“There is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits”
– Milton Friedman
Sound familiar? This is the thesis the brilliant Milton Friedman put forth in a famous article in the NY Times back in 1970 (he actually published the idea seven years earlier). This quote is widely used and often repeated – many times in ways that challenge or critique his basic assertion. Often an article attacking corporate responsibility refers to this quote as their primary attacking point. And it does sound harsh and unfeeling – and has a whiff of the unethical. Now I will post his full, but less often seen quote below.
“… 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 in the rules of the game, which is to say, engages in open and free competition, without deception or fraud” – Milton Friedman
Loses a bit of its sting and harshness doesn’t it? What Mr. Friedman was saying is that businesses who operate in such a manner are being socially responsible since a corporation behaving in this fashion is providing economic growth for society at large, providing employment for workers, providing profits for shareholders, providing taxes for the various governmental entities, providing desired and valued products for consumers and is doing so in the most efficient manner possible, thereby making the pie bigger for all.
We can take this thought a bit further using yesterday’s post re: Mylan Pharmaceuticals. What would Mr. Friedman and his theory have made of Mylan’s treatment of the EpiPen pricing strategy? Well, Mr. Friedman’s guiding principal is for a corporation to increase profits overall for shareholders (this leads to an increase in the value of the company – and the stock price). It doesn’t say to maximize a given product line. It does state the need for “open and free competition” – this bit is actually crucial. It further states “without deception or fraud”.
I would argue that Mylan violated the precept on several levels. First, there was no competition for the EpiPen specifically because of the FDA’s refusal to approve a generic competitor. As a result there was no “open and free competition”. While this allowed the company to earn above market returns it also conveyed both a risk and in effect a responsibility on the company.
The risk was obvious, that there would be a public backlash over price gouging – especially in a product that related to the safety of children. The public was not going to blame the FDA, they were of course going to blame Mylan. The company was even warned externally of this concern by various street analysts who covered the stock. It’s worth pointing out one more time that the sole reason this entire “risk event” occurred was because free and open competition was simply not allowed.
The responsibility conveyed onto Mylan was managing the “risk” they had taken on. Management had a duty to shareholders to manage pricing of the EpiPen in such a manner that was both profit generating but also in such a way as to avoid scandal. This was something Mylan’s management failed to do. And they and more specifically Mylan’s shareholders paid dearly for that mistake.
One billion in EpiPen revenues (not profits) led to well over $3 billion in lost market value and an almost half-billion fine! Furthermore, the company’s reputation is now severely tarnished reducing the value of its “brand” and the company has almost certainly lost the ability to earn large profits from the EpiPen going forward as all eyes will now be on the company’s pricing of that particular product.
My point to all this is simply that Friedman’s guiding principal is alive and well but needs to be viewed as he wrote it – in its entirety. Pursuing profits in a manner that risks destroying shareholder value is not actually pursuing profits. It is pursuing foolishness. Using one part of Friedman’s theory as an excuse or crutch is both wrong and dangerous and is not what Friedman stated or intended. He provided the caveats he did for good reason and they must be heeded.
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