Corporate failure as a means to corporate responsibility

Abstract

Milton Friedman has argued that corporations have no responsibility to society beyond that of obeying the law and maximizing profits for shareholders. Individuals may have social responsibilities according to Friedman, but not corporations.

When executives make contributions to address social problems in the name of the corporation, they are doing so with other people's (shareholders') money. The responsibility of corporate executives is a fiduciary one, to serve as an agent for the corporation's shareholders, and to uphold shareholders' trust, which requires executives to maximize the return to their shareholders, who can then, if they choose, contribute their own money to worthy causes.

Of course, shareholders face the decision problems inherent in the classic “prisoners' dilemma,” where the choices that are collectively sensible are individually unreasonable. Given their dilemma, shareholders should not expect to be able to control executives sufficiently to make them perfect agents, dutifully seeking to maximize shareholder profits in every decision. But, at least as an ideal, Friedman would argue that executivesshould serve as perfect agents andshould not reduce corporate profits by contributing to social causes. Friedman's critics have focused on the assumptions implicit in Friedman's conceptual framework, one of the more important of which is that executives have no other fiduciary responsibility other that the one they have with their shareholders.

The purpose of this paper is to stay within Friedman's conceptual framework and, at the same time, the question Friedman's view on the social responsibility of business, even as an ideal. We do this by focusing directly on how managers will behave, given their status as agents and the extant costs shareholders must incur to closely monitor their executives, and then drawing on important conceptual insights regarding the inefficient provision of community or public goods, best articulated by Friedman himself.

Friedman has argued that contributions to many social problems generate positive neighborhood, or spillover, effects. Because of these positive spillovers, a prisoners' dilemma exists with collective rationality calling for everyone to contribute to the solution of a social problem, but with it being irrational from the perspective of each individual to make such a contribution. Once this prisoners' dilemma is recognized, the possibility exists that all shareholders would be worse off if the shareholders of each corporation had the ability to exert perfect control over their corporate agents, thereby preventing them from violating Friedman's prescription for social responsibility by making corporate contributions in excess of profit maximizing levels.