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A strategic response to Friedman’s critique

of business ethics
Scott Gallagher

Scott Gallagher is an Assistant
Professor at James Madison
University in Harrisonburg,
Virginia. This article is a result of
discussions with his strategic
management and international
management students, as well
as colleagues and managers.
He has published articles on
strategic alliances and
standards-based industries in a
number of publications.
E-mail: gallagsr@jmu.edu

n 1970 Nobel Prize-winning economist Milton Friedman’s[1] article ‘‘A Friedman
doctrine: the social responsibility of business is to increase its profits’’ appeared in the
New York Times Magazine. While apparently written with a focus on charitable giving by
firms, Dr Friedman argued that:

I

. . . there is one and only one social responsibility of business – to use its resources and engage in
activities designed to increase its profits so long as it stays within the rules of the game, which is to
say, engages in open and free competition without deception or fraud (Friedman, 1970, p. 125).

Reiterated by Friedman many times since, this powerful critique has hung over discussions
of corporate social responsibility and business ethics ever since (Friedman, 1998, 2002).
While the experiences of WorldCom and Enron may appear to be prima facie evidence that
increased attention to business ethics is needed, the recent successful legal proceedings
against officers of these companies suggest that their conduct was in fact illegal, not just
unethical. Therefore, these examples do not detract from Friedman’s position since the
illegal actions perpetrated by these firms’ executives are in violation of his standard.
Perhaps Friedman’s argument has such power because it is tied so closely to the generic
mission statement of firms to ‘‘maximize shareholder value.’’ Widely taught in business
schools, this mantra ‘‘. . . dominated management thinking during the nineties . . . ’’ and
remains popular to this day (Bossidy and Charan, 2004, p. 62; Ghoshal, 2005). Friedman’s
argument also reinforces most managers’ beliefs that they are there to focus on the returns to
the firm, a belief that can be further reinforced if they are rewarded via stock options or
grants. In addition, the argument has strong institutional appeal because shareholders are
the legal owners of the firm and strong practical appeal because profitability is the
foundation for firm success. Finally, and in fairness to Friedman, there is nothing wrong with
profits. Profits are clearly socially beneficial since outcomes such as greater employment
and higher wages frequently derive from them.
Friedman’s critique also possesses great simplicity and clarity, especially in comparison to
the various ways of knowing, models of ethical conduct, and models of thinking through
ethical problems that often embody a discussion of business ethics[2]. While these
frameworks are theoretically sound, one can only wonder at the probability of their being
retained by managers as they go forward with their duties. In comparison to Friedman’s clear
guidance for managers, such frameworks are quite ponderous when confronting business
dilemmas.
This essay is an effort to articulate a response to Friedman based on ideas surrounding
strategic management. Strategic management, with its frameworks for internal and external
analysis and focus on why firm performance differs, offers a solid base to respond to the
clarity and applicability of Friedman’s position. Equally important, it provides a foundation
through strategic planning for raising issues that highlight ethical considerations.

DOI 10.1108/02756660510633028

VOL. 26 NO. 6 2005, pp. 55-60, Q Emerald Group Publishing Limited, ISSN 0275-6668

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g. This is why free political systems that enact laws for society. ‘‘How do you want to live?’’ Economic systems are a part of an answer to Socrates. ’’ Responses to Friedman – co-option and assaults Direct responses to Friedman. Robert Almeder (1980) attempts to equate Friedman’s position with arguments concerning killing an innocent human being for financial reward. Perhaps this is why direct assaults on Friedman from ethics writers have not met with much success. a simple survey of ‘‘who knows of an ethical firm’’ and ‘‘who has bought products from this firm because they were ethical’’ given to any class or group of executives will quickly reveal not many people are aware of ethical firms and even fewer patronize them because of their ethics. For example. 6 2005 . While there is some historical evidence for this co-option approach. by driving to work I. 2000) and this argument has many problems. then there would not be any need for a subject called ‘‘business ethics’’ nor much discussion of corporate social responsibility. Examples Almeder cites include the discharge of carcinogens into the environment and advertising cigarettes. too. Friedman would correctly point out that his critique includes obeying the law and so remains as a perfectly viable ethical standard for businesses. Ethics are a response to Socrates’ famous question. Therefore. including laws like no slavery. and capitalism is great at this. By definition ethics generally refers to a system of moral values that may differ from the incentives of economic systems. Finally. on the narrow basis of economic return is doomed to failure. Is driving to work therefore unethical? While it may be unwise for me to smoke (an implicit endorsement) is it really unethical? Such arguments may strike managers as not applicable to the obvious reality of their lives or worse. if behaving ethically was immediately rewarding economically or obvious. but economic efficiency is not the sum total of our lives. but are generally evaluated based on how they aid a society in efficiently allocating scarce resources. research has been mixed (e. and economic freedom. Barlett and j j PAGE 56 JOURNAL OF BUSINESS STRATEGY VOL. have been quite limited. As noted earlier. the evaluation of an ethical system needs a broader metric for evaluation and attempting to argue for ethics. As an advocate of political. are so important. McWilliams and Siegel. Friedman would agree with this line of thought (Friedman. human. firms often engage in unethical conduct because doing so is a way to enhance their performance. Enron and WorldCom were both highly lauded at one time in rankings such as Fortune’s Most Admired Companies while WorldCom even cracked the top 60 in the 2001 corporate reputation survey conducted by Harris Interactive[3]. If society’s ethical norms were not in occasional conflict with capitalist economic systems. Voluntary exchange is at the core of his philosophy. It seems a mistake to argue ethics on these terms. discharge carcinogens into the environment. e. 26 NO. Ford’s success with the five-dollar day. surveys of the most respected or ethical firms reveal considerable variance in their populations from year to year.‘‘ Strategic management. with its frameworks for internal and external analysis and focus on why firm performance differs. there wouldn’t be a need for business ethics. A different approach is needed. offers a solid base to respond to the clarity and applicability of Friedman’s position. For example. Many responses attempt to co-opt Friedman by arguing that firms that behave ethically will gain considerable amounts of good will from customers and thereby have superior performance over the long term. Living within a system that efficiently allocates resources is certainly admirable. But these arguments fade in power upon reflection. First. shrill. 1991).g. at least as they have appeared in business related outlets. Second. business or otherwise.

firms where managers act ethically are better able to gain a sustainable competitive advantage because their conduct and behavior is tied more closely to the social macro environmental force. ’’ j j VOL. In short. Hitt et al. Laws.’’ image enhancement. The simplest way to do this seems to be by encouraging a long-term view of the implications of decisions inside firms (Barlett and Preston. in democracies. while Enron’s may have been only lip service. subject to less risk.. are less likely to get blindsided by changes in these environments. This article aims to help them by viewing ethical behavior as a strategic shock absorber or ‘‘social insurance’’ for a firm. or paying only lip service via empty codes of conduct. especially when social changes eventually show up in mandated legal changes. are not stable. As a part of traditional strength/weakness/ opportunity/threat analysis the external environment is examined. or firm’s performance by chiseling on their ethical beliefs just need a way to articulate their ‘‘gut feelings’’ about it into a convincing business argument.g.’’ helped managers with the conflict and complexity of ethical issues in business. the need is for long-term vision. Since ethics is tied to broadly accepted cultural norms for conduct. Since by definition social norms are aligned with ethical behavior. suggest that managers don’t view decisions as ethical or unethical they view them in terms of success and failure. Therefore. It is this aspect of insulating the firm against change that offers a useful response to Friedman and provides a real reason to behave ethically rather than simply engaging in ‘‘ethical marketing. 26 NO.. 2005). a firm that is acting ethically serves to insulate itself from instability caused by this external force because its conduct is already in accord with existing socio-cultural norms. This tension between a long-term view and the need for earnings growth is what viewing ethical behavior as a strategic shock absorber can help offset. It would seem scholars could better serve managers if they acknowledged this and. This article assumes most people are honest and when confronted with opportunities to enhance their personal. Boeing was quite serious about theirs. division. I believe it is impressive how honest most business people are. acting ethically is a way to minimize the effects of change from the socio-cultural environment on the firm. thereby less frequently compelled to change their policies and procedures. Many firms have ethical codes of conduct and. 2005). especially in the USA. Therefore. Hill and Jones. ethical firms are more secure. The fact that ethical decisions in business are easy or obvious is clearly a myth (Trevino and Brown. rather than invoking cliche´s such as ‘‘do the right thing. In addition. 2000). and can therefore expect higher returns. So a firm operating within the law but in an unethical manner can see its business destroyed as laws come to reflect social norms. are frequently included as a component of the frameworks used for analyzing the external environment (e. The question then becomes how to motivate and bring forward that long-term view. The fact that stories such as accounting fraud are still ‘‘news’’ is evidence that these are not common events. Given the amounts of money involved. managers for firms who act ethically. e. ‘‘ The fact that ethical decisions in business are easy or obvious is clearly a myth. the socio-cultural environment is tied to the political/legal environment through elections and peer jurors. defined as the shared norms and values in a society. firms clearly care about ethics. the Sarbanes-Oxley Act of 2002. 2004. 2004). as evidenced by the resignation of their CEO for violating it (Lunsford et al. Sociocultural norms.g. especially against the never-ending pressure for earnings and earnings growth in publicly traded companies.Preston (2000). 6 2005 JOURNAL OF BUSINESS STRATEGY PAGE 57 . Ethical behavior as a strategic shock absorber Extant strategy practice offers a potentially powerful and simple response to Friedman that to date appears to have been overlooked.e. i. in accordance with the shared norms and values of society. Further. writing in the Journal of Business Ethics.

a rigged crash test by NBC News. Judges and jurors have had no compunction about penalizing companies acting in this manner. For example consider the recent trouble conversions of traditional pension plans to ‘‘cash balance’’ plans has caused companies (Schultz. Such consideration could be integrated with a firm’s strategic planning functions. Similar experiences have been noted at General Electric under Jack Welch.’’ the exercise of examining the political/legal environment and considering its long-term direction and consequences can help bring forward a long term view further encouraging and facilitating the articulation of the value of ethical conduct. Buffett and Berkshire Hathaway didn’t know where the next ethical challenge or lapse was going to come from. 2005)[5]. Your lawyers and accountants say it is okay (in fact. they might have even sold your firm the idea!). Buffett acted ethically for its own sake. Cigarette and asbestos manufacturers may be additional examples of firms that were clearly operating within the law who were later blindsided by ethical missteps. who has a strong ethical reputation. it also has a CEO. Warren Buffett. The legal system in the USA offers numerous examples to illustrate the pitfalls of unethical. as the collapse of Arthur Andersen underscores. A minority of executives acting unethically inside a firm are potentially gambling the firm’s very survival. It can provide the legitimacy for questionable activities that will generate considerable wealth. is not always enough because aspects of the law are tacit and subject to change. why not wait for the law? The issue is that waiting for the law may be too late. Cigarette firms face decades of billion dollar payouts for activities they did that were perfectly legal at the time. and encouraging ethical behavior by j j PAGE 58 JOURNAL OF BUSINESS STRATEGY VOL. in countries such as the USA with strong common law traditions. This example also highlights how this argument goes beyond pre-emption. rather than blatantly illegal. even upholding its spirit while avoiding fraud and deception. Unethical behavior by a small minority of managers at that firm destroyed the financial security of hundreds of other honest Arthur Andersen partners[4]. 6 2005 . including some dramatic ethical statements during his running of Salomon Brothers in the early 1990s (Eisinger. so why be ethical. where a large number of embarrassing incidents. 26 NO. 2002). and $350 million in phony profits at its Kidder Peabody finance unit and even embarrassing personal disclosures that resulted from Welch’s divorce have not harmed his or GE’s reputation (Slater. could easily dominate managerial decision making. or implicit duties. This attempt to reduce pension costs clearly discriminated against a firm’s oldest and presumably most loyal workers. 2003).Laws change. Even if a firm’s strategic plan ‘‘sits on a shelf. While Berkshire Hathaway is more diversified than AIG. Marsh McLennan and American Insurance Group (AIG) found themselves (and their stock price) in tatters. By acting ethically. Those calling for increased attention to business ethics need to offer managers a coherent response to this elementary 35-year-old challenge. and congruence with the norms and expectations of life in a capitalist economic system. So acting within the law. overcharges to the Defense Department. Imagine being present in the Enron boardroom discussing the creation of an off balance sheet entity that will boost your firm’s reported financial performance. Yet Berkshire Hathaway was partner for some of the AIG transactions and it has not suffered nearly as much financially or otherwise (Karmin. due to its applicability. intuitive appeal.. 2005). Murry et al. simplicity. Implications and examples Friedman’s critique goes to the heart of the firm and if left unchallenged. so why shouldn’t you create considerable wealth for yourself and your shareholders by setting up entities that appear to be independent on the balance sheet? It may not ‘‘feel right in your gut’’ but what strategic argument could you use against this? By clearly linking ethics to other strategic analysis frameworks the approach of ethics as insurance offers an integrated response to bringing forward the value of a long-term view and providing a clear answer to questions like these. 1999.g. behavior. A dramatic example of the potential power of this approach is exhibited by the disparate impact of New York Attorney General Eliot Spitzer’s probes into the insurance industry. e. The risks of only doing what the law requires are further exacerbated by torts.

In addition to his work in theoretical economics he has written numerous books and articles on issues of freedom and related public policy issues. Another example is a utility company that has recently become much more aggressive about collecting on its accounts (Smith. Teaching Business Ethics for Effective Learning. ‘‘Lose money for the firm and I will be understanding. 3. which is a lot harder to remember and implement than.others (including their firm’s reward systems) these icons of US business could be confident that ethical conduct would help shield themselves and their company from future challenges. starting in the late 1980s. The legal system is the most obvious but not the only way that failing to conform to ethical norms can cause problems for firms. when coupled with advances in communications such as the internet. Governance. maximize profits while following the rules of the game. Will people be as sympathetic of firms penalizing people and using as heavy-handed collection tactics for electric bills as for credit card debts? Or consider the recent news that hedge funds are starting to offer preferential redemption options for their wealthiest clients (Mollenkamp and Reilly. Managers cannot afford to wait for laws to tell them what is ethical because legal entrepreneurs (or aspiring attorneys general) are always looking for new torts to ensnare them and by the time new laws arrive it may be too late for the firm and its incumbent managers. as court proceedings begin it will be interesting to see if the voluntary action by Merck helps that firm. Notes 1. 2005). In addition to potential reputation effects. and I will be ruthless. Sims. 2005). but firm existence. ethical behavior by a firm’s managers serve as a shock absorber from a wide range of socio-cultural related threats. Social responsibility. The Harris Interactive poll results are published by the Wall Street Journal. Carrol (1979) that despite being only eight pages provides three dimensions and multiple categories per dimension. R. not only to firm performance. Carrol (2004) discusses broader aspects of corporate social responsibility. Ironically.000 to $20. Economic theory So what’s the point? Managers inside firms should act ethically because if their actions do not align with society’s broader view of ethical behavior the entire organization is at risk. After all. The Fortune listings have come out annually since 1981 in February. 2. 4. (2002). there are many potential examples where ethical behavior may serve firms well. Westport CT. While hedge funds have benefited from not being as strictly regulated as mutual funds. and company reputations may be especially vulnerable to unethical activity. Given the inevitability of side effects.000. recent innovations have allowed smaller investors access to them by cutting minimum investments from $1. Quorum Books. 6 2005 JOURNAL OF BUSINESS STRATEGY PAGE 59 . Arthur Andersen was one of the strongest advocates of business ethics and teaching business ethics. See. 2005). For example the transparency of corporate activities appears to be increasing.’’ j j VOL. Conclusion Keywords: Business ethics. See for example. While it is clear that the data each company had on the side effects of their drugs differed. Buffett’s most famous ethical statement at Salomon was a message he sent to his employees. I firmly believe that almost all practicing managers are honest individuals. 5. Merck voluntarily recalled Vioxx while Pfizer kept Celebrex on the market.000 (Zuckerman. Friedman is most famous for his work on the monetary theory of economics for which he won the Nobel Prize in 1976. Consider the recent controversy over the COX-2 pain inhibitors that were marketed by Pfizer and Merck. lose a shred of reputation for the firm. 26 NO. Acting ethically therefore becomes one of the best insurance policies a company can have. pharmaceuticals may be an especially apt industry in which ethical behavior is important. Florida changed its laws retroactively to enable its Medicaid lawsuits against cigarette companies (Levy. I would expect that preferential treatment for an already privileged class to a core function like the return of capital could be viewed by many as unethical and easily result in increased regulation for this industry. 1997). Looking forward.

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