(I apologize in advance for the lengthy nature of my post)
I read Milton's article and my knee-jerk reaction, was that we were assigned the article to get a fired up about an underlying statement that managers of firms should not deviate from maximizing profitability even if it means that sacrificing profits is for something socially or environmentally positive. I'll admit I felt that Milton came off as insensitive to social plight, however I don't think his theory is wrong. In fact not only do I agree with his theory, I believe that his theory actually strongly supports an argument for social entrepreneurship if one accounts for environmental and social externalities appropriately the equation of profit maximization.
Milton summarizes his argument that "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
He does not imply that companies should act in socially irresponsible ways. I think the two most important points in this statement are the "efficient use of resources" and "staying within the rules of the game". If companies followed this statement there would be opportunity to influence the profit maximizing behavior of firms by putting economic dollar value on "social benefits and costs".
This is already occurring in the example of Green House Gas (GHG) emissions. The Global Reporting Initiative (GRI) (www.celb.org/xp/CELB/downloads/GRI_2002.pdf) is an initiative to essentially create an international metric system by which companies can report their GHG emission. This would pave the way for things like treating GHG emission as a commodity and thus dollarizing air pollution to be factored into project NPVs. The end result is the opportunity for firms to make more educated decisions about the efficent use of their resources.
Playing within the rules of the game is how Milton factors in government regulation as the force that stipulates the boundary conditions on all the variables that go into profit maximization. This also supports the other opportunity for those who want a company to function in socially responsible ways in the Milton economic world. While Milton argues that companies and CEO are not people; In a republic or democracy, governments are a representation of the populous. Thus, it is in my opinion the responsibility of those who argue for social responsible corporations, to use the government as a tool to set laws that require companies to have a minimal level of social responsibility. As our ability to measure these environmental externalities increases, the expectations of our companies should increase as well.
This brings me to my question for the class.
How should regulation of social externalities be implemented in the U.S.?
To get this started, the thought that has rolled around in my head since I started learning more about social responsibility is that this question seems very analogous to issues that the U.S. has had with capitalism and financial transparency. Lack of financial reporting standards and transparency caused the stock market crash in 1929 which resulted in the formation of the Securities and Exchange Commission (SEC). The SEC influenced policy through what is now independently known as the Financial Accounting Standards Board (FASB) and their Generally Accepted Accounting Principles (GAAP). This made it mandatory for all public U.S. companies to report a minimal level of financial information and suffer penalties if they did not comply with certain financial standards. I believe in order for the U.S. to make an impact in social responsibility a similar mandatory reporting structure must be created. The GRI guideline seems like the most comprehensive document out there in terms of reporting and many Fortune 100 firms are beginning to use it as the "gold standard" of CSR reporting, but it is still only voluntary, and unfortunately when we ask everyone to play nice and use the honor system we end up with Enrons and Drexel Burnham Lamberts.
Subscribe to:
Post Comments (Atom)
2 comments:
(friction v. framework)
Porter/Kramer make the claim that the current friction between business leaders and CSR has longstanding inertia. Their argument is that the mind-set needs to change. This seems hopeful at best. We cannot hope for mind-sets to change. It will take a long time for managers to simply agree to disentangle the friction. It seems far more realistic to assume that a structured framework would be more efficient. The GRI sounds like the start of such framework.
Porter/Kramer also make the claim that "each company can identify the particular set of societal problems that it is best equipped to help resolve and from which it can gain the greatest competitive benefit." Again this seems loose and hopeful. A question I pose is, would it wise to structure CSR compliance along industry lines?
For example: energy companies must allocate their resources to CSR that will help to solve energy problems?
Also, do we ever run the risk of having companies go private because of GRI costs? There has been a recent spate of companies going private as a result of costsly Sarbanes-Oxley compliance.
I think Friedman is still correct.
The conclusion of last Monday's class was apparantely that the world had indeed changed, displacing Friedman, but I think all of his arguments are still entirely valid. As Adam indicates, the change needs to come in the "rules of the game", such as laws.
And changing the rules of the game is exactly how Friedman would suggest change.
In class, Amit brought up the fact the issue of the fleet entrepreneur being able to more quickly institute change, but I believe this further bolsters Friedman because he would note that entrepreneurial hubris cannot be always trusted. At a panel at school on environmental consulting, the representative from Mattel responded to an outraged audience member that their green responses are tempered because of uncertainty - they don't want to switch their fleet to biofuels because there are lingering questions about the sustainability of biofuels, particularly with regard to sourcing (particularly in lesser developed areas of the world).
I am curious how Porter & Kramer feel about companies that are well intentioned who make poor choices.
Hence, these measures ought to be vetted until there is an overwhelming consensus that they're "good." And if such a consensus exists, the government will act in the interest of this vast majority and the rules of the game will change.
The maverick entrepreneur trying to act for some social cause may cause deeper problems (consider the company who decides to unilaterally ship goods to an impoverished area of the world, only for those goods to be taken forcibly by guerrillas and used to bolster their operations).
Chris W. also brought up an interesting point that companies wanting to become more responsible will often need to talk with consultants as they will not be able to fully research all the options themselves (Chris, I hope this is an accurate characterization of what you were saying... it's been 6 days...). I think this is very true and very supportive of Friedman - few individual companies will have the resources or expertise to develop and implement cohesive social/environmental strategies. This returns to Friedman who would say that this use of a "tax" in an inefficient manner is poorly representing the interests of either the shareholders, employees, or customers, who could have themselves invested in the same projects.
Lastly, I very much agree with Adam's point that working efficiently with resources is in the best interest of the company, so environmental initiatives may be seen as longterm strategies. If they're not strategic for marketing, COGS, etc, then the agents are not acting in the manner to which they are charged.
Post a Comment