The Corporation and the Community: Part 1 – Corporate Philanthropy

Corporate obligations to the community

Q. Do corporations have an ethical obligation to contribute to the community?

A. Recent years have seen an impressive increase in the demand for corporate involvement in the community. The main idea is that the corporation benefits from the community and should be “giving something back,” besides wages and taxes.

Community involvement takes two main forms: distributing or investing money or company products/services based partially on charitable rather than business considerations, and community volunteer work by employees. In this column we will discuss the general criteria for corporate involvement; subsequent columns will deal with the specific topics of philanthropic giving and corporate voluntarism.

The most prominent discussion of the ethics of corporate social responsibility is economist Milton Friedman’s 1970 article, “The Social Responsibility of Business is to Increase Its Profits”. Friedman, who later won a Nobel Memorial prize, was very critical of the demand for business to pay attention to social criteria.

Friedman makes a number of claims:

  • His main claim is that business executives have an ethical responsibility to carry out the desires of the owners, that is, the shareholders; he asserts that shareholders would like the firm to make as much money as possible; if they want to promote social responsibility, they can do that privately with their earnings.
  • A related claim is that business executives are simply neither qualified nor authorized to make judgments regarding competing social claims; these judgments belong in the realm of politics, where freely elected representatives weigh the interests of the community as a whole. Privately hired managers have neither expertise nor legitimacy to make these decisions; they are experts in production and sales, not community development.
  • Furthermore, business already fulfills a wonderful social responsibility by producing goods and services and creating jobs.

Consistent with this argument, Friedman acknowledges that when corporations are created expressly for philanthropic aims, such as hospitals or schools, managers are equally ethically obligated to promote these aims. He also doesn’t object to corporate philanthropy if its real goal is to further profits, for example by increasing good will in the community or among customers. He even acknowledges that in some cases shareholders might find it advantageous, for example for tax reasons, to donate money through the corporation rather than from their own share of corporate earnings.

Friedman’s article generated a storm of controversy and a stream of rejoinders, some of them quite cogent. Without delving into this fascinating debate, we can point out here that ultimately there is more agreement than dispute. Even Friedman acknowledges that many kinds of corporate giving are appropriate; while even his rivals generally acknowledge that we don’t want business firms to become busy-bodies, occupying themselves with the conduct of their neighbors more than with the success of their products.

From an ethical point of view, we can validate Friedman’s claim that managers are ultimately managing other people’s money and should advance the shareholders’ interests; at the same time, we can recognize that shareholders have ethical as well as financial interests, and managers are charged with representing both.

If I run my own business, it is certainly ethical for me to be focused on business success. Of course I have to give charity, but this can be done from the proceeds of the business. But if my business activity itself gives me some unique opportunity to help others, it would be wrong for me to pass up this opportunity with the claim that I’m at work. We should never let a mitzvah slip through our hands! (1)

This principle doesn’t disappear when the business is run by managers. Managers should be focused on business success, not on “do-gooding.” They shouldn’t be giving charitable donations on behalf of the owners, since the owners can decide for themselves what they want to give. (2) But usually the work environment and resources themselves provide unique opportunities to help others or to minimize damage. Managers who take advantage of these opportunities are not shirking their financial duty to shareholders; rather, they are fulfilling their ethical duty.

Corporate social responsibility is just an extension of the individual social responsibility of the owners. It follows that managers should not make arbitrary decisions about how to allocate profits to worthy charities. But they should take account of unique opportunities to help the community which present themselves specifically in the context of the firm’s activities and strengths.

SOURCES: (1) Mechilta deRebbe Yishmael on Shemot 12:17. (2) Rema YD 177:22. An excellent discussion of this topic is found in Case Studies in Jewish Business Ethics by Aaron Levine, pp. 350-365.