Jean-Etienne de Bettignies is Professor, and Distinguished Professor of Business Economics, at Queen’s University Smith School of Business; Hua Fang Liu Assistant Professor of Business Administration at Brandon University; and David T. Robinson is James and Gail Vander Weide Distinguished Professor at Duke University’s Fuqua School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).
September 2020 marked the 50th anniversary of Milton Friedman’s famous New York Times Magazine article, in which he summarized and expanded on an earlier argument 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” (Milton Friedman, Capitalism and Freedom, p.133). This argument was controversial then and remains so today. In his view, it is the regulator’s job to ensure the appropriate behavior of profit-maximizing firms by setting proper rules and regulations, rather than firms’ responsibility to determine and implement their notion of socially responsible behavior. Implicit in this argument is the assumption that the government or regulatory body is able to ensure appropriate behavior by firms. But what happens if the regulator is unable to monitor firm behavior effectively? What if the regulator doesn’t know whether the firm is staying within the rules of the game?
To put the question slightly differently, would a self-interested, profit-maximizing entrepreneur ever find it optimal to engage in corporate social responsibility (CSR) when regulatory oversight was imperfect? More generally, how is the quality of oversight connected to the prevalence of CSR? How does this change how we view Friedman’s admonition?