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Company scandals keep masking a shift toward corporate responsibility

Former Volkswagen chief executive Martin Winterkorn arrives to testify to a German parliamentary committee on the carmaker's emissions scandal in Berlin, Germany, January 19, 2017.
REUTERS/Hannibal Hanschke
Former Volkswagen CEO Martin Winterkorn arrives to testify to German parliament in 2017 on the carmaker's emissions scandal.
  • Bill Novelli
By Bill Novelli

Author of "Good Business" and founder of the Georgetown Business for Impact initiative

A decade ago, the consultants at McKinsey examined the trend of solving social problems through business strategies and asked where the public would come out on corporate social responsibility. Would it be perceived as corporate greed just dressed up to look like something else? Now McKinsey itself is being questioned for its own practices, most recently for assisting Purdue Pharma to “turbocharge” the marketing of OxyContin when opioid abuse had already killed hundreds of thousands of Americans.

What is the purpose of a corporation and what responsibilities does it have? Five years ago, Volkswagen’s emissions cheating scandal contributed to a steep downturn in public trust of companies. Today, the giant tech companies are under a spotlight for monopolistic and other practices, further eroding the public’s trust in the private sector.

Was Milton Friedman right?

Just over 50 years ago, the Nobel-prize winning economist Milton Friedman locked in the notion that the only legal responsibility of a corporation is to create profit. That idea persisted for decades and influenced managers to relentlessly pursue earnings per share, trim employee benefits, award high CEO payouts, and chase profits above all. But there actually has never been a US law requiring managers to maximize profits, except when a company is up for sale. And no law mandates that shareholder interests supersede the long-term health of a corporation. What is required is that manages use corporate assets in the firm’s best interest.

In 2019, the Business Roundtable—made up of the CEOs of America’s largest companies—redefined its statement on the purpose of a corporation to “promote an economy that serves all stakeholders: customers, employees, suppliers, communities and shareholders.” Where the Friedman dictum is referred to as “stockholder capitalism,” the BRT approach is often called “stakeholder capitalism,” or what we might think of as enlightened self- interest. Indeed, by strategically creating social value, companies can gain a competitive advantage, recruit and retain talent, and increase savings and profits. It can be a pathway to success. For example, CVS Caremark remade itself into CVS Health, first by ending tobacco sales in its stores and then transforming its product line to focus on health and wellness products. The company found its sweet spot in doing well by doing good.

Are companies amoral?

But in the ageless quest for wealth, should we worry that ethical behavior will always, eventually, take a backseat to profits? Put another way: Are companies ultimately amoral, if not immoral?

The motto of Francesco Datini, the 14th-century Merchant of Prato, was supposedly, “In the name of God and profit.” Pollution, industrial accidents, obesity, low wages, addiction, global warming, and other misfortunes might be said to be just so much collateral damage. Rachel Maddow, in her book Blowout, calls the oil and gas industry amoral. When a lion kills a gazelle, says Maddow, “you can’t really blame the lion. It’s who she is; it’s in her nature.”

While there are certainly examples of indefensible corporate behavior, there also are many checks and balances in place. Whistleblowers can email their complaints and get results , The Wells Fargo fake-accounts scandal was brought to light by a Los Angeles Times expose that prompted a regulatory investigation. The Volkswagen fiasco came to light through independent product testing. Purdue Pharma eventually filed for bankruptcy, agreed to plead guilty to three counts of criminal wrongdoing, and reached an $8.3 billion settlement with the US Justice Department. Unfortunately, the sanctions usually kick in after much of the damage is done.

Do companies have the expertise to do good?

It used to be said that corporations aren’t equipped to deal with social responsibility issues—better they should support nonprofits doing the work and pay their taxes so government can solve social problems while companies tend to their businesses. But sustained, positive social change is difficult, and nonprofits and government are often challenged to create it on their own.

Today’s huge social and environmental problems require that everyone be at the table. And that’s increasingly happening. The United Nations formed the Connecting Business Initiative. The UN Development Programme works with the private sector on research, advocacy, public-private dialogue, and multi-stakeholder partnerships. The US Agency for International Development says working with the private sector is a sustainable shift in countries’ journeys to self-reliance.

PepsiCo and Coca Cola may be criticized for their products’ contributions to poor nutrition, but both companies are working closely with the UN on improving water security, sanitation, and responsible water-resource management. And CARE, a nongovernment organization, says the private sector has a critical role to play in reducing poverty through job creation, technology, providing goods and services and overall economic development.

None of this is easy. For example, deforestation and the use of child labor in west Africa are persistent problems that neither cocoa-buying companies nor their NGO and government partners have been able to solve. But today, companies see the opportunity—and responsibility—to apply enlightened self-interest to make a difference as well as a profit.

Who should set social priorities?

Business tycoons have enormous wealth, and often spend it on pet causes—sometimes ill advised, sometimes beneficial for the rest of us (see Microsoft co-founder Paul Allen’s contributions to brain science, or the Bill and Melinda Gates Foundation’s incredible support of disease eradication and improvement in the lives of women and girls in developing nations. But who is the arbiter in all this? As the American Association for the Advancement of Science declared in a 2013 blog post: “For better or worse, the practice of science in the twenty-first century is becoming shaped less by national priorities or by peer review groups and more by the particular preferences of individuals with huge amounts of money to give.”

In Winners Take All: the Elite Charade of Changing the World, Anand Giridharadas calls the super wealthy “philanthropic plutocrats” who seem to believe they are saviors, helping to make things better when their companies often are making things worse. This is not new in America. John D. Rockefeller and Andrew Carnegie were major social “investors” in their day. As Bill Gates has said, “The genius of capitalism lies in its ability to make self-interest serve the wider interest.”

So the super-rich are laying enormous bets on their preferred issues. It’s a problem as well as an opportunity. Michael Bloomberg invests heavily in anti-tobacco and vaping-control initiatives here and across low-income countries, to positive effect. He also supports gun control. Is he trampling on Americans’ Second Amendment rights, or contributing to reducing a social scourge, or both?

Clearly, there are conflicting views of companies and their social responsibility or irresponsibility. They can do good and do harm—sometimes simultaneously. But so can religious organizations, governments, nonprofits, and individuals. While there is plenty of criticism of companies today, often justified, we seem to be heading in the right direction, tending toward social responsibility. As citizens, voters, consumers, and employees, it’s our role to encourage companies and to hold them accountable.

Bill Novelli, author of “Good Business: The Talk, Fight, Win Way to Change the World,” is a former CEO of AARP, founder and president of the Campaign for Tobacco-Free Kids, EVP of CARE, and president of Porter Novelli, the global public relations agency. He began his career at Unilever and also was director of advertising and creative services at the Peace Corps.  Today, Novelli is a professor in the McDonough School of Business at Georgetown University, where he teaches in the MBA program, and also founded and oversees the Georgetown Business for Impact initiative.

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