Milton Friedman (1970) famously wrote an article entitled;
Friedman, M. (1970), "The social responsibility of business is to increase its profits", New York Times Magazine, September 13. Available at http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
This article was written more than 40 years ago, but
still holds true even now in the 21st
century business world. The main objective of a business should
always be to maximize the total shareholder value of the firm. The
total value of the firm is the total value of all the financial
claims of the firm. (Jensen, M. 2000).
The purpose of the business organization is to create long lasting
value for its investors while working within the ethical boundary.
If a business organization doesn't pursue to maximize shareholder
value, but instead starts giving away capital in name of philanthropy
then they are indirectly causing a dis-service to the society.
Contrary to popular belief majority of the investors in a publicly
traded company are indirect investors comprising of hard working
middle-class population who have invested through their pension plan,
children's college savings plan or other type of life savings plan.
Giving away money in the name of societal responsibility is merely a
wealth distribution and a corporation doesn't have a right to do it
unless all the shareholders can explicitly agree to give away their
share of entitlement. Besides, by pursuing long term profit and
reinvesting this profit into the firms growth, businesses are
providing jobs and better goods and services to the people which by
itself is a noble contribution to the society. Social welfare is
maximized when all the firms in an economy maximize total firm value
(Jensen, M. 2000).
Secondly,
there are alternative theories of the Sales-revenue maximization by
Baumol and Managerial Utility maximizing by Williamson. These
theories argue that the shareholders and managers have different
objectives. When the ownership and control of the business are in
different hands, managers will pursue to maximize their personal
utilities and not the owner's objectives of the profit maximization.
This again is not necessarily true in a 21st
century company. All the executive managers, mid-level managers and
employees are compensated with some kind of company equity. These
days its comman for almost all employees to have company equity tied
into their pay package via retirement investment accounts (401K),
employee stock purchase program, Restricted Stock Units,etc. So the
employees, mid level management and executive management are all
owners of the company. They are naturally driven to maximize the
value of the company as they will be increasing their own wealth.
There are many CEOs of the Fortune 100 companies who earn a token
base salary of $1 annual but given millions of dollars worth of
company stocks based on performance. As an example, Tim Cook, the
current CEO of Apple received a compensation of $59 million in 2010,
out of which only about $6 million was his salary and bonus.
Remainder of the $52 million was from the company stocks. So
obviously there cannot be disconnect between management and
shareholders objectives as everyone is a shareholder.
That
said, a corporate philanthropy should not be eliminated all together.
Corporate Social Responsibility or CSR is a good thing for business
and it is imperative that a modern corporation should include CSR as
part of its Business strategy. In the present climate of opinion,
with aversion to 'capitalism' and 'profits,' the corporation cannot
act ruthless and alienate its own target customer base in pursuit of
short term profit. For the long term survival of a business, it is
important for the businesses to be customer focussed with ultimate
goal of creating long term relationships with its customer base.
Having a Corporate Social Responsibility program is a way for a
business to generate goodwill, brand equity and loyal customers as a
by-product of its CSR expenditures. However this corporate
philanthropy activities should only be pursued with an aim of
maximizing shareholder value in the long term.