Rethinking the Social Responsibility of Business

A debate reprinted with permission from Reason magazine featuring Milton Friedman, Whole Foods' John Mackey, and Cypress Semiconductor's T.J. Rodgers.

 

Thirty-five years ago, Milton Friedman wrote a famous article for The New York Times Magazine whose title aptly summed up its main point: "The Social Responsibility of Business Is to Increase Its Profits." The future Nobel laureate in economics had no patience for capitalists who claimed 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 employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of re formers."

 

Friedman, now a senior research fellow at the Hoover Institution and the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, wrote that such people are "preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting pup pets of the intellectual forces that have been undermining the basis of a free society these past decades."

 

John Mackey, the founder and CEO of Whole Foods, is one businessman who disagrees with Friedman. A self-described ardent libertarian whose conversation is peppered with references to Ludwig von Mises and Abraham Maslow, Austrian economics and astrology, Mackey believes Friedman's view is too narrow a description of his and many other businesses' activities. As important, he argues that Friedman's take woefully undersells the humanitarian dimension of capitalism.

 

In the debate that follows, Mackey lays out his personal vision of the social responsibility of business. Friedman responds, as does T.J. Rodgers, the founder and CEO of Cypress Semiconductor and the chief spokesman of what might be called the tough love school of laissez faire. Dubbed "one of America's toughest bosses" by Fortune, Rodgers argues that corporations add far more to society by maximizing "long-term shareholder value" than they do by donating time and money to charity.

 

Reason offers this exchange as the starting point of a discussion that should be intensely important to all devotees of free minds and free markets. Subscribe to Reason.

 

Putting Customers Ahead of Investors - John Mackey

 

In 1970 Milton Friedman wrote that "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." That's the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders

 

I strongly disagree. I'm a businessman and a free market libertarian, but I believe that the enlightened corporation should try to create value for all of its constituencies. From an investor's perspective, the purpose of the business is to maximize profits. But that's not the purpose for other stakeholders-for customers, employees, suppliers, and the community. Each of those groups will define the purpose of the business in terms of its own needs and desires, and each perspective is valid and legitimate.

 

My argument should not be mistaken for a hostility to profit. I believe I know something about creating shareholder value. When I co-founded Whole Foods Market 27 years ago, we began with $45,000 in capital; we only had $250,000 in sales our first year. During the last 12 months we had sales of more than $4.6 billion, net profits of more than $160 million, and a market capitalization over $8 billion.

 

But we have not achieved our tremendous increase in shareholder value by making shareholder value the primary purpose of our business. In my marriage, my wife's happiness is an end in itself, not merely a means to my own happiness; love leads me to put my wife's happiness first, but in doing so I also make myself happier. Similarly, the most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of.

 

Not that we're only concerned with customers. At Whole Foods, we measure our success by how much value we can create for all six of our most important stakeholders: customers, team members (employees), investors, vendors, communities, and the environment. Our philosophy is graphically represented in the opposite column.

 

There is, of course, no magical formula to calculate how much value each stakeholder should receive from the company. It is a dynamic process that evolves with the competitive marketplace. No stakeholder remains satisfied for long. It is the function of company leadership to develop solutions that continually work for the common good.

 

Many thinking people will readily accept my arguments that caring about customers and employees is good business. But they might draw the line at believing a company has any responsibility to its community and environment. To donate time and capital to philanthropy, they will argue, is to steal from the investors. After all, the corporation's assets legally belong to the investors, don't they? Management has a fiduciary responsibility to maximize shareholder value; therefore, any activities that don't maximize shareholder value are violations of this duty. If you feel altruism towards other people, you should exercise that altruism with your own money, not with the assets of a corporation that doesn't belong to you.

 

This position sounds reasonable. A company's assets do belong to the investors, and its management does have a duty to manage those assets responsibly. In my view, the argument is not wrong so much as it is too narrow.

 

First, there can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors. For example: In addition to the many thousands of small donations each Whole Foods store makes each year, we also hold five 5% Days throughout the year. On those days, we donate 5 percent of a store's total sales to a nonprofit organization. While our stores select worthwhile organizations to support, they also tend to focus on groups that have large membership lists, which are contacted and encouraged to shop our store that day to support the organization. This usually brings hundreds of new or lapsed customers into our stores, many of whom then become regular shoppers. So a 5% Day not only allows us to support worthwhile causes, but is an excellent marketing strategy that has benefited Whole Foods investors immensely.

 

That said, I believe such programs would be completely justifiable even if they produced no profits and no P.R. This is because I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company. It is the entrepreneurs who create a company, who bring all the factors of production together and coordinate it into viable business. It is the entrepreneurs who set the company strategy and who negotiate the terms of trade with all of the voluntarily cooperating stakeholders—including the investors. At Whole Foods we "hired" our original investors. They didn't hire us.

 

We first announced that we would donate 5 percent of the company's net profits to philanthropy when we drafted our mission statement, back in 1985. Our policy has therefore been in place for over 20 years, and it predates our IPO by seven years. All seven of the private investors at the time we created the policy voted for it when they served on our board of directors. When we took in venture capital money back in 1989, none of the venture firms objected to the policy. In addition, in almost 14 years as a publicly traded company, almost no investors have ever raised objections to the policy. How can Whole Foods' philanthropy be "theft" from the current investors if the original owners of the company unanimously approved the policy and all subsequent investors made their investments after the policy was in effect and well publicized?

 

The shareholders of a public company own their stock voluntarily. If they don't agree with the philosophy of the business, they can always sell their investment, just as the customers and employees can exit their relationships with the company if they don't like the terms of trade. If that is unacceptable to them, they always have the legal right to submit a resolution at our annual shareholders meeting to change the company's philanthropic philosophy. A number of our company policies have been changed over the years through successful shareholder resolutions.

 

Another objection to the Whole Foods philosophy is where to draw the line. If donating 5 percent of profits is good, wouldn't 10 percent be even better? Why not donate 100 percent of our profits to the betterment of society? But the fact that Whole Foods has responsibilities to our community doesn't mean that we don't have any responsibilities to our investors. It's a question of finding the appropriate balance and trying to create value for all of our stakeholders. Is 5 percent the "right amount" to donate to the community? I don't think there is a right answer to this question, except that I believe 0 percent is too little. It is an arbitrary percentage that the co-founders of the company decided was a reasonable amount and which was approved by the owners of the company at the time we made the decision. Corporate philanthropy is a good thing, but it requires the legitimacy of investor approval. In my experience, most investors understand that it can be beneficial to both the corporation and to the larger society.

 

That doesn't answer the question of why we give money to the community stakeholder. For that, you should turn to one of the fathers of free-market economics, Adam Smith. The Wealth of Nations was a tremendous achievement, but economists would be well served to read Smith's other great book, The Theory of Moral Sentiments. There he explains that human nature isn't just about self-interest. It also includes sympathy, empathy, friendship, love, and the desire for social approval. As motives for human behavior, these are at least as important as self-interest. For many people, they are more important.

 

When we are small children we are egocentric, concerned only about our own needs and desires. As we mature, most people grow beyond this egocentrism and begin to care about others-their families, friends, communities, and countries. Our capacity to love can expand even further: to loving people from different races, religions, and countries—potentially to unlimited love for all people and even for other sentient creatures. This is our potential as human beings, to take joy in the flourishing of people everywhere. Whole Foods gives money to our communities because we care about them and feel a responsibility to help them flourish as well as possible.

 

The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the "invisible hand" to generate positive results for society. The "brand" of capitalism is in terrible shape throughout the world, and corporations are widely seen as selfish, greedy, and uncaring. This is both unfortunate and unnecessary, and could be changed if businesses and economists widely adopted the business model that I have outlined here.

 

To extend our love and care beyond our narrow self-interest is antithetical to neither our human nature nor our financial success. Rather, it leads to the further fulfillment of both. Why do we not encourage this in our theories of business and economics? Why do we restrict our theories to such a pessimistic and crabby view of human nature? What are we afraid of?

 

 

Making Philanthropy Out of Obscenity -Milton Friedman

 

By pursuing his own interest [an individual] frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. -Adam Smith, The Wealth of Nations

 

The differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical. Strip off the camouflage, and it turns out we are in essential agreement. Moreover, his company, Whole Foods Market, behaves in accordance with the principles I spelled out in my 1970 New York Times Magazine article.

 

With respect to his company, it could hardly be otherwise. It has done well in a highly competitive industry. Had it devoted any significant fraction of its resources to exercising a social responsibility unrelated to the bottom line, it would be out of business by now or would have been taken over. Here is how Mackey himself describes his firm's activities:

  1. "The most successful businesses put the customer first, instead of the investors" (which clearly means that this is the way to put the investors first).
  2. "There can be little doubt that a certain amount of corporate philanthropy is simply good business and works for the long-term benefit of the investors."

Compare this to what I wrote in 1970:

 

"Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.

 

"To illustrate, it may well be in the long run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government.

 

"In each of these…cases, there is a strong temptation to rationalize these actions as an exercise of 'social responsibility.' In the present climate of opinion, with its widespread aversion to 'capitalism,' 'profits,' the 'soulless corporation' and so on, this is one way for a corporation to generate goodwill as a by-product of expenditures that are entirely justified in its own self-interest.

 

"It would be inconsistent of me to call on corporate executives to refrain from this hypocritical window-dressing because it harms the foundations of a free society. That would be to call on them to exercise a 'social responsibility'! If our institutions and the attitudes of the public make it in their self-interest to cloak their actions in this way, I cannot summon much indignation to denounce them."

 

I believe Mackey's flat statement that "corporate philanthropy is a good thing" is flatly wrong. Consider the decision by the founders of Whole Foods to donate 5 percent of net profits to philanthropy. They were clearly within their rights in doing so. They were spending their own money, using 5 percent of one part of their wealth to establish, thanks to corporate tax provisions, the equivalent of a 501c(3) charitable foundation, though with no mission statement, no separate by-laws, and no provision for deciding on the beneficiaries. But what reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose of it? The practice makes sense only because of our obscene tax laws, whereby a stockholder can make a larger gift for a given after-tax cost if the corporation makes the gift on his behalf than if he makes the gift directly. That is a good reason for eliminating the corporate tax or for eliminating the deductibility of corporate charity, but it is not a justification for corporate charity.

 

Whole Foods Market's contribution to society-and as a customer I can testify that it is an important one-is to enhance the pleasure of shopping for food. Whole Foods has no special competence in deciding how charity should be distributed. Any funds devoted to the latter would surely have contributed more to society if they had been devoted to improving still further the former.

 

Finally, I shall try to explain why my statement that "the social responsibility of business [is] to increase its profits" and Mackey's statement that "the enlightened corporation should try to create value for all of its constituencies" are equivalent.

 

Note first that I refer to social responsibility, not financial, or accounting, or legal. It is social precisely to allow for the constituencies to which Mackey refers. Maximizing profits is an end from the private point of view; it is a means from the social point of view. A system based on private property and free markets is a sophisticated means of enabling people to cooperate in their economic activities without compulsion; it enables separated knowledge to assure that each resource is used for its most valued use, and is combined with other resources in the most efficient way.

 

Of course, this is abstract and idealized. The world is not ideal. There are all sorts of deviations from the perfect market-many, if not most, I suspect, due to government interventions. But with all its defects, the current largely free-market, private-property world seems to me vastly preferable to a world in which a large fraction of resources is used and distributed by 501c(3)s and their corporate counterparts.

 

Put Profits First -T.J. Rodgers

 

John Mackey's article attacking corporate profit maximization could not have been written by "a free market libertarian," as claimed. Indeed, if the examples he cites had not identified him as the author, one could easily assume the piece was written by Ralph Nader. A more accurate title for his article is "How Business and Profit Making Fit Into My Overarching Philosophy of Altruism."

 

Mackey spouts nonsense about how his company hired his original investors, not vice versa. If Whole Foods ever falls on persistent hard times-perhaps when the Luddites are no longer able to hold back the genetic food revolution using junk science and fear-he will quickly find out who has hired whom, as his investors fire him.

 

Mackey does make one point that is consistent with, but not supportive of, free market capitalism. He knows that shareholders own his stock voluntarily. If they don't like the policies of his company, they can always vote to change those policies with a shareholder resolution or simply sell the stock and buy that of another company more aligned with their objectives. Thus, he informs his shareholders of his objectives and lets them make a choice on which stock to buy. So far, so good.

 

It is also simply good business for a company to cater to its customers, train and retain its employees, build long-term positive relationships with its suppliers, and become a good citizen in its community, including performing some philanthropic activity. When Milton Friedman says a company should stay "within the rules of the game" and operate "without deception or fraud," he means it should deal with all its various constituencies properly in order to maximize long-term shareholder value. He does not mean that a company should put every last nickel on the bottom line every quarter, regardless of the long-term consequences.

 

My company, Cypress Semiconductor, has won the trophy for the Second Harvest Food Bank competition for the most food donated per employee in Silicon Valley for the last 13 consecutive years (1 million pounds of food in 2004). The contest creates competition among our divisions, leading to employee involvement, company food drives, internal social events with admissions "paid for" by food donations, and so forth. It is a big employee morale builder, a way to attract new employees, good P.R. for the company, and a significant benefit to the community-all of which makes Cypress a better place to work and invest in. Indeed, Mackey's own proud example of Whole Foods' community involvement programs also made a profit.

 

But Mackey's subordination of his profession as a businessman to altruistic ideals shows up as he attempts to negate the empirically demonstrated social benefit of "self-interest" by defining it narrowly as "increasing short-term profits." Why is it that when Whole Foods gives money to a worthy cause, it serves a high moral objective, while a company that provides a good return to small investors-who simply put their money into their own retirement funds or a children's college fund-is somehow selfish? It's the philosophy that is objectionable here, not the specific actions. If Mackey wants to run a hybrid business/charity whose mission is fully disclosed to his shareholders-and if those shareholder-owners want to support that mission-so be it. But I balk at the proposition that a company's "stakeholders" (a term often used by collectivists to justify unreasonable demands) should be allowed to control the property of the shareholders. It seems Mackey's philosophy is more accurately described by Karl Marx: "From each according to his ability" (the shareholders surrender money and assets); "to each according to his needs" (the charities, social interest groups, and environmentalists get what they want). That's not free market capitalism.

 

Then there is the arrogant proposition that if other corporations would simply emulate the higher corporate life form defined by Whole Foods, the world would be better off. After all, Mackey says corporations are viewed as "selfish, greedy, and uncaring." I, for one, consider free market capitalism to be a high calling, even without the infusion of altruism practiced by Whole Foods.

 

If one goes beyond the sensationalistic journalism surrounding the Enron-like debacles, one discovers that only about 10 to 20 public corporations have been justifiably accused of serious wrongdoing. That's about 0.1 percent of America's 17,500 public companies. What's the failure rate of the publications that demean business? (Consider the New York Times scandal involving manufactured stories.) What's the percentage of U.S. presidents who have been forced or almost forced from office? (It's 10 times higher than the failure rate of corporations.) What percentage of our congressmen have spent time in jail? The fact is that despite some well-publicized failures, most corporations are run with the highest ethical standards-and the public knows it. Public opinion polls demonstrate that fact by routinely ranking businessmen above journalists and politicians in esteem.

 

I am proud of what the semiconductor industry does-relentlessly cutting the cost of a transistor from $3 in 1960 to three-millionths of a dollar today. Mackey would be keeping his business records with hordes of accountants on paper ledgers if our industry didn't exist. He would have to charge his poorest customers more for their food, pay his valued employees less, and cut his philanthropy programs if the semiconductor industry had not focused so relentlessly on increasing its profits, cutting his costs in the process. Of course, if the U.S. semiconductor industry had been less cost-competitive due to its own philanthropy, the food industry simply would have bought cheaper computers made from Japanese and Korean silicon chips (which happened anyway). Layoffs in the nonunion semiconductor industry were actually good news to Whole Foods' unionized grocery store clerks. Where was Mackey's sense of altruism when unemployed semiconductor workers needed it? Of course, that rhetorical question is foolish, since he did exactly the right thing by ruthlessly reducing his recordkeeping costs so as to maximize his profits.

 

I am proud to be a free market capitalist. And I resent the fact that Mackey's philosophy demeans me as an egocentric child because I have refused on moral grounds to embrace the philosophies of collectivism and altruism that have caused so much human misery, however tempting the sales pitch for them sounds.

 

Profit Is the Means, Not End -John Mackey

 

Let me begin my response to Milton Friedman by noting that he is one of my personal heroes. His contributions to economic thought and the fight for freedom are without parallel, and it is an honor to have him critique my article.

 

Friedman says "the differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical." But are we essentially in agreement? I don't think so. We are thinking about business in entirely different ways.

 

Friedman is thinking only in terms of maximizing profits for the investors. If putting customers first helps maximize profits for the investors, then it is acceptable. If some corporate philanthropy creates goodwill and helps a company "cloak" its self-interested goals of maximizing profits, then it is acceptable (although Friedman also believes it is "hypocritical"). In contrast to Friedman, I do not believe maximizing profits for the investors is the only acceptable justification for all corporate actions. The investors are not the only people who matter. Corporations can exist for purposes other than simply maximizing profits.

 

As for who decides what the purpose of any particular business is, I made an important argument that Friedman doesn't address: "I believe the entrepreneurs, not the current investors in a company's stock, have the right and responsibility to define the purpose of the company." Whole Foods Market was not created solely to maximize profits for its investors, but to create value for all of its stakeholders. I believe there are thousands of other businesses similar to Whole Foods (Medtronic, REI, and Starbucks, for example) that were created by entrepreneurs with goals beyond maximizing profits, and that these goals are neither "hypocritical" nor "cloaking devices" but are intrinsic to the purpose of the business.

 

I will concede that many other businesses, such as T.J. Rodgers' Cypress Semiconductor, have been created by entrepreneurs whose sole purpose for the business is to maximize profits for their investors. Does Cypress therefore have any social responsibility besides maximizing profits if it follows the laws of society? No, it doesn't. Rodgers apparently created it solely to maximize profits, and therefore all of Friedman's arguments about business social responsibility become completely valid. Business social responsibility should not be coerced; it is a voluntary decision that the entrepreneurial leadership of every company must make on its own. Friedman is right to argue that profit making is intrinsically valuable for society, but I believe he is mistaken that all businesses have only this purpose.

 

While Friedman believes that taking care of customers, employees, and business philanthropy are means to the end of increasing investor profits, I take the exact opposite view: Making high profits is the means to the end of fulfilling Whole Foods' core business mission. We want to improve the health and well-being of everyone on the planet through higher-quality foods and better nutrition, and we can't fulfill this mission unless we are highly profitable. High profits are necessary to fuel our growth across the United States and the world. Just as people cannot live without eating, so a business cannot live without profits. But most people don't live to eat, and neither must a businesses live just to make profits.

 

Toward the end of his critique Friedman says his statement that "the social responsibility of business [is] to increase its profits" and my statement that "the enlightened corporation should try to create value for all of its constituencies" are "equivalent." He argues that maximizing profits is a private end achieved through social means because it supports a society based on private property and free markets. If our two statements are equivalent, if we really mean the same thing, then I know which statement has the superior "marketing power." Mine does.

 

Both capitalism and corporations are misunderstood, mistrusted, and disliked around the world because of statements like Friedman's on social responsibility. His comment is used by the enemies of capitalism to argue that capitalism is greedy, selfish, and uncaring. It is right up there with William Vanderbilt's "the public be damned" and former G.M. Chairman Charlie Wilson's declaration that "what's good for the country is good for General Motors, and vice versa." If we are truly interested in spreading capitalism throughout the world (I certainly am), we need to do a better job marketing it. I believe if economists and business people consistently communicated and acted on my message that "the enlightened corporation should try to create value for all of its constituencies," we would see most of the resistance to capitalism disappear.

 

Friedman also understands that Whole Foods makes an important contribution to society besides simply maximizing profits for our investors, which is to "enhance the pleasure of shopping for food." This is why we put "satisfying and delighting our customers" as a core value whenever we talk about the purpose of our business. Why don't Friedman and other economists consistently teach this idea? Why don't they talk more about all the valuable contributions that business makes in creating value for its customers, for its employees, and for its communities? Why talk only about maximizing profits for the investors? Doing so harms the brand of capitalism.

 

As for Whole Foods' philanthropy, who does have "special competence" in this area? Does the government? Do individuals? Libertarians generally would agree that most bureaucratic government solutions to social problems cause more harm than good and that government help is seldom the answer. Neither do individuals have any special competence in charity. By Friedman's logic, individuals shouldn't donate any money to help others but should instead keep all their money invested in businesses, where it will create more social value.

 

The truth is that there is no way to calculate whether money invested in business or money invested in helping to solve social problems will create more value. Businesses exist within real communities and have real effects, both good and bad, on those communities. Like individuals living in communities, businesses make valuable social contributions by providing goods and services and employment. But just as individuals can feel a responsibility to provide some philanthropic support for the communities in which they live, so too can a business. The responsibility of business toward the community is not infinite, but neither is it zero. Each enlightened business must find the proper balance between all of its constituencies: customers, employees, investors, suppliers, and communities.

 

While I respect Milton Friedman's thoughtful response, I do not feel the same way about T.J. Rodgers' critique. It is obvious to me that Rodgers didn't carefully read my article, think deeply about my arguments, or attempt to craft an intelligent response. Instead he launches various ad hominem attacks on me, my company, and our customers. According to Rodgers, my business philosophy is similar to those of Ralph Nader and Karl Marx; Whole Foods Market and our customers are a bunch of Luddites engaging in junk science and fear mongering; and our unionized grocery clerks don't care about layoffs of workers in Rodgers' own semiconductor industry.

 

For the record: I don't agree with the philosophies of Ralph Nader or Karl Marx; Whole Foods Market doesn't engage in junk science or fear mongering, and neither do 99 percent of our customers or vendors; and of Whole Foods' 36,000 employees, exactly zero of them belong to unions, and we are in fact sorry about layoffs in his industry.

 

When Rodgers isn't engaging in ad hominem attacks, he seems to be arguing against a leftist, socialist, and collectivist perspective that may exist in his own mind but does not appear in my article. Contrary to Rodgers' claim, Whole Foods is running not a "hybrid business/charity" but an enormously profitable business that has created tremendous shareholder value.

 

Of all the food retailers in the Fortune 500 (including Wal-Mart), we have the highest profits as a percentage of sales, as well as the highest return on invested capital, sales per square foot, same-store sales, and growth rate. We are currently doubling in size every three and a half years. The bottom line is that Whole Foods stakeholder business philosophy works and has produced tremendous value for all of our stakeholders, including our investors.

 

In contrast, Cypress Semiconductor has struggled to be profitable for many years now, and their balance sheet shows negative retained earnings of over $408 million. This means that in its entire 23-year history, Cypress has lost far more money for its investors than it has made. Instead of calling my business philosophy Marxist, perhaps it is time for Rodgers to rethink his own.

 

Rodgers says with passion, "I am proud of what the semiconductor industry does-relentlessly cutting the cost of a transistor from $3 in 1960 to three-millionths of a dollar today." Rodgers is entitled to be proud. What a wonderful accomplishment this is, and the semiconductor industry has indeed made all our lives better. Then why not consistently communicate this message as the purpose of his business, instead of talking all the time about maximizing profits and shareholder value? Like medicine, law, and education, business has noble purposes: to provide goods and services that improve its customers' lives, to provide jobs and meaningful work for employees, to create wealth and prosperity for its investors, and to be a responsible and caring citizen.

 

Businesses such as Whole Foods have multiple stakeholders and therefore have multiple responsibilities. But the fact that we have responsibilities to stakeholders besides investors does not give those other stakeholders any "property rights" in the company, contrary to Rodgers' fears. The investors still own the business, are entitled to the residual profits, and can fire the management if they wish. A doctor has an ethical responsibility to try to heal her patients, but that responsibility doesn't mean her patients are entitled to receive a share of the profits from her practice.

 

Rodgers probably will never agree with my business philosophy, but it doesn't really matter. The ideas I'm articulating result in a more robust business model than the profit-maximization model that it competes against, because they encourage and tap into more powerful motivations than self-interest alone. These ideas will triumph over time, not by persuading intellectuals and economists through argument but by winning the competitive test of the marketplace. Someday businesses like Whole Foods, which adhere to a stakeholder model of deeper business purpose, will dominate the economic landscape. Wait and see.

 

Read comments at Reason's Hit and Run blog.

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Comments

Joel Verdon says …

Wow - I am disappointed as a Whole Foods Team Member that I neglected to visit this section of "our" website because the conversation is - well - stimulating! Milton and John are, indeed, saying the same thing except that Milton Friedman prefers not to use the term 'social responsibility.' Milton believes businesses like Whole Foods operate as his model dictates - for profit only - and that our social responsibility is just a play on words. Call it what you wish, but John makes his point by making that social responsibility part of the Core Values and Mission of WFM (Whole Foods Market)...and, by making it a verbal agreement for his/our business, he takes Milton's business model to the next level. On a personal note - I believe in the "invisible hand" - as do most of us on this blog - and I sometimes get overly enthused at how miraculously economic models can change just by going to work everyday in support of a product-customer base-economic model that I LIKE! When I first shopped for organics 26 years ago I was gravely disappointed by the lack of choices, the costs, and the overall product. Who could have forseen the impact that a small group of folks in Austin, in 1980, would have on WORLDWIDE agriculture a quarter century later!? What could be better than being a part of that? Wow! And to tell the economic truth, Whole Foods will probably not always be the "end all" of natural/organics - we have set the bar and we are just now starting to see the lean-face of competition...but thanks to John Mackey, et. al. we face them on very firm footing. I'd love to keep writing, but I have got to get to work - Joel

Jim McClure says …

The thing that most people do is to misquote Friedman. Most people misinterpret him as saying that the social responsibility of business is to increase profits, period. Friedman made several key caveats: 1) profit seeking must be conducted in "open competition" with other firms (this rules out interfirm price fixing arrangements; 2) profit seeking must be within the "rules of the game" (that is according to the rule of law); 3) profit seeking must be conducted without "deception" or "fraud".

Luap says …

We have been waiting, waiting, waiting for the right client to stand up and embrace our misison for healing this world with education, artistry, compassion, sustainability, grace and love. Food from our Earth Mother to Us. Each thing has All within in it, a piece of paper, in a Whole Foods box, is the cloud, the rain, the earth, the people who harvested, cut, processed, and on and on and on. We know this. We are ready. Be this. Smile. Teach. Love.

cheryl white says …

Dear John: I really liked your analogy with your wife to describe the social responsibility of a business in a community. In fact, I believe, that if we are passionate about whatever it is that we do and focus on the right behaviors or things (such as you mentioned:putting customers,employees, suppliers, etc.first) then profits follow. Your enterprise is a good example of how doing the right things leads to the right kind of results. I work for a global human resource consulting firm, and I must confess I read your blog because I've been trying to secure an introductory appointment with the right person in your organization. However, one of our missions or goals is to get organizations' to understand that investing in people will lead them to profits, not ignoring people for the sake of profits. Albeit, we are talking about two different things, I think our values are similiar in doing the right kinds of things. I enjoyed reading your blog. And look forward to reading more of your thoughts. Sincerely, Cheryl White

Tom Cobb says …

Jim McClure says that Friedman is frequently misquoted, as people disregard the caveats Friedman places upon his contention that businesses should seek only profits. This is not correct. Friedman claims a belief in the rule of law, but argues against the validity of nearly every law brought into being for the purpose of containg corporate privilege. In fact, the very example McClure gives - interfirm price-fixing arrangements - is a "rule of law" Friedman argues against in "Free To Choose". See the chapter titled the "Tyranny of Controls." It is disingenuous to claim a belief in the "rule of law", and then oppose its use in virtually all cases.

Emilio Ferrero says …

Dear John: Although I read your article several months after it was published, I wanted to express my admiration for what Whole Foods stands for, which clearly reflects your own personal views. For the past few months I have been working on, learning about, and hopefully helping to shape, Corporate Social Responsibilty in Latin America. I strongly believe that the recent resurgence of socialism in the region, especially in those radical cases where anti-capitalism and anti-americanism were two of the flags used by its leaders is, in part, a response to Mr. Friedman's view regarding the main responsibility of private companies. Mr. Friedman statement about your policy to distribute 5% of WF profits to charitable institutions, i.e., to society,: "But what reason is there to suppose that the stream of profit distributed in this way would do more good for society than investing that stream of profit in the enterprise itself or paying it out as dividends and letting the stockholders dispose of it?" falls on its face when it comes to multinational corporations doing business abroad. Shareholders are so far away -and even so far apart- from the rest of the stakeholders that the only way the companies can effectively excercise their social responsiblity is by assuming it directly. If more of the multinational corporations presently doing business in our countries for the past 30 years had had your view, we might be living in a different social scenario...

mike anderson says …

John, Many thanks to you and your staff for the effort you make to give back to the communities and world you serve. 5% of profits is not the measure, it is the intent behind your gift of philanthropy. I belive it to be pure and good, and in the best interest of my family and my neighbor. As a stakeholder it is my pleasere to share and give of my self [profits] because of love. Mike Anderson SolarAmp.com

Dr Tom Laga says …

Having shopped at the Whole Foods market in West Hartford, CT yesterday, my wife & I were curious about the WF's organization. So today, I visited www.wholefoods.com. Starting at 3:05 pm, I finished at 5:25 pm... reading everything including the 14 pages of CEO John Mackey's blog re the social responsibility of business. Being a Holistic Health counselor [Nutrition, Fitness, Stresscare] and Dr Laga Wellness Seminars presenter here in CT for many years, I can state that I have seldom been so impressed as I was by JM's philosophy. The decline [loss?] of the middle class and the difference between the haves and have-nots has bothered me for years. I always wondered why all of us couldn't share and therefore implement JM's philosophy articulated so effectively in conversational, American English. I'd LOVE to write or edit or speak or be a trainer for this company! Peace to JM's spirit. Holisitically, Dr Tom Laga, newsletter editor for the Connecticut Holistic Health Association.

Alysha Collins says …

Mr. Mackey' I just saw your 60 minutes interview' I applaud your compassion for animals. I have the same compassion and am an animal lover. My concern is your apparent lack of compassion or understanding for people who are poor. Those of us who are disabled or on Social Security disibility..no one gets more than 5 or 6 hundred dollars on this program...or those who have otherwise hit hard times' can no more shop in your store than hang out in beverly hills for a day. You said for the poor it's about choices. No Mr Mackey I don't think so. We don't have the choice to shop at your store. All the money we get in a month would be used up in a couple of shopping trips.

Ariel says …

Hi John, I just saw you on 60 minutes, thank you for being yourself and explaining that just because Whole Foods is successful doesn't mean it can't have the core compassion for animals and the environment that it had when it began. I have been a customer for at least 6 years now, and am thrilled that you are expanding. Eventually the cost of organic will go down if we can get the rest of the US to buy fully organic. cheers, Ariel

Jane says …

Dear Mr. Mackey, The social/corporate connection runs both ways, and isn't merely due to a company reaching out to customers or community asking for an embrace, it also moves from the community inward. My neighbors and I are already emotionally invested in your company's well-being – not as stockholders but as stakeholders – and the store's not even built yet. The steel framing for the roof of your new store in University Heights, Ohio, near Cleveland, went up this week, its v-form suggestive of skeleton wings – strong, but light enough to soar. Quite appropriate, considering the tons of expectations we have placed on our new Whole Foods Market. The community hopes that it will raise the fortunes of the surrounding inner-ring areas. I hope that your whole-earth, green philosophy spreads beyond the front doors and helps raise the consciousness of the community. I commend you for choosing to locate your store in an inner-ring suburb and be part of a revitalization effort, rather than take the easy route and build on a greenfield farther out in the exurbs. Your store can improve not only people's diets and lifestyles, it's also changing this community's vision of itself. As the ward councilwoman representing the residents and businesses in the city across the street (literally, the other side of Cedar Road, which lies in the City of South Euclid,) I'm a little surprised at the way everyone here points to the "Coming Soon" sign as if the gods were about to descend and show us how to make fire. Don't get me wrong. I'm thrilled that you're coming, and I'll be one of the first through the door, carrying my well-worn Whole Foods canvas bags, bought on out-of-town shopping trips. (Nice ergonomic touch, by the way, the long shoulder strap.) Your store will be an important asset as we redevelop our own side of the tired old shopping strip into housing, retail, restaurants and greenspace (also "coming soon".) It will also set an example for other developments, assuming your green building elements are used in this store. It's about more than food and profits to us. It's about doing well by doing good. So...thanks for coming to town.

Ron Nutz says …

John, please do not let Wal Mart destroy the Organic industry by jumping in on it...Wal Mart must learn that protection of the single or small coop of farmers is vital to the industry. I am really concerned that Wal Mart will source "Organic" product overseas that may be in question as demand will exceed supply. We have to continue to consume in season....I am impressed with your West Vancouver , Canada location...Keep the ball rolling....Ron

CHARLES MUKUKA says …

As a firm believer in what John preaches, i finally joined WFM and am enjoying every bit of it. As a business scholar, i find myself getting convinced everyday that this man is who he is because of a deeper convinction in his life. In short John deserves a nobel peace prize for supporting this noble call and your name is worthy submitting for such considerations.

Scott Piro says …

Dear Mr. Mackey: Whole Foods continues to be a leader in taking actions that bring industry and the populace closer to living more sustainable lifestyles. The company philosophy on your website (“Vision of a Sustainable Future”) cites examples like your dedication to organic produce and poultry, the “green building” of your corporate headquarters and financial support of environmental organizations. These actions are highly laudable and needed. I challenge you to take the bold, first step in terms of your policy regarding consumers and reusable shopping bags. Your current nickel-per-bag program is already very progressive. However, instead of offering customers a financial incentive to use their own canvas bags to carry their groceries, the time has come to begin penalizing them for not doing so. This model has already become prevalent throughout supermarket chains in Europe, the U.K. and Canada. For example the German-headquartered Aldi chain — which boasts stores across the United States – asks customers to pay for their bags. Governments in Australia, South Africa and Ireland have even begun imposing taxes on the flimsy plastic bags typically used in supermarkets. Let’s not wait for our government to take action. Other U.S. chains are reluctant to adopt this change, for fear it would put them at a competitive disadvantage. However, Whole Foods, whose image is so strongly associated with organics and sustainability, has such a loyal customer base that a campaign with a careful launch could serve to deepen customers’ bonds for the store. Whole Foods would design and begin selling canvas (or similarly reusable, durable bags) with their logo on it. The sale of the bags would be a source of income for the company, and the bags would double as billboards for Whole Foods, as customers began using them – for groceries and other uses. Customers who purchase and use the Whole Foods-designed bags (or other reusable bags of their own) would continue to save a nickel-per-bag, as your current program warrants. However, customers, who require plastic or paper bags would pay an additional five cents, which Whole Foods could donate to an environmental organization or keep as income. Whole Foods would see a savings in its cost for materials, because as more customers switch to reusable bags, fewer plastic/paper ones would need to be purchased. In addition, because it would be an unprecedented action in this country and viewed by some as both assertive and carrying some risk, it would result in a huge corporate story for you in the trade and mainstream press – yielding heavy publicity for Whole Foods. Your niche has become more competitive the last few years, and this action would reinforce your leadership status and insure your continued domination. Most importantly it is the right thing to do. Plastic bags are working their way up the food chain in our oceans. Paper bags are a factor in the decimation of our forests. In real terms the institution of a program like this would do tremendous good for the environment (as well as for Whole Foods!) And if other firms eventually copy it – well, then Whole Foods will have demonstrated what true leadership is. Please begin work on a program like this NOW so that its implementation can begin ASAP. Sincerely, Scott Piro

Alena says …

I will continue to visit enjoyed the reading thanks

john beck says …

I strongly believe that the recent resurgence of socialism in the region, especially in those radical cases where anti-capitalism and anti-americanism were two of the flags used by its leaders.

Susan Cergol says …

Mr. Mackey, as a marketing professional currently developing a corporate social responsibility program for a regional supermarket company in the Middle East, I am delighted to have found this post. I wholeheartedly agreee with your understanding of how to create social value while generating profits. I also applaud your courage and willingness to engage your stakeholders in a blog conversation. It's a step too few corporate leaders are willing to take just yet.

Alex Bäcker says …

Contrary to Roger Collins, President of Afternic, (thanks Roger for pointing me to the debate), I believe John Mackey's argument is the winning one in this debate. But I don't think Mackey makes an entirely compelling case for his argument, so I will pitch in to try to help. Mackey claims that corporations following his multi-stakeholder-pleasing model will eventually prevail in the economic landscape by winning the competitive test of the marketplace. He may well be right. But if he is, that will only prove Mr. Friedman right, who claimed that Mr. Mackey's model and his own profit-maximizing one are equivalent, for surely a model which prevails in the economic landscape maximizes long-term profits. Mackey points out that if they truly are equivalent, his own description has more marketing appeal. But I believe that Mackey's model is more than just marketing and packaging. If we are to look for meaningful differences between the models, we need to look for cases in which a corporation finds a way to maximize value for its multiple stakeholders (Mackey describes his as customers, team members (employees), investors, vendors, communities, and the environment) *without* maximizing profits. Consider, for example, a corporation which systematically spends (reinvests) would-be-profits across its various stakeholders in such a way as to be left with zero profits every month. This corporation could grow and become very valuable, providing a return on investment for its shareholders. And yet it may well become less valuable for its shareholders (investors is the term used in the above-mentioned debate, but only some of the shareholders of a corporations are investors; shareholders typically include entrepreneurs and employees as well) than a sister company that does everything else equal except it does not distribute (as much of) its profits to non-shareholder stakeholders. For some of the wealth created by the first corporation would have gone to customers, vendors, communities, and the environment. And yet, I would claim, nothing is to say that the profit-maximizing corporation is either more socially responsible or better in any other way. For clearly the value created for non-shareholder stakeholders has non-zero value --even Friedman agrees with this when he says Whole Foods' important contribution to society is to enhance the pleasure of shopping for food. In particular, and just to make the fallacy of profit as the sole measure of corporate success more clear, imagine a case where corporation A systematically makes $1B of profits a year in addition to disbursing $10B a year in value to other stakeholders (customers, employees, community, vendors, environment), while corporation B makes $1.1B in profits a year and generates only $0.1B in value to other stakeholders. All but the most rabid profit-maximizer would concede that it would be fair to call corporation A the more successful, certainly when measured by society (which is, after all, the judge that Friedman was after when he spoke of "social responsibility"). Friedman might counter that even more successful would be a corporation C that kept all $11B as profits, for individual shareholders to distribute as each sees fit. But there are at least two fallacies with this: First, that Friedman cites no evidence that individual shareholders are more competent in distributing wealth than corporations are --on the contrary, he mentions that in the real world we live in (a world that is inevitably more interesting to write about than theoretical constructs), tax laws make corporations more efficient at this task (assuming the citation of Adam Smith made by Friedman, "I have never known much good done by those who affected to trade for the public good", holds true of governments, who collect taxes). Second, corporation C may not exist. For the very reason that propels corporation A to generate more value than corporation B might be the goodwill generated by its value-sharing policies among the various constituencies whose cooperation generates the value to begin with. Conversely, a corporation which generates massive profits by selling and dropping hydrogen bombs for the wealthiest individuals on Earth to experience the power that money can buy is surely not a model of socially responsible business. Capitalism is to me the most complex and fascinating system known to man. Far more complex than a single brain, or that the behavior of distant stars. But what makes the system so powerful is not a dictum that all agents must uniformly seek to maximize profits, but rather the fact that each agent in the market is free to act according to his/her own desires. When commanding all business to follow the same rule and optimize for the same metric, Friedman committed the very crime he so faults socialist regimes with: forgetting the power of free markets. Alex Bäcker, Ph.D. Altadena, California

Sonia Cruz says …

Social responsibility as nonsense? ABSURD! God created a social structure intended to equip people to act responsibility toward developing that structure into a rich and sustainable development. If we all contributed responsibly to our society, none would be poor. But to consider the debate at hand related to business, I agree with Mackey in terms of responsibility. I do not, however, wish to relate social responsibility to creating value, and most certainly do not consider it a cloak for those exercising the value of responsibility in their business. Many, yes many, businesses have tainted the public view of responsible business practices because of their use of social responsibility as a cloak. However, we do reap what we sow, and while some may even see that view as a cloak for the personal bottom line, it is evident that contributing to one's community and environment establishes relationships beyond a networking perspective. It is conceivable that a company may desire to contribute to the community and the environment for the simple sake of doing so. Building relationships is a key element of leadership, and social responsibility builds relationships - regardless of the bottom line.

Michael Krepelka says …

I definitely agree with John Mackey. Customers, employees, shareholders and vendors all have to be the focus of the business. If all the time and energy is driven by profit and

gkblair says …

i am a former employee of WFM as well. We had a hand in the success of this business. We made history every day. It was a pleasure to be a part of that organization the mighty white and green. It also exposed us to the inner workings of the business first hand and what it entails to be successful, as long as you were deadly serious. We could also count on John Mackey to come down to each store and break off gems of knowlege and motivate us personally. I spent 10 years with that organization and was a TMAG as well. WFM is REAL and to this day they still enjoy crowded parking lots and folks knocking on the door well after they are closed

eric says …

awesome

Denise Chilcote says …

Thank you for being a man of integrity and for giving us a wonderful healthy grocery store! Even though we have to travel a distance to Birmingham to get to your store, it's worth every single mile! I would love to eventually have a Whole Foods in or near our town of Prattville, Alabama. Our city is booming and the people here are health oriented, educated and would love to have a great grocery store like Whole Foods in our backyard! Keep up the great work sir!

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