06/12/2013 08:57 am ET | Updated Aug 12, 2013

Milton Friedman Was Wrong About Corporate Social Responsibility

It happens very often when I speak about sustainability and corporate responsibility, and it happened again last week. Someone will ask me about Milton Friedman's famous quote: "There is one and only one social responsibility of business -- to increase its profits."

In fact they are misquoting and simplifying just one part of Mr. Friedman's more than four decades' old statement. The complete statement is rather broader and brings in a few elements of what is today considered to be integral parts of corporate responsibility -- ethics and integrity.

"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." -Milton Friedman, New York Times Magazine, September 1970

By leaving out the second half of the statement the shortened quote allows for broad range of latitude that Friedman surely* did not mean. Specifically when he speaks to avoiding the deception or fraud (presumably of customers, employees, suppliers, shareholders and a host of other stakeholders who's interests would not be met by those actions).

Mr. Friedman argues that a corporation, unlike a person, cannot have responsibility. No one would engage in a business contract with a corporation if they thought for one minute that a corporation was not responsible to pay its bills, for example. So clearly, therefore, a corporation can have legal, but also moral responsibilities.

He also uses what to me is the key phrase 'as long as it stays within the rules of the game' while narrowly defining that in legal terms. But what about the rules of the game that are not coded into law? There are other rules that businesses must adhere to if they wish to be successful; such as the obvious rules of the marketplace including supply and demand. In addition, as we have seen with the proliferation of 'new' technologies, the law usually follows advancements in technology and thinking. But the fundamental principle of responsibility often precedes the legal cases being decided because unless or until enough people think something should be made illegal, it won't be made illegal.

So, if one accepts that 1) companies are in fact capable of having responsibilities and that 2) they must follow rules of the game beyond those codified into law (particularly concerns that cross borders and therefore are subject to multiple and sometimes contradictory statutes) the basic premises behind the argument Mr. Friedman made in the fall of 1970 collapse.

Conforming within acceptable legal limits may keep them out of court, but companies know well that holding themselves accountable to a higher standard will keep them in good stead with their customers, employees, shareholders, suppliers, regulators and communities.

Any business, if its wants to be sustained over time, must maximize its profits but do so in a manner that meets the needs of the stakeholders that allow it to remain viable. When those needs change, businesses have a responsibility to adapt their behaviors accordingly if it wishes to survive. That is the piece that Mr. Friedman's argument missed. The rules of the game have changed in fundamental ways -- and people today expect (and demand) more of business than simply that they maximize their profits without coming to grief by some violation of law. Consumers want and expect attributes from what they buy -- quality, safety, value - depending of course on the price they pay.

Employees want more than a paycheck. Communities want the company to be a good corporate citizen and hire from the community, provide employees with a living wage, not pollute and to pay its fair share of taxes and support the community (even if each of these things are not legally required).

As much as people claim that shareholders are only interested in maximizing short term returns, recent stories that a decent percentage of Walmart shareholders voted against the CEO and other leaders because of their handling of bribery charges and working conditions in factories in the company's supply chain demonstrate that this too is evolving.

Regulators may only require companies to toe the legal line, but things like sloppy paperwork and cutting it too close to the line (when it comes to things like emissions) result in more frequent and deeper investigations, costing the company time and money. Having robust systems in place that ensure a margin of safety also result in less costly enforcement actions.

Communities often want companies to do more than what is required; leading to a host of strategic philanthropy efforts that are part of, but do not by themselves constitute a responsible corporation, especially if they are seen as compensating for a business model or culture that is less desirable.

And so, I think it is time that we take (the other) Mr. Friedman's argument in historical context and recognize it as a relic of a past and perhaps simpler time.

Note: The author is no relation to the economist Milton Friedman and has no knowledge of or insights into Mr. Friedman's thoughts other than what is in the public record.