an easy way. Another example is that there are tens of millions of persons with disabilities in China. If they are excluded from the digital society, then it will hurt both their personal development and the inclusive development of the society. At present, many Chinese Internet companies, including some software companies, formed an accessibility alliance to make digital tools accessible to all including audio, visual, and tactile access.

So, active or passive, companies can use their technology and core capabilities to address the pain points, difficult points, and sensitive points of the society, meanwhile advancing on a broader path for development.

Duoguang Bei: 

Yes, I think this is very important, and this may be the difference between "the mature society" and "the immature society". For example, in the past two years, from our research of the SRI, we found that there is a kind of fund called the Social Assistance Fund for Road Traffic Accidents in China, which is designed for traffic accident victims. However, very few people applied for this fund, and it was difficult for the government to determine whether the applicant was eligible or not. Later, commercial insurance companies in Jiangsu Province get involved in the management of the fund. After the traffic accident, the insurance company will investigate, determine the claims, advance medical costs and funeral expenses, if necessary, and provide subsidies to victims in financial difficulties. This is how commercial organizations can help solve problems.

Shuo Qin: 

This is a very good case. I would also like to share a case related to emergency response, such as how to respond to sudden death or sudden diseases such as heart attacks and cerebral infarction. Actually, it happened to some of my friends recently, which is really heartbreaking. At present, there are many organizations in China, including non-profit ones, that are engaging in rescue training to teach people how to use emergency equipment promptly. In addition, there are some Internet companies that started such training first with the purpose of rescuing their employees. Later, they began to think about how to use their internal systems in the wider society. For example, if one falls, how can he or she send an SOS message? You know, in many primary and secondary schools, students are not allowed to bring cell phones. So, we may use wearable devices in specific scenarios.

For example, Tencent piloted a program at Nanjing University using a lot of devices and conducting a lot of training. It's easy to find many volunteers in universities. However, Tencent found that it would be difficult to replicate the program nationwide.

In the future, it is necessary to unify various emergency and rescue signals from hospitals, police stations, communities, etc. into one system. If one falls, without any manual operation, he or she can send an emergency signal by speaking, or even by a facial expression, and then the signal will be sent to the system, so those who have been trained at the nearest distance can come to rescue. But then it might involve some legal issues, say, if you come to rescue someone, what if you fail to do so?


When discussing this case, I find that such problems can only be solved by breaking down the boundaries between sectors, departments, businesses, and local governments and by integrating all the information.

Duoguang Bei:

Mr. Qin, thanks for your inspirational sharing today. I am very glad to have this in-depth discussion with you. I originally planned to discuss entrepreneurship and the articles you wrote recently. Unfortunately, this is all we have, but we will leave it for another time. Thank you very much for joining us today.