What is the responsibility of business?

The Business Roundtable (BR), a group of chief executive officers (CEOs) of some of America’s largest corporations, recently released a statement claiming that businesses have a broader purpose than simply making profit. By contrast, in a famous essay economist Milton Friedman argued that the social responsibility of business was to increase its profit. The BR statement may perhaps be pure public relations. Still, should we regard profit as less important than other potential business goals?

Answering this depends on the nature of profits. In the market, all transactions are voluntary. No business, however large, can compel anyone to buy their product, work for them, or loan them money. Profit must be earned by producing valuable goods or services. Customers will only buy a product that delivers more value than comparably priced goods, or similar value for a lower price. Workers will only work if the pay and conditions compare favorably to other jobs.

In a market economy, profit cannot be made through exploitation. Some people, unfortunately, do not have very good alternatives. Many Americans do not consider a minimum wage job attractive; the person willing to work for $7.25 an hour is better off, given their other options. We might lament the lack of better alternatives but any better opportunity is an improvement.

Should corporations lower prices or pay workers more instead of earning profits? Not necessarily. Profit is the reward for investors who enable investment, the hiring of workers, and production. Profit also enables charity. America’s great philanthropic foundations – like the Ford, Rockefeller, and Gates Foundations – were built off enormously successful and profitable businesses. If Microsoft were not so profitable, Bill Gates could not be so charitable today.

Why will stockholders want businesses to earn profits? Millions of Americans own stock, either directly or through their pension plans. They invest for many different reasons: for retirement, to provide for their children or grandchildren, or to enable donations to charitable causes. Money allows the stockholders to pursue these distinct goals. Absent specific evidence otherwise, we should presume that stockholders want profit.

The BR statement says that corporations have commitments to other stakeholders: they should deliver value to customers, treat and compensate employees fairly, and deal ethically with suppliers. I see no real divergence here from Professor Friedman, who insisted that increases in profit had to be achieved within society’s legal and ethical bounds.

This might seem surprising, as corporations appear to many to shortchange customers and take advantage of employees. Yet markets are entirely voluntary. Providing a shoddy product and ignoring customer complaints may reduce costs and increase profit in the near term. But dissatisfied customers will turn elsewhere and damages a company’s reputation.

Corporations rely on their employees, as the owners do not do all the work themselves. The workers know how to make a business’ products. Dissatisfied workers can quit, taking their training and skills with them. Stiffing workers on overtime or benefits may save a little money, but losing skilled workers is very costly.

Treating people the right way – especially customers, employees and suppliers – is arguably how to increase profits. It may be difficult to quantify how much this adds to the bottom line and so may appear to be an item of faith. Still, the BR statement here just seems like good business.

One of Professor Friedman’s concerns remains relevant today. CEOs make decisions, give speeches, and receive media attention but ultimately do not own corporations. Owners ultimately get to make the decisions; the CEO works for the stockholders, represented by the board of directors.

A CEO may choose to support trendy social causes to build a reputation as an enlightened executive. It is easy to be charitable with other people’s money. Hold your applause when businesses support broader social causes. CEOs ultimately should heed the stockholders and not grab the spotlight to boost their egos.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.