In September 1970, Milton Friedman wrote a controversial and highly influential article entitled The Social Responsibility of Business is to Increase its Profits, in which he declared:
In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.
This month is the 50th anniversary of its publication and there have been many retrospectives in the news recently. The article was offered during a time of social unrest and corresponding corporate pledges to address a wide variety of societal ills – the parallels to today are another reason for the elevated attention. The original article is here for those interested, and one recent retrospective is here.
I have read many critiques and defenses of Friedman and none that I’ve seen pinpoint a central flaw in his thinking, i.e., profit maximization is not in fact the purpose of any business. If not profit, what then is the purpose of a business? The customer. Even the mighty shareholder, the employer of Friedman’s article, has nothing if the business does not have customers.
Sixteen years prior to Friedman’s doctrine, another great thinker offered a much better answer when contemplating the purpose of business. In his 1954 book The Practice of Management, Peter Drucker said:
If we want to know what a business is, we have to start with its purpose. And the purpose must lie outside the business itself. In fact, it must lie in society, since a business enterprise is an organ of society. There is only one valid definition of business purpose: to create a customer. The customer is a foundation of a business and keeps it in existence. The customer alone gives employment. And it is to supply the customer that society entrusts wealth-producing resources to the business enterprise.
According to Drucker: “Profit is not the explanation, cause, or rationale of business behavior and business decisions, but the test of their validity.” The equation for success in business, and I think both Friedman and Drucker would agree, is to delight the customer at the lowest possible cost – profit is the desirable outcome of doing these two things well, for both shareholders and society. Too often, businesses focus on cost management to the relative neglect of customers, due in part to Friedman’s influence on successive waves of management thinking in the 70s and 80s.
I am empathetic to Friedman’s worldview in many respects, but his acolytes are wrong to assume, as he did, that managers and CEOs who take up so-called social causes do so from personal motives to the peril of the shareholder. When a food company pledges to use organic grain or an oil company pledges to reduce greenhouse gas emissions or a bank pledges actions toward racial equity, they are doing so because their customer cares about these issues – notwithstanding that these leaders often also care about these issues.
Admittedly, “the customer” as purpose is a generic answer to a broadly applied question. To compete effectively, each business must have a purpose grounded in its own unique customer and its own place in the world. At McDonald Strategy Partners, we’ve helped leaders develop meaningful purpose for their organization, sometimes as a stand-alone exercise, but often as part of a larger strategic plan. You can read about one case here.
Are you looking for help with your strategy? Call us, we’d love to help.