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The Charity Of Business

Jim Prevor’s Perishable Pundit, August 7, 2006

Charity has been much in the news lately as Bill Gates announced his intention to transition out of a day-to-day role at Microsoft in order to spend more time at the Bill & Melinda Gates Foundation. Warren Buffett announced his pledge to donate much of his fortune to the same foundation. Late last year ReasonOnLine featured a terrific debate between Milton Friedman, the Nobel Prize winning economist, John Mackey, founder and CEO of Whole Foods and T.J. Rodgers, founder and CEO of Cypress Semiconductors on the topic, “Rethinking the Social Responsibility of Business.”

Mackey is smart and articulate but comes out on the short end of the debate because there is a Catch-22 to his argument. Mackey wants to claim that businesses have responsibilities to their customers, suppliers, employees and community other than making profits. But he also wants to claim that acting on these responsibilities builds long-term value. For example, Mackey explains the Whole Foods concept of “5% Days” as such:

"First, there can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors. For example: In addition to the many thousands of small donations each Whole Foods store makes each year, we also hold five 5% Days throughout the year. On those days, we donate 5 percent of a store’s total sales to a nonprofit organization. While our stores select worthwhile organizations to support, they also tend to focus on groups that have large membership lists, which are contacted and encouraged to shop our store that day to support the organization. This usually brings hundreds of new or lapsed customers into our stores, many of whom then become regular shoppers. So a 5% Day not only allows us to support worthwhile causes, but is an excellent marketing strategy that has benefited Whole Foods investors immensely."

The point is obvious. Of course they should have 5% Days if it is a wise marketing strategy. Maybe they should even have 5% Days just because it increases the affinity of their customers or their employees for the company. Perhaps they should even have 5% Days because it makes politicians feel good about approving their site plans for new stores. Maybe they should have 5% Days just because John Mackay would quit if they didn’t and he is a leader worth paying that price to keep. But all these things are just sound business strategy and have nothing to do with whether corporations, particularly publicly held corporations, should be altruistic or have responsibilities beyond maximizing profits.

Milton Friedman, of course, caught this right away and quoted from his original 1970 article on the subject in The New York Times Magazine:

“Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

“To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government.…

“In each of these…cases, there is a strong temptation to rationalize these actions as an exercise of ‘social responsibility.’ In the present climate of opinion, with its widespread aversion to ‘capitalism,’ ‘profits,’ the ‘soulless corporation’ and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.

“It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a ‘social responsibility’! If our institutions and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them.”

I give the now 94-year-old economist the last word. You can read a nice interview The Wall Street Journal Editorial Page did with Milton and Rose Friedman, his wife and a prominent economist in her own right, here.

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