Milton Friedman’s Critique of CSR

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Table of Contents

Introduction
Benefits and Indulgences for Companies
Shareholders’ Return
Tax Indulgences and Political Leniency
Alternative Interpretation in Favor of CSR
Conclusion
References

Introduction

The desire of modern companies to win the loyalty of target consumers and investors by creating a positive image is a natural practice implemented by many market participants. As a result, the concept of corporate social responsibility, or CSR, has evolved in an individual field with associated rules and practices. Although firms using CSR principles in their activities address socially significant aspects, this practice is often questioned, and one of its main critics was Milton Friedman, an American economist and theorist. In his article, Friedman (1970) denounced the mechanisms of CSR, accusing companies of falsely trying to show concern for current world problems and arguing that the accumulation of profits was the main task. Although over the past half-century, CSR methods have developed significantly, the criticism of these approaches remains partly relevant and rational, which is largely due to state concessions and benefits provided for doing business.

Benefits and Indulgences for Companies

From the standpoint of economic rationality, CSR is contrary to natural market principles, which indicates an additional benefit for companies that adhere to this strategy in their business. According to Friedman (1970), the ideal market environment involves the free entry of different participants, each of whom benefits from work. When analyzing CSR methods, one may notice that companies that spend money on tackling current problems, such as environmental issues, poverty, and other world challenges, get nothing in return. Therefore, CSR practices can be erroneously treated as charitable activities as they are not directly profitable. However, given Friedman’s (1970) idea that managers do not sacrifice but only follow orders by spending a small fraction of the real owners’ assets, one can assume the self-interested nature of such a strategy. In evaluating this position, Salazar and Husted (2008) emphasize that selfish or unselfish goals can only be determined at the private business level, where the owner is responsible for the assets being distributed. At the corporate level, this principle does not work, which indicates a clear benefit for companies promoting CSR approaches.

Shareholders’ Return

Shareholder investment-based businesses can practice CSR without being overly concerned about costs. This is due to the fact that any expenditures on socially significant needs are not actually final savings and are formed from third-party budget revenues. Bhattacharyya and Rahman (2020) review Friedman’s (1970) position and justify his ideas by arguing that gains realized through CSR costs are the gains of equity holders but not business owners. As a result, real costs affect the company’s market stability insignificantly. Banerjee (2008) is convinced that a sustainable economic model cannot be built on the principles of morality and justice, which exceed the value of return on capital. Therefore, despite potential social benefits, CSR methods are often a tool to gain credibility without spending much money and without experiencing significant budget gaps.

Tax Indulgences and Political Leniency

One of the arguments in support of Friedman’s (1970) critique of CSR approaches is to evaluate this practice from a tax liability perspective. Friedman (1970) insists that any tax expense, which is often compared to and sometimes equivalent to CSR costs, should be controlled by government departments and not by companies themselves. In other words, the business owner does not have the right to independently determine the terms of the tax policy, ignoring the existing rules. However, as Montenegro (2021) argues, CSR costs are often equated with tax costs, which serve as a type of indulgence and exempt corporations from additional payments to the state. Such an approach can hardly be called unambiguously honest, and criticism is acceptable since independent coordination of fiscal aspects can make the company a market monopolist. According to Banerjee (2008), market equity is, in this case, conditional because the resources and capabilities of different enterprises differ. Tax indulgences allow owners of large businesses to expand their sphere of influence by distributing assets in a way that suits them, thereby monopolizing their industry.

Along with tax concessions from the government, companies pursuing CSR methods often have political indulgences. Friedman (1970) states that business owners who encourage CSR act as public servants because they change from their entrepreneurial status to social performers. Consequently, their role is changing, which allows them to build public loyalty not only through business proposals but also through other means, including ideological strategies. In this regard, Wood (2010) insists that businesses with CSR strategies perform direct economic functions formally because, in fact, their activities go beyond the entrepreneurial sphere. If a corporation honestly fulfills its stated obligations within the framework of social responsibility, this acts for the public good. However, enhanced management capabilities often become a pretext for the realization of selfish goals that are not related to good intentions (Friedman, 1970). The loyalty of political boards, in this case, is a gap, and indulgences for large businesses by the authorities may be perceived as an injustice by smaller participants. As a result, political leniency can negatively affect the fairness of market formation.

Alternative Interpretation in Favor of CSR

Time Difference

Despite the criticism of CSR practice, not all of Friedman’s (1970) arguments against this phenomenon can be considered adequate and relevant today. One of the reasons is the discrepancy in the time period. The first critical views on CSR were presented as early as 1962, that is, during the period when the Cold War was gaining momentum and the world was divided into militant camps (Friedman, 1970). Under such conditions, any attempts to gain market dominance were perceived as rational methods of economic struggle, and it is possible that at that time, CSR approaches had little in common with real social initiatives. As Carroll and Shabana (2010) argue, in the period after World War II until the 1960s, CSR mechanisms represented an attempt to keep capitalist relations. They were considered the most promising market model and demonstrated the failure of communist doctrine. Today, these ideas are not relevant because globalization and free market presence have smoothed out the previous contradictions. As a result, one cannot say that CSR is solely a manipulation strategy designed to reinforce relevant economic doctrines.

Theoretical Justification

From a theoretical perspective, CSR initiatives can also be justified through relevant concepts and practical frameworks. In particular, Garriga and Melé (2004) mention cause-related marketing as a theory that explains the mechanisms for gaining market reputation. Under this concept, companies pursuing CSR strategies in their operations implement product differentiation initiatives that, in turn, allow them to compare favorably with competitors (Garriga & Melé, 2004). Banerjee (2008) also justifies CSR practice and describes it as a way to achieve competitive advantage through influencing stakeholder groups. In other words, a business that is popularized not only through standard promotion steps and marketing principles but also through incremental growth techniques has a better chance of gaining the trust of the target market. Given the fact that such a perspective is one of the key ones in the entrepreneurial sector, it is irrational to condemn CSR. Therefore, from the standpoint of some theoretical interpretations, this approach to business development is relevant, especially in today’s globalization conditions and the expansion of many companies’ innovative potential.

Real Ethical Motives

Even under conditions of market competition and struggle for customer interest, CSR can be a business strategy that is grounded in the context of the real ethical motives driving a particular company. Friedman himself (1970) confirms that an organization created specifically to address the social aspects of life, such as education or healthcare, pursues a good mission and builds a system of work based on voluntary donation. Today, such non-profit organizations also exist; they may be related to religious, social, or other areas of work, but their ultimate goals are usually morally justified. Carroll and Shabana (2010) evaluate the donations of some UK financial companies to non-profit organizations and note the significant funds coming from CSR activities. Regardless of intermediate goals and vested interests, the real benefits of such initiatives remain, and the transparency of all financial investments in favor of the vulnerable and needy proves this. Thus, even despite the ambiguous views on CSR, this practice has positive impacts, including in the modern world. Nonetheless, given contemporary entrepreneurial trends, even such aspects as globalization and innovation do not allow for absolutely ethical CSR initiatives.

Economic Inequality as an Incentive for CSR

At the time of writing his article, Friedman (1970) noted that the American economy was in crisis and was forced to look for alternative ways of development. However, today, the economic models of the West have evolved significantly, and capitalist forms of market activity have become the core. Countries with less developed financial systems that do not have the same potential are forced to give up their leading positions. For instance, Mishra (2019) compares American and Indian CSR approaches and argues that in the Eastern country, this practice is not considered common and is perceived as a Western phenomenon. One of the main reasons for this is the inability to conduct market activities at the same level as Western companies. As a result, this leads to the inability to promote sustainable and financially viable CSR mechanisms even at the level of large corporations. Therefore, such a practice can be considered the desire of stronger market participants to widen the economic gap and dominate totally, thereby promoting inequality as a natural aspect in the current conditions of globalization.

Civil Functions as a Replacement for Government Control

Given the voluntary nature of participation in CSR programs, companies promoting such strategies are beginning to act as civilian regulators. In this case, according to Friedman (1970), serious questions arise about the powers of governments, namely the legitimacy of directing funds to solve socially significant problems. Today, this position has not lost its relevance, and the increased economic potential of many corporations provides additional tenets for reasoning. Having colossal assets, large market participants donate funds, thereby replacing the state in its major functions. As Sharma (2019) remarks, members of different communities begin to doubt the competence of policymakers, thereby undermining the authority of the legislature. In today’s conditions of economic and geopolitical instability, depriving governments of the function of control is fraught with the expansion of the influence of individual business owners, whose interests may become dominant. As a result, the mere adoption of CSR practice without proper oversight and regulation of this activity can lead to public unrest, which is highly undesirable.

When communities turn to corporations rather than authorities for help and support, this may be a consequence of a disturbed social order. According to Salazar and Husted (2008), such an outcome excludes almost any altruistic initiative on the part of companies, which are often willing to go to any lengths to capitalize on profits. In modern conditions, this perspective remains relevant because many global corporations, such as Apple or Google, have developed significantly; they have large political weight and can determine social trends. Thus, even the inherently altruistic nature of CSR makes the practice questionable in terms of potential negative implications, thereby justifying Friedman’s (1970) criticism.

Conclusion

Since Friedman (1970) wrote his article critical of CSR practice, much has changed in the economic and geopolitical sectors, but many ideas have retained their relevance, proving the ambiguity of such initiatives. In particular, the substantial benefits for companies and the freedom to do business, including in the context of tax liabilities, justify this. State concessions allow large corporations to capitalize on profits and spend funds from investors on socially significant problems, thereby not experiencing budgetary difficulties. Economic inequality and the replacement of governmental functions exacerbate the situation. Despite alternative interpretations, such as the theoretical rationale for CSR, the time difference between past and modern rationale, and the intrinsically ethical nature of this practice, questions about its actual benefit remain.

References

Banerjee, S. B. (2008). Corporate social responsibility: The good, the bad and the ugly. Critical Sociology, 34(1), 51-79. Web.

Bhattacharyya, A., & Rahman, M. L. (2020). Mandatory CSR expenditure and stock return. Meditari Accountancy Research, 28(6), 951-975. Web.

Carroll, A. B., & Shabana, K. M. (2010). The business case for corporate social responsibility: A review of concepts, research and practice. International Journal of Management Reviews, 12(1), 85-105. Web.

Friedman, M. (1970). The social responsibility of business is to increase its profits. The New York Times. Web.

Garriga, E., & Melé, D. (2004). Corporate social responsibility theories: Mapping the territory. Journal of Business Ethics, 53(1-2), 51-71. Web.

Mishra, S. (2019). Evolution of corporate social responsibility: Two sets of explanation. Social Responsibility Journal, 16(8), 1341-1356. Web.

Montenegro, T. M. (2021). Tax evasion, corporate social responsibility and national governance: A country-level study. Sustainability, 13(20), 11166. Web.

Salazar, J., & Husted, B. W. (2008). Principals and agents: Further thoughts on the Friedmanite critique of corporate social responsibility. In A. Crane, D. Matten, A. McWilliams, J. Moon, & D. S. Siegel (Eds.), The Oxford handbook of corporate social responsibility (pp. 137-155). Oxford University Press.

Sharma, E. (2019). A review of corporate social responsibility in developed and developing nations. Corporate Social Responsibility and Environmental Management, 26(4), 712-720. Web.

Wood, D. J. (2010). Measuring corporate social performance: A review. International Journal of Management Reviews, 12(1), 50-84. Web.

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