On September 13, 1970, Dr. Milton Friedman, professor of economics at the University of Chicago, published an article in the The New York Times magazine titled The Social Responsibility of Business is to Increase Its Profits. As the title indicates, Friedman asserts that an efficient business manager not only has the obligation to see that his or her business is profitable, but has the responsibility to do so at all costs. This position led to the theory known as the “shareholder view” since, under this view, the fiduciary duty owed to shareholders to maximize profits takes priority over everything else.
It wasn’t until 1984 when R. Edward Freeman published his book, Strategic Management: A Stakeholder Approach, that a new theory was put forth: it is not only shareholders that depend on and influence business; rather, there are other individuals or groups that are also affected by the company. These stakeholders — in addition to shareholders — include customers, employees, suppliers, creditors, the community, and the government, among others. The argument is that the performance of the business has a direct or indirect impact on all of them.
Friedman’s shareholder view suggests that only profitable businesses have the capacity to create jobs, pay taxes and contribute to the economy in general; so, the fiduciary duty owed to the shareholders alone is where their responsibility to society ends. This is a very narrow definition that predominated an entire decade in which companies defended now-questionable business conducts in order to be “socially responsible.” For example, during the 1970’s, commercial discrimination, labor exploitation, overworked and underpaid workers, unreasonable exclusivity agreements, price fixing, low-quality materials, poor-safety standards and environmental pollution, among others, were common business practices that sought to reduce costs in order to increase the earnings of the company.
Freeman’s stakeholder approach, on the other hand, states that while company directors do have a fiduciary duty to their shareholders, a company’s ethical and responsible operation must take into account the interests of all its stakeholders, without giving priority to any one over the rest. As Freeman states, an efficient business manager is the one who is able to “…keep the relationships among stakeholders in balance”. Under the stakeholder approach, it is in this balance where the social responsibility of the company resides.
“Corporate social responsibility has become an emblem in modern-day business, in which companies have become aware of their unique position to contribute and give back to the community.”
The current definition of social responsibility stems from Freeman’s stakeholder approach and is much more expansive. Today, it requires commitment to all of the company’s stakeholders, including even competitors and the environment. Corporate Social Responsibility has become an emblem in modern-day business, in which companies have become aware of their unique position to contribute and give back to the community. In this sense, modern-day corporate social responsibility practices rely greatly on voluntary measures taken by the company through its own initiative, recognizing that the purpose of business is not limited only to complying with the fiduciary duty to their shareholders, but also covers a general obligation to all stakeholders and to society as a whole.
