Milton Friedman was wrong about corporate philanthropy

Posted Nov 17th 2006 9:54AM by Peter Cohan
Filed under: Market Matters

As Michael Fowlkes points out, economist Milton Friedman recently passed away and his accomplishments have been lionized. But I disagree with Friedman's views on corporate philanthropy.

Specifically I think Friedman was wrong to argue that corporations have only one purpose -- to maximize shareholder value. Friedman thought that chief executive officers who talked about giving back to their communities were merely displaying one of their ''suicidal impulses.'' The notion that businesses should aim to avoid pollution, say, or donate resources to a neighborhood was ''pure and unadulterated socialism,'' Friedman wrote in 1970. Corporations, Friedman argued, had but one purpose: to increase profits as much as was humanly possible. If you're feeling generous, give the money to shareholders.

In Value Leadership, I argued that corporations have a vital interest in giving to their communities. Companies that contribute to the communities in which they operate display a commitment to others that makes potential employees and customers feel better about the companies. In particular, I found three key activities that match corporate donors and recipients in a mutually beneficial way:

Inspire employees. When companies support charitable causes that employees find personally meaningful, the recipients gain committed support while the companies enhance loyalty by letting employees choose a charity in whose cause they believe. Southwest Airlines Company (NYSE: LUV) inspires its very service-oriented employees to volunteer at Ronald McDonald Houses -- which shelter families of children receiving treatment at nearby hospitals;
Enrich the community. By making carefully selected contributions to key community leaders and local causes, companies can overcome resistance to the opening of a local operation and/or or sustain support for its expansion. While the community benefits from such contributions, the company creates an environment that is more receptive to its business objectives. Wal-Mart Stores Inc. (NYSE: WMT) encourages its employees to give to charitable causes that are particularly meaningful to the communities surrounding each store;
Attack big societal problems. A handful of companies have the wealth and the management will to address societal problems that go beyond the areas where companies hire and sell. These companies use their products, cash, and political influence to implement systemic solutions to diseases that affect millions of people, such as river blindness or AIDS. While the recipient's benefit is clear, the companies benefit through an enhanced global reputation and the executives' satisfaction of exercising a unique form of power to better society. For example, Microsoft Corporation (NASDAQ: MSFT) with its Bill and Melinda Gates Foundation is well-known for giving away billions trying to solve problems that resist the efforts of government like AIDS and Malaria prevention in Africa.

I've been inspired by Google Inc.'s (NASDAQ: GOOG) corporate philanthropy as well as what Gates is accomplishing. These companies' philanthropic achievements demonstrate that corporate philanthropy and shareholder value creation are not mutually exclusive as Friedman argued. Rather they can be self-reinforcing.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, and a Professor of Management at Babson College. He has no financial interest in Google, Microsoft, Southwest or Wal-Mart.

Tags: corporate philanthropy, CorporatePhilanthropy, economics, friedman, friedman's legacy, Friedman'sLegacy, milton friedman, MiltonFriedman, philanthropy

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Reader Comments (Page 1 of 1)

11-17-2006 @ 10:30AM

steve krueger said...

Wow. As always you know what is best for everyone else. Corporations should decide what to do for society. Even if the owners of that company aren't interested. Dr. Friedman was, and still is, correct. The only purpose of any corporation is to provide for its ownership. Then, and only then, the owners can inspire, enrich or attack the issues that they feel are important.
Corporations do not exist in and off themselves. They are a vehicle through which people provide goods and services to willing consumers. Those people (the owners) are the ones to decide the fate of the profits. Not the Board nor any committe nor a faceless executive responding to public pressures.

11-17-2006 @ 11:33AM

Michael Schneider said...

Even if a corporation would exist solely to create profits the company that engages in philantropy can increase their profits due to free and positive publicity obtained from giving which can help consumer companies especially. Moreover companies that increase their public profiles might have more influence on laws and political decisions that affect them. Seperating public relations, political lobbying and philanthropy isn't so easily done.

Further, boiling everything down to economics is an affliction of economic thinkers from Friedman on one end of the spectrum to Marx at the other. Friedman placed too much faith on the market economy to do everything- one reason why we have huge imbalances and inefficiencies in many market arenas. We don't have an efficient stock market for example let alone market efficiencies in pay scales, salaries or anything else. As Michael Lewis wrote in one of his well respected books, he was paid highly as a bond trader-a job he, an art history major, gained through connections not merit- because the money was there not because of any inherent wisdom of the market in allocating rewards.

11-17-2006 @ 1:03PM

pete mccoy said...

Dr. Cohen,

I appreciate your blog comments about Milton Friedman. Unfortunately, The plugging of your book causes one to wonder about your true reason for the blog. Hopefully not a "internet marketing" strategy to goose the sales and eyeballs toward your publication.

11-17-2006 @ 1:43PM

Corporate Jay said...

I have to agree with you on this one, Peter. Friedman's assertion is fine if corporations operate in a vacuum where business is done without any societal, political, or environmental ramifications.

There are many instances in which corporate philanthropy and shareholder value can co-exist. Starbucks, for example, strongly promotes conservation and recycling amongst its other social responsibility programs. Without such programs, the company would arguably fall into corporate monolith status and it would lose many socially-conscious consumers.

On the environmental side, many companies can reduce the use of energy and raw materials while at the same time reducing their COGS. Lee Scott, the CEO of Wal-Mart, for example, mentioned the use of new recyclable packaging for detergent on the Charlie Rose Show. This switch from bottles to recyclable cardboard boxes enabled Wal-Mart to fit more products on a pallet, thereby reducing the impact on inventory. I'm just mentioning one of many possible examples at large corporations where the interest of profit and conservation can overlap.

I would recommend reading chapter 10 of Michael Porter's "On Competition" for further information and a much more lucid argument.