October 27, 2005

Friedman, Kleiman, and Goodpaster on Business Ethics

Mark A.R. Kleiman notes that Milton Friedman believes that the sole responsibility of business is to maximize profit for its shareholders, and observes that this leads to obscene moral conclusions. Friedman's original argument, in a nutshell, is that a corporation's assets belong to its investors, and that an executive who fails to maximize profits out of a private moral concern (Kleiman's phrase--Friedman says "general social interest") is effectively giving the investors' money away.

But, Kleiman says, surely there are some actions that are morally wrong even though they are not (and should not be) illegal, and we can criticize someone who performs one of those. Then we can criticize an executive who performs a similar act on behalf of a corporation's shareholders. As Kleiman says, a "moral onus cannot be abolished by separating that individual into a shareholder and a fiduciary."

This is a common debate in business ethics, and Kleiman's view is essentially the view that Kenneth Goodpaster argues for in “Business Ethics and Stakeholder Analysis”: If it would be immoral for you to perform a certain action, it would be immoral for you to delegate that action to someone else. So even if an executive is an agent acting on the investor's behalf, the investor cannot reasonably expect the executive to act immorally so as to increase profits for the investor. So the rule that would follow from the agent-principal analysis is that the executive is obliged to maximize profits insofar as it is moral to do so; and morality is not restricted to legality.

Friedman's actual argument, I think (and I'm not inclined to be awfully charitable to him), sometimes slides back and forth between the idea that the idea that executives are obliged to maximize profit because of investors' rights [Cowen's #2 linked below], and the idea that executives are obliged to maximize profit because everyone's maximizing profit results in the best outcome for everyone [Cowen's #4]. So I think, in Tyler Cowen's analysis, Friedman is arguing in large part from #2, with his belief in #4 meaning that he doesn't need to worry too much about the bad consequences of the argument, because there won't be any. In his new update he's relying largely on #4; the idea that Whole Foods has no special competence in how to distribute charity is essentially an argument for the utility of the unfettered free market. But his original argument from the agent-principal distinction does not seem to depend on the utility of the free market; in fact it entertains the notion that the government could legitimately impose taxes for charitable purposes (though later in the article I believe he rejects it). And that argument falls prey to the Kleiman/Goodpaster objection (the other argument falls prey to the fact that it's wrong).

I should also note that some writers on this topic, such as John Boatright, don't think it's accurate to say that investors own the corporation; agency theory as developed by Eugene Fama (in the article I read) seems to come to the same conclusion.

(Slightly to my discomfort, when I skim this exchange I find myself sympathizing with Mackey; there's nothing about the structure of the corporation that dictates that its sole purpose must be profit.)

Posted by Matt Weiner at October 27, 2005 09:39 PM

Having industry wide moral restraints on the actions of the corporations often tends to help the corporations in the long run. When companies ignore moral restaints, the government often comes in with additional(potentially burdensome)legal restaints. If we could trust the corporations to do the right thing they wouldn't have to fill out all those Sarbanes-Oxley forms.

Posted by: joe o at October 28, 2005 06:45 PM

Matt, are you teaching business ethics this semester? I'm teaching it now for the first time and must say that for the most part when I read something to prepare for class, two words come to mind. 'Impressive' is one; 'not' is the other.

To be fair to Friedman, he does sometimes add the proviso that the obligation is to maximize profit 'within acceptable limits'. Isn't the real problem with his view that it is either evil, vacuous, or the road to ruin?

If you develop the view with the proviso in place, you end up with the idea that obligations to maximize profit have to be constrained in the following way: only having first established that a range of prospective options are permissible may one select the one that shall maximize profits. Perhaps Friedman is of the view that such limits will require only that one refrains from performing certain kinds of actions, but then this leads to two difficulties. No one thinks that we can get a sense of what acceptable limits are framed solely in terms of negative duties. No one thinks that the modern corporation can function without harming (using or spoiling the commons, for example). At any rate, I rather like Friedman's view on this reading. Given a suitable diet of examples from Singer, we might come to the view that the primary obligations of business are to make sacrifice's on the shareholder's behalf to see to it that their resources are being used within acceptable moral limits.

Posted by: Clayton at October 29, 2005 02:03 PM