Ethics, CSR, and Milton Friedman
Marketing in the Era of Managerial Distrust

During the first few years of the twenty first century, and in the wake of the terrorist attacks of 9/11, the business world was rocked with news of financial and accounting scandals at major Fortune 500 companies. Enron, a Texas based energy company, lied about profits and was accused of concealing debts so they did not show up in the company’s accounts (BBC News, 8/22/2002). Arthur Andersen, an accounting giant, member of the “Big Six”, and Enron’s corporate auditor, collapsed completely after being found guilty of deliberately destroying evidence of its relationship with Enron (BBC News, 8/22/2002). Tyco executives L. Dennis Kowlowski and Mark H. Swartz were indicted and charged with misappropriating more than 170 million dollars from the company as well as outright stealing 430 million additional dollars through sale of fraudulent shares of Tyco stock (Daniels Funds Ethics Initiative). MCI Worldcom was found guilty of accounting fraud in relation to an overstatement of earnings in 2001 and 2002 (CSR Report for Congress, 8/29/2002), during which time its own auditor was also Arthur Andersen. Executives at each firm (Kenneth Lay, Bernard Ebbers, Dennis Kozlowski, and Mark H. Swartz amongst others) served jail time for their role in these scandals, which severely eroded the public’s trust in the corporate sector. Tyco’s stock plunged from $60.00 to $18.00 in the wake of the scandal, and many employee stockholders saw their savings dissolve (Daniels Fund Ethics Initiative). MCI Worldcom employees/stockholders saw even larger losses, as the stock decreased in price from $64.50 in mid-1999 to pennies shortly after announcement of the fraudulent accounting practices. On a personal note, my sister, after preparing hundreds of severance packages for employees of MCI Worldcom, was herself the victim of a layoff from that corporation in late 2002. These scandals, as well as the Great Recession, had large scale effects on the attitude of employees and the public toward the corporate sector and its leaders. By 2012, in the United Kingdom, only 36% of workers trusted their senior leaders and more than half of workers (58%) show signs of having adopted a ‘not bothered” attitude to their work. One can assume comparable numbers in the United States. It is apparent that corporate scandal and bailout has created a paradigm shift throughout the world with regard to our view of corporate leaders. Clearly, the leadership deficiencies presented above are not in concert with Kohlberg’s theory of cognitive moral development. Kohlberg laid out six stages of development, explained through three levels. The first level is Preconventional Morality, which focuses on simplistic and childlike morality states, and includes Obedience and Punishment Orientation, in which rules from authority figures must be obeyed, and Individualism and Exchange, in which different viewpoints from ones own can be recognized. The second level of Conventional Morality, which moves us from childhood to teenage years and beyond, is comprised of Good Interpersonal Relationships, in which we recognize the necessity to behave in “good” ways for the good of the family and community, and Maintaining the Social Order, in which we become concerned not just with the welfare of family or of friends, but of society as a whole. The final, adult level of Postconventional Morality, includes the fifth state of Social Contract and Individual Rights, which takes the leader beyond the realm of maintaining the society in general and into the arena of determining what comprises a good society, and how to get to that point, and finally, Universal Principles, in which the leader is actively working toward achievement of a “good” society (W.C. Crain, Theories of Development, 1985). The actions of the leaders at Worldcom, Arthur Andersen, Enron, and Tyco are not those of individuals within the Postconventional Morality stages we would expect from seasoned corporate executives and leaders. These individuals are acting more in line with the Obedience and Punishment Orientation of the young child, in which punishment must be avoided and rules must be obeyed; as there were no set “rules’ regarding their actions, and as they, at least for a time, received no “punishment” as the result of their actions, they saw nothing inappropriate with regard to their behavior, despite the negative ramifications to their employees and society at large that a leader at a higher level of cognitive moral development would immediately have recognized. Why are many of our leaders acting at an incredibly low level of cognitive moral development, and why do we as a society allow that to happen? I believe that the answer, in part, lies in the doctrine of Milton Friedman. Friedman was an economist working in the mid to late twentieth century, who is famous for his outright dismissal of the social responsibility of the business leader so evident in Kohlberg’s cognitive moral development model, and his insistence that corporate leaders should focus only on the bottom line. The following quotes from his “The Social Responsibility of Business is to Increase its Profits, New York Times Magazine, September 13, 1970” are illustrative of this position: “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 business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society…What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as a businessman? If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers…The whole justification for permitting the corporate executive to be selected by the stockholders is that the executive is an agent serving the interests of his principal. This justification disappears when the corporate executive imposes taxes and spends the proceeds for ‘social’ purposes. He becomes in effect a public employee, a civil servant, even though he remains in name an employee of a private enterprise.” (Friedman, NYT, 9/13/1970) What Friedman is saying is that it is completely acceptable for a leader to operate at the first level of Kohlberg’s model of cognitive moral development. So long as he or she is obeying the “rules of the game” and avoiding punishment, the leader is acting in the best interests of their employer, and should give no further consideration to more overarching issues of society as a whole. This is a flawed and oversimplified way of looking at the role of a leader, and allows the leader to focus completely on one goal, maximizing profitability while avoiding punishment, while often sacrificing moral, ethical, or societal obligations. This is childlike behavior that encourages misconduct if punishment can be avoided or rules can be stretched. Friedman’s model, which appears to have been the model in place for much of the decades leading up to the scandals of the early 2000’s, turns a blind eye to corporate ethicality in pursuit of maximizing profitability. In the wake of the corporate scandals mentioned above, the idea of Corporate Social Responsibility gained popularity. The Corporate Social Responsibility construct describes the relationship between business and the larger society (Snider/Hill/Martin, Journal of Business Ethics, 2003). CSR may be defined, in general terms, as the obligation of the firm to use its resources in ways to benefit society, through committed participation as a member of society, taking into account the society at large and improving welfare of society at large independent of direct gains of the company (Kok et al. 2001). CSR, thus, seems to be in direct conflict with the ideas of Milton Friedman, and a refreshing change to the tunnel vision mentality of the leader obsessed only with maximizing profit. But is CSR truly a deviation from pure pursuit of maximum profitability? One of the biggest criticisms leveled against CSR is that companies only care about it for marketing purposes. “For most companies, CSR is PR”, according to Ian C. MacMillan, professor of innovation and entrepreneurship at Wharton. “It looks good. It sounds good. It’s the ‘right’ thing to do—and it gets the media out of their faces” (Time, 5/28/2012). To take this analysis a step further, according to a Vanderbilt University study entitled “The Surprising Link Between Social Responsibility and Profits”, “Corporations that make social responsibility disclosures beyond the norm have something else in common—a tendency to be more profitable over the long term than the competition” (Vanderbilt News, 09/2013). In fact, CSR can be considered central to the idea of profitability going forward as illustrated in the following statement from Harvard Business School Professor Michael Porter; “Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center” (Devex, 2/20/2013). In short, CSR in the twenty first century, despite being devalued by Friedman in 1970, in actuality is in a complementary role to his work today. CSR in 2014 appears to be a recognized central component of the profit maximization Friedman was so intent in focusing on. Money invested in CSR today will be seen down the road in the form of increased profits and growth, and corporate leaders recognize this and act accordingly. What does this mean for our current and future leaders? One refreshing change is that leaders and organizations who continue to advocate the focus of the leader purely on corporate profitability can now do so not by operating solely within the first stage of Kohlberg’s cognitive moral development model, but instead can graduate to stages five and six, while still being attentive to the bottom line. Thus, we have evolved Friedman’s idea into one in which the leader can operate with the good of society as a whole in mind while also maximizing profitability within his organization. But is this really good for society? Social responsibility with an ulterior motive will always be necessarily self-interested and thus prone to questionable judgment. Utilizing a construct as important as societal advancement as a tool for profitability maximization seems somewhat disingenuous, and may leave a bad taste in the mouth of those pursuing societal evolution in what they may see as a more “pure” fashion. The question of whether or not the underlying rationale for pursuit of what we might all agree to be noble goals matters is difficult to answer; are we content that corporate giants, with their large influence and substantial assets are lending their support to societal issues, or do we scoff at the idea of the corporate leader as a change agent for purposes which are clearly self-motivated. I can only imagine Kohlberg believing that progression to Stages 5 and 6 of cognitive moral development based not on a moral evolution but rather a different way of producing enhanced profitability is not necessarily in line with his model These viewpoints, amongst others, will continue to define the future of CSR and the evolution of the public assessment of the corporate leader in the United States and elsewhere in the years to come.