In an article published in New York Times 50 years ago, Milton Friedman formulated the position known today as the Friedman doctrine: "The social responsibility of companies is limited to increasing their own profits." This is a topic he dealt with in the book as well Capitalism and freedom from 1962, where he claimed that companies have "only one" debt to society, and that is the pursuit of profit within the limits of the rules established by law.
Friedman's doctrine marked our era. It legitimizes rampant capitalism that produces economic insecurity, increases inequality, deepens regional divisions and accelerates climate change. This kind of capitalism finally caused dissatisfaction and violent reactions in the social and political sphere. Many of the big companies responded to the attacks by accepting and promoting the idea of corporate social responsibility, if only in words.
The idea of social responsibility marks an important anniversary this year. As a call for companies to take into account the interests of the wider community, the United Nations Global Compact, adopted 20 years ago, was in direct conflict with the Friedman Doctrine. It was signed by more than 11.000 companies in 156 countries, accepting additional obligations in the field of human rights, labor and environmental standards and the fight against corruption.
John Ruggie, a man who played a key role in the preparation of the Global Compact, describes the agreement and similar initiatives as international projects that help companies build the social dimension of their identity.
By promoting certain norms of behavior, such initiatives should contribute to self-regulation in the business world. Thus, Ruggie claims, the gap created by the decline of traditional forms of regulation implemented by state authorities and international organizations will be filled, and companies will become an important actor in the search for a new balance between the needs of the market and the society we want. Leading professors of business schools, such as Rebecca Henderson from Harvard or Zeynep Ton from MIT, believe that company heads have a long-term interest in taking care of their workers and the environment. Last year, the US Business Roundtable joined them in this, with a revised statement on business objectives and the obligation of companies to provide value not only to their shareholders, but also to all "stakeholders", including employees, customers, suppliers and local communities. The statement was signed by the heads of almost 200 largest companies whose total market capitalization exceeds 13 trillion dollars.
But, despite the massive expression of support for the idea of social responsibility, the big question is whether relying on company directors and their enlightened understanding of their own business interest will bring us the desired results. A recently published analysis by Lucian Bebchuk and Robert Tallarita of Harvard is sobering.
Bebchuk and Tallarita come to the conclusion that initiatives such as this statement are primarily part of a "rhetorical campaign" that should leave a good impression on the public: such initiatives are not reflected in company management practices and do not contribute to the construction of compromises that are necessary if the needs of all interested parties really take into account. Moreover, they can be counterproductive because they "encourage illusory hopes that the expected positive effects are close at hand." That is why state policies that regulate the relationship of companies to workers, local communities and the environment are still crucially important. But what will we do if corporations are already so powerful that they can make the state laws that suit them best? Columnist Financial Times Martin Wolf recently said, “I thought Milton Friedman was right. I don't think so anymore". The flaw in Friedman's doctrine, Wolf explains, is that it ignores the fact that the rules of the game by which companies make profits are not determined democratically, but are under the "dominant influence" of money. They are compromised by the subversion of the political process itself by the contributions that companies give to political campaigns.
Proponents of capitalism that respects the interests of all parties do not necessarily deny the importance of the role of the state. Some of them, for example, Rebecca Henderson, argue that corporate social responsibility will help the state do its part. Or, as Bebchuck and Tallarita state, state regulation and self-regulation of the business sector are not mutually exclusive but complementary.
Taking money out of politics, as Wolf suggests, would not completely solve the problem. The reason is that epistemic supremacy has as strong an effect as financial supremacy. Regulation and creation of policies imply a good knowledge of all circumstances of companies' operations, available options and scenarios for the future. Civil servants have left the initiative to corporations in the domains of environmental protection, finance, consumer protection, anti-trust laws and trade policies because corporations have the most influence on how the mentioned types of knowledge are collected and distributed, and hence can influence how define the problems, what solutions will be considered and what technologies will be applied.
In such a situation, it is not easy for states to establish basic socially desirable rules without a significant contribution, including the influence of the business world. This requires a different model of regulatory management, a model in which government representatives would define the broadest set economic, social and environmental goals, and then refine them (and revise them if necessary) through continuous cooperation with the business world. Finding the optimal balance of power between public and private interest is not easy, but there are already successful examples of such cooperation in the regulation of technological development, food safety and water quality.
In the last instance, the only effective solution is the democratization of the companies themselves. This means that workers and members of the local community would have to get a direct right to vote in the management of their business. Companies can be a reliable partner in protecting the public good only if they speak with the voice of those whose lives they most directly affect.
The author is a professor of international political economy at Harvard University
(Project Syndicate; Peščanik.net; translation: Đ. Tomić)
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