Do corporations have an obligation to address the needs of the larger society? Or was Milton Friedman right, that their only clear obligation is to their shareholders?

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Most people have intuitions about moral issues of consequence, but we often find it difficult to put these intuitions into words. Something seems to us to be right or wrong, but we struggle to express our ideas accurately and to explain why our intuitions are reasonable pelling. As Peter Drucker used to say, we now live in a “society of organizations,” and as these organizations e large and powerful, we certainly form a strong intuition that they have responsibilities. But what are these responsibilities, and to whom are these organizations to be responsible? And how can we be sure these responsibilities will be met?

These questions are not new. Fifty-one years ago, Milton Friedman wrote a short essay on the topic for The New York Times, an essay that is likely read—and criticized—in more business ethics classes than anything else in the literature. Though it monly misunderstood, the main point of this essay was that the executives of publicly held corporations have neither a mandate nor the authority, under a theory of corporate social responsibility (CSR), to use the resources of pany to address problems or needs in society that are outside the scope of pany’s business. Instead, the presumption—absent clear instructions to the contrary from directors and shareholders—should be that executives have a duty to manage the operations of pany in such a way as to secure the highest return on investment, consistent with the requirements of law and ethics.

Friedman was not arguing that executives should pursue the highest possible profits without regard to moral obligations, or even law. He was instead attempting to rebut mon claim that business corporations had a duty, not merely a liberty, to use some portion of their assets for social purposes. In this objective he was largely unsuccessful, as one version or another of this notion of CSR is now more prevalent than ever, even as, or perhaps because, it has taken on many different forms.

Two points are worth noting here. First, the corporate form for business associations was deliberately designed as a vehicle to plish certain ends, which included generating products and services of value to the munity, creating new opportunities for employment, and making it possible for even small, private investors to share in the creation of new wealth. Each of these objectives is ponent of mon good of society, and in devising the corporate form, legislatures were channeling the energies and possibilities of a new era in service of mon good.

Second, despite what monly taught in business schools, nothing in the American law of corporations, or in related case law, specifies that the purpose of a business corporation is to maximize the wealth of shareholders. The law is silent on the question of purpose, leaving it to those who manage and direct corporations to make that determination.

Of course, every business hopes to be profitable, just as every well-managed nonprofit corporation hopes to secure an excess of revenues over expenses in order to continue its operations. In both cases, it might be more accurate to say that “profit” is a necessary condition for the continuing success of a corporation, not the ultimate goal.

But if that is true, what is the goal of a business corporation’s activities? There are several at least. One is certainly to provide an attractive return on investment to the providers of capital, who in turn use that return for purposes of their own (some of which are indeed contributions to the general well-being of munity). Another goal is to provide products and services that serve the needs of customers. And still another is to generate a continuing e stream that can provide a livelihood for the employees who actually make up pany. Each of these objectives must be held in balance if the organization is to succeed and endure. This reality, the need to manage and balance legitimate objectives, is the foundation of corporate responsibility.

To carry this point further, the corporation, that artificial person recognized in law, does not have moral responsibilities—but some of its members do. Specifically, the members of the board of directors, and particularly the executives of pany, have important moral and legal responsibilities that they exercise on behalf of the corporation. If, as we might say, the corporation fails to discharge its responsibilities, it is in fact the directors and executives who have failed.

What, then, of other theories of CSR? There are at least three that are part of the contemporary discussion that deserve some attention.

First, there is the claim that CSR requires directors and executives to step away from sound management practice to attend to duties to employees, customers, and other stakeholders, though it is rarely expressed in quite this language. We see this, for example, in the August 2019 statement of the Business Roundtable promising what seems to be a mitment to serve all stakeholders, as if perhaps this is not what they had been doing previously.

Unfortunately, a statement like this serves to reinforce a negative perception of corporations in which directors and executives are quite willing to exploit employees and customers, and to munities, in service of the greed of their shareholders. Without denying that this description may fit panies, as it also may fit some nonprofits, it is a false depiction of corporations as a whole. This vision, however, seems to lie behind such efforts as the “Corporate Actual Responsibility” project announced by Oren Cass in 2020, which identifies some practices and conditions that are indeed morally objectionable but despairs of the capacity of directors and executives to correct the problems. Instead, the project proposes greater government intervention to ensure corporate responsibility.

A similar message, at about the same time, was offered by Senator Marco Rubio, who proposed new government efforts to promote “Common Good Capitalism.” His proposal was to move in the direction of a set of incentives and regulations to create an economy that would work for everyone and not just the wealthy and the fortunate.

Ironies abound here. Cass is right to be skeptical of the capacity of directors and executives to exercise real corporate responsibility if the nearly 200 executives of our largest business corporations who signed the Business Roundtable document have only lately discovered such duties. On the other hand, hoping to rely on government intervention to correct highly particular problems in panies seems unreasonable. Government has itself created any number of perverse incentives in the past—while seeking to correct other problems. In any event, law and regulation are blunt instruments not well suited to the adjustment of particular moral responsibilities.

A second conception of CSR is represented by the annual letters that Laurence Fink, CEO of Blackrock (the world’s largest asset manager), has sent in recent years to CEOs of panies. In these letters and on Blackrock’s website, Fink has identified several social issues, such as climate change and racism, as challenges to business and to wealth. As a fiduciary for clients who have placed money with Blackrock, he has made it clear that he has a responsibility to ensure that panies in which they are invested are taking steps to address these issues. Mr. Fink is certainly free to exercise his own good judgment about which issues confronting society are most important, and it would seem to be a proper exercise of his own duties to advise CEOs about how pany may make investment decisions in the future. The implication, however, is that large business corporations (at least) have duties not only to protect themselves against the challenges posed by these issues but also to play an aggressive role in addressing them in the context of their own operations.

A third conception of CSR is related to the second. This is the view that business corporations, in consideration of the resources they control, have a duty to society to use some of these resources to address social problems and cultural needs unrelated to their business operations. It is this conception that prompted Friedman’s rebuttal in 1970. I won’t summarize his arguments here, though I think most of them are sound. I will, however, make two broad observations.

In the first place, a business corporation should certainly be free to engage in philanthropic giving. It may do so as part of a general strategy, in which case it may serve a number of different purposes. It may do so purely out of a sense of returning something to munities that have supported its operations, though this may not mon. In such a case, however, it seems to me that this posture fails to recognize the good that pany has done for munity by creating and sustaining jobs, providing needed products and services, and creating wealth (to say nothing of paying taxes). Furthermore, if pany wishes to be generous (as distinct from being strategic about its giving) it might be better if it were to review its own operations to see if it might find ways to serve neglected groups in its proper area of business. Banks, for example, may consider whether they could subsidize banking services to e customers (who might otherwise resort to high-interest payday lenders). Pharmaceutical manufacturers might consider whether they could subsidize treatments for “neglected” ailments for which it might not otherwise be profitable to devise remedies. And the list could go on. The point is that corporations are free to engage in these activities, not duty-bound to do so. However, and this is no small matter, freely engaging in such activities is also to pursue excellence in what pany does and not to be satisfied with the moral minimum.

The second observation is that placing pressure on corporations to fund projects addressing social issues is often itself a strategy of sorts on the part of activists and beneficiaries. It may be easier to persuade a corporation, which usually means targeting a small number of key individuals within that corporation, than to persuade the legislature or city council to act. Here again, corporations are free to contribute their resources but, despite the language, it is not their responsibility to do so. They should also consider, but often do not, that funding any controversial project or movement is likely to alienate some part of their customer base, as many recent examples have illustrated. And we should remember Friedman’s observation that society may not be better off at all if social policies are directed by unelected executives with little or no expertise in matters of public concern.

To sum up, business corporations do have responsibilities to the societies in which they operate. The persons discharging these responsibilities are, in fact, the directors and executives of the corporation. Their principal responsibilities are to serve society by creating and sustaining good jobs, by providing quality products and services to customers at fair prices, and by providing attractive returns on investment to providers of capital. In addition, they must obey all relevant laws and regulations, and attend to the impacts of their operations on munity.

In the larger context, business corporations have no responsibility to address problems in munities that are outside their area of operation, whether through direct action or by contributing resources. They are, however, free to do so, provided that appropriate consent within pany is obtained.

And finally, despite its flaws and imperfections, despite the evident need to constrain some of the enormous multinational corporations currently operating, we should all remember the benefits that societies have enjoyed from the operations of business corporations.