The responsibility of corporate executives

Many workers are employees of companies. These workers agree to do what the companies’ owners tell them to do. In return, the companies pay the employees a wage or salary. This relationship, or contract, is an example of a principal-agent agreement: the company is the principal and the worker is the agent. The principal-agent agreement is the most common employment contract in capitalist countries. It is the basis of the economic model for businesses, most of which consider their sole purpose to be maximizing profits for owners. In a publicly traded company, the owners are the company’s shareholders.
Advocates of corporate social responsibility argue that profit is essential to a business’s well-being and continued existence, but profit should not entirely define the business’s purpose. These advocates believe the principal-agent agreement also has a trust or fiduciary aspect that includes a set of expectations related to honesty, loyalty, obedience and the full disclosure of relevant facts. Workers have a fiduciary duty to their employer, for example, to obey the firm’s rules. A company has a fiduciary duty to its shareholders to report financial data honestly. But advocates of corporate social responsibility believe that a firm’s fiduciary duty extends beyond its shareholders to other stakeholders: employees, suppliers, customers and the community.
Milton Friedman won the 1976 Nobel Prize in Economic Sciences. John Mackey is the founder of Whole Foods Market, a business that has billions of dollars of sales each year. Read the two articles by Friedman and Mackey in Course Materials. You can also consider the individuals you heard in the Doing the Right Thing video.

1. According to Friedman, what is the responsibility of corporate executives?
2. Beyond making a profit, what ethical responsibilities does Friedman say businesses have to society in general?
3. Does Friedman’s emphasis on maximizing corporate profits mean that he is not concerned with the welfare of society?
4. Why does Friedman believe a corporate executive should be socially responsible as an individual but not in his or her corporate role?
5. What is the difference between a shareholder and a stakeholder?
6. Who are the stakeholders in John Mackey’s conception of the corporation? What ethical duties does the corporation owe to each stakeholder?
7. What motives besides money does Mackey argue are important in understanding human nature? How might these motives be relevant in running a business?
8. Are Mackey’s views on the social responsibility of business inconsistent with maximizing profits? Why?
9. Corporations have provided billions of dollars in aid to victims of Hurricane Katrina, the south Pacific tsunami and AIDs in Africa. In some cases, these contributions have been more effective than government aid. Would Friedman and Mackey support these types of donations?
10. With whom do you think the owners of the Omni hotels and Amway would agree?
11. Consider this quote by Adam Smith in The Wealth of Nations:
    “[A merchant] intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he 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.”
    What do you think Adam Smith means when he says that a merchant who strives only for his own gain unwittingly promotes the interest of society? What are society’s interests, and how does the merchant promote them?
12. Whose position on the social responsibility of business does Smith’s quotation support, Friedman or Mackey?
13. With whom do you agree? Why? What most influences your position?