The Case FOR Corporate Responsibility

Earlier this week, Aneel Karnani, an associate professor of strategy at the University of Michigan’s business school wrote a scathing attack against corporate responsibility in The Wall Street Journal entitled “The Case Against Corporate Social Responsibility.” I would like to challenge my junior colleague’s assertions in this blog post.

The great University of Chicago economist, Milton Friedman, first voiced Professor Karnani’s confusing ideas, much more eloquently and coherently in the New York Times in the early 1970s. Friedman stated passionately that the sole purpose of a business is to maximize profits for shareholders. Friedman’s ideas made sense at the time because Professor Karnani’s hope for more government regulation was firmly in place, the business world was less complex and less powerful, and stakeholders such as customers, employees, and the community at large relied less than they do today on business for their social welfare needs.

Today, however, we need look no further than the current economic crisis to see what happens when companies put short-term profit orientation ahead of the long-term interests of society. The relentless maximization of profits almost destroyed the entire financial system. Losses have been estimated to be over one trillion dollars to date.

Unlike Friedman’s world of 40 years ago, corporation’s today must heed the needs of multiple stakeholders beyond just shareholders to stay in business for the long term. Crises involving many recent fallen icons such as Toyota, BP, and Goldman Sachs show the negative consequences of ignoring the interests of society including loss of license to operate, consumer boycotts, litigation, and damaged brand and reputation.

Today, business and society are largely interdependent, and businesses are more accountable to society than ever before because of the power they have amassed over the last half-century. With that power, however, come great expectations from society who holds global businesses accountable as the only institutions strong enough to meet the long-term challenges of society.

Why wouldn’t we as a society want companies and business leaders to make the world a better place? Indeed, if corporations want to succeed in today’s volatile environment, we need them to rethink what it means to be competitive and focus on the long-term needs of all constituencies and society as a whole. Doing so has actually proven to be much more profitable for everyone in the long term. That’s what corporate responsibility is all about.