Philip Morris: The Milton Friedman Ideal

Corporate Social Responsibility (CSR) is not a marketing fad or about the amount of money a company donates. Donating more does not make one more socially responsible. Such activity is philanthropy (not to be confused with CSR) and donating more makes one generous, not more responsible.

Nor is CSR at odds with shareholder interests. It ticks me off no end when I read the writings of some supposed expert professor who has never set foot in the corporate world, arguing against CSR. Most such authors claim social responsibility or stakeholder theory (often lumped together) as being the responsibility of governments, not corporations; that the only responsibility a company has is to its shareholders and the only job of the business is to maximise returns to shareholders.

Dissenters to that view have been dubbed socialists. Oh my. My inner capitalist is crushed with this condemnation!

Nobel Prize winner in Economics, Milton Friedman, in his essay “The Social Responsibility of Business is to Increase its Profits” in The New York Times Magazine, September 13, 1970 claims:

The businessmen believe that they are defending free enterprise when they declaim that business is not concerned “merely” with profit but also with promoting desirable “social” ends; that business has a “social conscience” and takes seriously its responsibilities for providing em¬ployment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers. In fact they are–or would be if they or anyone else took them seriously–preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.

The discussions of the “social responsibilities of business” are notable for their analytical looseness and lack of rigor. What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense.

Friedman is wrong. So too the impressive list of professors at business schools the world over who blindly and unquestioningly repeat these mantras. A big call, I know, but I have lived and breathed in the business world, not in the heady halls of academia.

It is specious to argue, as Friedman and his followers do, that businesses don’t have ethics, only people do. A business is only as good as its people. If a company’s greatest asset is its people, then surely the behaviour of those people is what is prized.

Those businesses are run by people, owned by people, represented by people; they employ, supply and impact entire communities. If those people have a moral compass and an understanding of what it means to be ethical, they will run their businesses ethically. If not…

Friedman writes in his book, Capitalism and Freedom (1962), “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine.”

That Mr Friedman, is not a social responsibility, but a commercial responsibility. Neither is it at odds with being a socially responsible corporation.

It is precisely Friedman’s line of thinking that led to the gapping void of ethics in corporate behaviour that gave us WorldCom, Enron, Bre-X and Solv-Ex, Lehman Brothers et al and more in the USA; Poseidon, Harris Scarfe, OneTel, Westpoint, Fincorp, ACR , Bridgecorp, Opes Prime, MFS and Storm Financial in Australia. And ultimately, the Global Financial Crisis (GFC) that impacts us all.

Friedman excuses and almost defends this morally corrupt culture as being part and parcel of a company conducting itself properly – “to make as much money for their stockholders as possible.”

To claim that the ONLY responsibility of business is to make money for its owners is blatantly morally corrupt, as it suggests it is OK to do so at the expense of the environment, the community, employees and dare I say, other stakeholders. And where morally corrupt behaviour is found, executives defend themselves and their actions as being “to the letter of the law,” however lax the regulatory regime may be. And yet it remains Friedman they teach under the guise of Business Ethics courses at the leading business schools. I think I’m going to puke.

Let me be very clear: as the owners of the business, it is shareholders who are ultimately responsible for the behaviour of the business. Give that a few seconds to sink in.

They’re starting young and dying young. 400 thousand Indonesians are dying each year from smoking related illnesses and business couldn’t be better for tobacco companies in retreat from punitive taxes and tough health regulations in the developed world.

This is the message from ABC’s Foreign Correspondent program 80 Million a Day, (play the video) September 1st, 2009. Below is an edited (for space) transcript. Reporter, Geoff Thompson narrates:

MATTHEW MYERS: [Campaign for Tobacco-Free Kids, USA] “Philip Morris is one of the most brilliant marketers in the world. In a place like Indonesia what they’re doing is they’re making tobacco use a form of Western independence and growth. What’s even worse is they’re hitting the exact images that appeal to Indonesian youth. It’s the reason we’re seeing such a dramatic rise in tobacco use among the Indonesian youth.”

DAVID STANFORD: [Indonesia Consumers Federation] “I think it would be fair to characterise Indonesia as a rogue state when it comes to tobacco control.”

DAVID STANFORD: “Indonesia is a very large market, the third largest market for tobacco products in the world. Second, it’s got the best regulation from a company’s perspective. It’s very, very loosely regulated. You can still sell tobacco to minors. There’s no sort of pack warnings or very small pack warnings on the back of packets. The tax is low and it’s got a very high growth rate of young smokers. Young people are getting into smoking much more quickly, much earlier than they used to do. From a tobacco company’s perspective, Indonesia is a paradise.”

THOMPSON: The marketing strategies of cigarette companies play a major role in a massive national habit. Among men, almost 70% light up every day. That’s about 80 million smokers.

MATTHEW MYERS: “Today, the leadership of Philip Morris International and other tobacco companies, have absolutely no moral compass whatsoever. They’re willing to make as much money, killing as many people, using whatever tactics the law will allow. It’s one of the most egregious moral and social violations of corporate responsibility that I can imagine.”
THOMPSON: Like anywhere else in the world, the prognosis for lung cancer is not good. Up to 400,000 Indonesians die each year from smoking related illnesses – 25,000 of them not even smokers.
THOMPSON: Pressure from the tobacco industry has successfully kept the government from raising cigarette taxes. The hand rolling of kreteks is a frenzied display of human dexterity. These have twice the nicotine and three times the tar of regular cigarettes. Kreteks account for 90% of the hundreds of billions of cigarettes sold in Indonesia each year.

And because they rely on manual labour, hand-rolled kreteks are taxed much less than their machine-made competitors. The margins are very profitable and very attractive to companies like Philip Morris and British American Tobacco. Their biggest sellers here are hand-rolled kreteks.
JOHN GLEDHILL: [Philip Morris, Indonesia] “On a personal level my conscience if fine actually. I work for a company which I believe not only follows the law by the letter but also in the spirit as well.”

THOMPSON: Internal Philip Morris documents obtained by Foreign Correspondent confirm that the company is very focused on enticing young Indonesians to sample their deadly wares. Philip Morris’ documents refer to its A – Mild brand of kretek cigarettes as the “Aspirational brand for young adult smokers”. The documents say the company’s marketing goal is to generate trial and repurchase, that is, to get the young hooked on their product.

Sure, Philip Morris is following the letter of the law in Indonesia, but that doesn’t make what it is doing, right. It certainly is not socially responsible behaviour, is it?

It is for this very reason that these practices were outlawed in the USA, Australia and UK. It is the reason why most people would be uncomfortable with the moral certitude of Philip Morris selling cigarettes to minors. Such corporate behaviour is why there has been a staggering growth in “ethical” investment funds. So too, is there a visible increase in the number of institutional investors selecting their targets based not on profit alone, but on profitability combined with moral and ethical behaviour. Because, as the owners of the business, shareholders are ultimately responsible for the behaviour of the business. Are you comfortable with the social responsibility of all your investments?

Wealth fund dumps Rio Tinto holding over Grasberg , The Times, September 10, 2008, by David Robertson:

One of Rio Tinto’s largest shareholders has sold its $1.1 billion stake in the mining company over concerns about its West Papuan Grasberg goldmine. The Norwegian Finance Minister publicly shamed Rio in a statement that accused the company of “severe environmental damage”.

Grasberg is operated by Freeport McMoRan, and Rio is a 40 per cent shareholder in the opencast pit. Environmental concerns at Grasberg centre on how the operation dumps 230,000 tonnes of tailings into the Ajikwa River every day. Mine tailings are often laced with cyanide – used in the gold extraction process – and toxic quantities of metals such as lead, copper and zinc.

A report by Friends of the Earth said that acid mine drainage, a common side-effect of opencast mining, had caused toxic levels of selenium and arsenic in the nearby river systems. It said that up to 70 per cent of aquatic life was suffering from chronic toxicity.

Norwegian Finance Minister Kristin Halvorsen said: “There are no indications to the effect that the company’s practices will be changed in future. The fund cannot hold ownership interests in such a company.”

The Grasberg mine contributed US $159 million to Rio’s profits of US $7.3 billion last year, but the operation is scheduled for a large expansion from this year. It is estimated that the mine, located in a national park that is on the World Heritage list, will cover 230 sq km when completed.

Business does not operate in a vacuum. The fact is we are a stakeholder society and CSR is about behaving responsibly as a member of that society – as an individual or business entity. Just as quality assurance and safety were previously ignored or deemed too expensive to adopt as business practices some years ago, they are now the norm. So too will social responsibility become a mandated part of business practice – at least within those companies run by and owned by ethical people.

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