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October 2005
Rethinking the Social Responsibility of Business
A Reason debate featuring Milton
Friedman, Whole Foods’ John Mackey, and Cypress Semiconductor’s T.J. Rodgers
Thirty-five
years ago,
Milton Friedman wrote a famous article for The New York Times Magazine
whose title aptly summed up its main point: “The Social Responsibility of
Business Is to Increase Its Profits.” The future Nobel laureate in economics
had no patience for capitalists who claimed that “business is not concerned
‘merely’ with profit but also with promoting desirable ‘social’ ends; that
business has a ‘social conscience’ and takes seriously its responsibilities for
providing employment, eliminating discrimination, avoiding pollution and
whatever else may be the catchwords of the contemporary crop of reformers.” Friedman, now a senior
research fellow at the Hoover Institution and the Paul Snowden Russell
Distinguished Service Professor Emeritus of Economics at the University of Chicago,
wrote that such people are “preaching pure and unadulterated socialism. Businessmen
who talk this way are unwitting puppets of the intellectual forces that have
been undermining the basis of a free society these past decades.” John Mackey, the founder
and CEO of Whole Foods, is one
businessman who disagrees with Friedman. A self-described ardent libertarian
whose conversation is peppered with references to Ludwig von Mises and Abraham
Maslow, Austrian economics and astrology, Mackey believes Friedman’s view is
too narrow a description of his and many other businesses’ activities. As
important, he argues that Friedman’s take woefully undersells the humanitarian
dimension of capitalism. In the debate that
follows, Mackey lays out his personal vision of the social responsibility of
business. Friedman responds, as does T.J. Rodgers, the founder and CEO of Cypress
Semiconductor and the chief spokesman of what might be called the tough love
school of laissez faire. Dubbed “one of America’s toughest bosses” by Fortune,
Rodgers argues that corporations add far more to society by maximizing
“long-term shareholder value” than they do by donating time and money to
charity. Reason offers this exchange as
the starting point of a discussion that should be intensely important to all
devotees of free minds and free markets. Comments should be sent to
letters@reason.com. Putting Customers Ahead of
Investors John Mackey In 1970 Milton Friedman
wrote 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, which is to say, engages in open and
free competition without deception or fraud.” That’s the orthodox view among
free market economists: that the only social responsibility a law-abiding
business has is to maximize profits for the shareholders. I strongly disagree. I’m
a businessman and a free market libertarian, but I believe that the enlightened
corporation should try to create value for all of its constituencies.
From an investor’s perspective, the purpose of the business is to maximize
profits. But that’s not the purpose for other stakeholders—for customers,
employees, suppliers, and the community. Each of those groups will define the
purpose of the business in terms of its own needs and desires, and each
perspective is valid and legitimate. My argument should not be
mistaken for a hostility to profit. I believe I know something about creating
shareholder value. When I co-founded Whole Foods Market 27 years ago, we began
with $45,000 in capital; we only had $250,000 in sales our first year. During
the last 12 months we had sales of more than $4.6 billion, net profits of more
than $160 million, and a market capitalization over $8 billion. But we have not achieved
our tremendous increase in shareholder value by making shareholder value the
primary purpose of our business. In my marriage, my wife’s happiness is an end
in itself, not merely a means to my own happiness; love leads me to put my
wife’s happiness first, but in doing so I also make myself happier. Similarly,
the most successful businesses put the customer first, ahead of the investors.
In the profit-centered business, customer happiness is merely a means to an
end: maximizing profits. In the customer-centered business, customer happiness
is an end in itself, and will be pursued with greater interest, passion, and
empathy than the profit-centered business is capable of. Not that we’re only
concerned with customers. At Whole Foods, we measure our success by how much
value we can create for all six of our most important stakeholders: customers,
team members (employees), investors, vendors, communities, and the environment.
Our philosophy is graphically represented in the opposite column. There is, of course, no
magical formula to calculate how much value each stakeholder should receive
from the company. It is a dynamic process that evolves with the competitive
marketplace. No stakeholder remains satisfied for long. It is the function of
company leadership to develop solutions that continually work for the common
good. Many thinking people
will readily accept my arguments that caring about customers and employees is
good business. But they might draw the line at believing a company has any
responsibility to its community and environment. To donate time and capital to
philanthropy, they will argue, is to steal from the investors. After all, the
corporation’s assets legally belong to the investors, don’t they? Management
has a fiduciary responsibility to maximize shareholder value; therefore, any
activities that don’t maximize shareholder value are violations of this duty.
If you feel altruism towards other people, you should exercise that altruism
with your own money, not with the assets of a corporation that doesn’t belong
to you. This position sounds
reasonable. A company’s assets do belong to the investors, and its management
does have a duty to manage those assets responsibly. In my view, the argument
is not wrong so much as it is too narrow. First, there can be
little doubt that a certain amount of corporate philanthropy is simply good
business and works for the long-term benefit of the investors. For example: In
addition to the many thousands of small donations each Whole Foods store makes
each year, we also hold five 5% Days throughout the year. On those days, we
donate 5 percent of a store’s total sales to a nonprofit organization. While
our stores select worthwhile organizations to support, they also tend to focus
on groups that have large membership lists, which are contacted and encouraged
to shop our store that day to support the organization. This usually brings
hundreds of new or lapsed customers into our stores, many of whom then become
regular shoppers. So a 5% Day not only allows us to support worthwhile causes,
but is an excellent marketing strategy that has benefited Whole Foods investors
immensely. That said, I believe
such programs would be completely justifiable even if they produced no profits
and no P.R. This is because I believe the entrepreneurs, not the current
investors in a company’s stock, have the right and responsibility to define the
purpose of the company. It is the entrepreneurs who create a company, who bring
all the factors of production together and coordinate it into viable business.
It is the entrepreneurs who set the company strategy and who negotiate the
terms of trade with all of the voluntarily cooperating stakeholders—including
the investors. At Whole Foods we “hired” our original investors. They didn’t
hire us. We first announced that
we would donate 5 percent of the company’s net profits to philanthropy when we
drafted our mission statement, back in 1985. Our policy has therefore been in
place for over 20 years, and it predates our IPO
by seven years. All seven of the private investors at the time we created the
policy voted for it when they served on our board of directors. When we took in
venture capital money back in 1989, none of the venture firms objected to the
policy. In addition, in almost 14 years as a publicly traded company, almost no
investors have ever raised objections to the policy. How can Whole Foods’
philanthropy be “theft” from the current investors if the original owners of
the company unanimously approved the policy and all subsequent investors made
their investments after the policy was in effect and well publicized? The shareholders of a
public company own their stock voluntarily. If they don’t agree with the
philosophy of the business, they can always sell their investment, just as the
customers and employees can exit their relationships with the company if they
don’t like the terms of trade. If that is unacceptable to them, they always
have the legal right to submit a resolution at our annual shareholders meeting
to change the company’s philanthropic philosophy. A number of our company
policies have been changed over the years through successful shareholder
resolutions. Another objection to the
Whole Foods philosophy is where to draw the line. If donating 5 percent of
profits is good, wouldn’t 10 percent be even better? Why not donate 100 percent
of our profits to the betterment of society? But the fact that Whole Foods has
responsibilities to our community doesn’t mean that we don’t have any
responsibilities to our investors. It’s a question of finding the appropriate
balance and trying to create value for all of our stakeholders. Is 5 percent
the “right amount” to donate to the community? I don’t think there is a right
answer to this question, except that I believe 0 percent is too little. It is
an arbitrary percentage that the co-founders of the company decided was a
reasonable amount and which was approved by the owners of the company at the
time we made the decision. Corporate philanthropy is a good thing, but it
requires the legitimacy of investor approval. In my experience, most investors
understand that it can be beneficial to both the corporation and to the larger
society. That doesn’t answer the
question of why we give money to the community stakeholder. For that,
you should turn to one of the fathers of free-market economics, Adam Smith. The
Wealth of Nations was a tremendous achievement, but economists would be
well served to read Smith’s other great book, The Theory of Moral Sentiments.
There he explains that human nature isn’t just about self-interest. It also
includes sympathy, empathy, friendship, love, and the desire for social
approval. As motives for human behavior, these are at least as important as
self-interest. For many people, they are more important. When we are small
children we are egocentric, concerned only about our own needs and desires. As
we mature, most people grow beyond this egocentrism and begin to care about
others—their families, friends, communities, and countries. Our capacity to
love can expand even further: to loving people from different races, religions,
and countries—potentially to unlimited love for all people and even for other
sentient creatures. This is our potential as human beings, to take joy in the
flourishing of people everywhere. Whole Foods gives money to our communities
because we care about them and feel a responsibility to help them flourish as
well as possible. The business model that
Whole Foods has embraced could represent a new form of capitalism, one that
more consciously works for the common good instead of depending solely on the
“invisible hand” to generate positive results for society. The “brand” of
capitalism is in terrible shape throughout the world, and corporations are
widely seen as selfish, greedy, and uncaring.This is both unfortunate and
unnecessary, and could be changed if businesses and economists widely adopted
the business model that I have outlined here. To extend our love and
care beyond our narrow self-interest is antithetical to neither our human
nature nor our financial success. Rather, it leads to the further fulfillment
of both. Why do we not encourage this in our theories of business and
economics? Why do we restrict our theories to such a pessimistic and crabby
view of human nature? What are we afraid of? Making Philanthropy Out of
Obscenity Milton Friedman By
pursuing his own interest [an individual] 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. —Adam
Smith, The Wealth of Nations The differences between
John Mackey and me regarding the social responsibility of business are for the
most part rhetorical. Strip off the camouflage, and it turns out we are in
essential agreement. Moreover, his company, Whole Foods Market, behaves in
accordance with the principles I spelled out in my 1970 New York Times
Magazine article. With respect to his
company, it could hardly be otherwise. It has done well in a highly competitive
industry. Had it devoted any significant fraction of its resources to
exercising a social responsibility unrelated to the bottom line, it would be
out of business by now or would have been taken over. Here is how Mackey
himself describes his firm’s activities: 1) “The most successful
businesses put the customer first, instead of the investors” (which clearly
means that this is the way to put the investors first). 2) “There can be little
doubt that a certain amount of corporate philanthropy is simply good business
and works for the long-term benefit of the investors.” Compare this to what I
wrote in 1970: “Of course, in practice
the doctrine of social responsibility is frequently a cloak for actions that
are justified on other grounds rather than a reason for those actions. “To illustrate, it may
well be in the long run interest of a corporation that is a major employer in a
small community to devote resources to providing amenities to that community or
to improving its government.… “In each of these…cases,
there is a strong temptation to rationalize these actions as an exercise of
‘social responsibility.’ In the present climate of opinion, with its widespread
aversion to ‘capitalism,’ ‘profits,’ the ‘soulless corporation’ and so on, this
is one way for a corporation to generate goodwill as a by-product of
expenditures that are entirely justified in its own self-interest. “It would be
inconsistent of me to call on corporate executives to refrain from this
hypocritical window-dressing because it harms the foundations of a free
society. That would be to call on them to exercise a ‘social responsibility’!
If our institutions and the attitudes of the public make it in their
self-interest to cloak their actions in this way, I cannot summon much
indignation to denounce them.” I believe Mackey’s flat
statement that “corporate philanthropy is a good thing” is flatly wrong.
Consider the decision by the founders of Whole Foods to donate 5 percent of net
profits to philanthropy. They were clearly within their rights in doing so.
They were spending their own money, using 5 percent of one part of their wealth
to establish, thanks to corporate tax provisions, the equivalent of a 501c(3)
charitable foundation, though with no mission statement, no separate by-laws,
and no provision for deciding on the beneficiaries. But what reason is there to
suppose that the stream of profit distributed in this way would do more good
for society than investing that stream of profit in the enterprise itself or
paying it out as dividends and letting the stockholders dispose of it? The
practice makes sense only because of our obscene tax laws, whereby a
stockholder can make a larger gift for a given after-tax cost if the
corporation makes the gift on his behalf than if he makes the gift directly.
That is a good reason for eliminating the corporate tax or for eliminating the
deductibility of corporate charity, but it is not a justification for corporate
charity. Whole Foods Market’s
contribution to society—and as a customer I can testify that it is an important
one—is to enhance the pleasure of shopping for food. Whole Foods has no special
competence in deciding how charity should be distributed. Any funds devoted to
the latter would surely have contributed more to society if they had been
devoted to improving still further the former. Finally, I shall try to
explain why my statement that “the social responsibility of business [is] to
increase its profits” and Mackey’s statement that “the enlightened corporation
should try to create value for all of its constituencies” are equivalent. Note first that I refer
to social responsibility, not financial, or accounting, or legal. It is
social precisely to allow for the constituencies to which Mackey refers.
Maximizing profits is an end from the private point of view; it is a means from
the social point of view. A system based on private property and free markets
is a sophisticated means of enabling people to cooperate in their economic
activities without compulsion; it enables separated knowledge to assure that
each resource is used for its most valued use, and is combined with other
resources in the most efficient way. Of course, this is
abstract and idealized. The world is not ideal. There are all sorts of
deviations from the perfect market—many, if not most, I suspect, due to
government interventions. But with all its defects, the current largely
free-market, private-property world seems to me vastly preferable to a world in
which a large fraction of resources is used and distributed by 501c(3)s and
their corporate counterparts. Put Profits First T.J. Rodgers John Mackey’s article
attacking corporate profit maximization could not have been written by “a free
market libertarian,” as claimed. Indeed, if the examples he cites had not
identified him as the author, one could easily assume the piece was written by
Ralph Nader. A more accurate title for his article is “How Business and Profit
Making Fit Into My Overarching Philosophy of Altruism.” Mackey spouts nonsense
about how his company hired his original investors, not vice versa. If Whole
Foods ever falls on persistent hard times—perhaps when the Luddites are no
longer able to hold back the genetic food revolution using junk science and
fear—he will quickly find out who has hired whom, as his investors fire him. Mackey does make one
point that is consistent with, but not supportive of, free market capitalism.
He knows that shareholders own his stock voluntarily. If they don’t like the
policies of his company, they can always vote to change those policies with a
shareholder resolution or simply sell the stock and buy that of another company
more aligned with their objectives. Thus, he informs his shareholders of his
objectives and lets them make a choice on which stock to buy. So far, so good. It is also simply good
business for a company to cater to its customers, train and retain its
employees, build long-term positive relationships with its suppliers, and
become a good citizen in its community, including performing some philanthropic
activity. When Milton Friedman says a company should stay “within the rules of
the game” and operate “without deception or fraud,” he means it should deal
with all its various constituencies properly in order to maximize long-term
shareholder value. He does not mean that a company should put every last nickel
on the bottom line every quarter, regardless of the long-term consequences. My
company, Cypress Semiconductor, has won the trophy for the Second Harvest Food
Bank competition for the most food donated per employee in Silicon Valley for
the last 13 consecutive years (1 million pounds of food in 2004). The contest
creates competition among our divisions, leading to employee involvement,
company food drives, internal social events with admissions “paid for” by food
donations, and so forth. It is a big employee morale builder, a way to attract
new employees, good P.R. for the company, and a significant benefit to the
community—all of which makes Cypress a better place to work and invest in.
Indeed, Mackey’s own proud example of Whole Foods’ community involvement
programs also made a profit. But Mackey’s
subordination of his profession as a businessman to altruistic ideals shows up
as he attempts to negate the empirically demonstrated social benefit of
“self-interest” by defining it narrowly as “increasing short-term profits.” Why
is it that when Whole Foods gives money to a worthy cause, it serves a high
moral objective, while a company that provides a good return to small
investors—who simply put their money into their own retirement funds or a
children’s college fund—is somehow selfish? It’s the philosophy that is
objectionable here, not the specific actions. If Mackey wants to run a hybrid
business/charity whose mission is fully disclosed to his shareholders—and if
those shareholder-owners want to support that mission—so be it. But I balk at
the proposition that a company’s “stakeholders” (a term often used by
collectivists to justify unreasonable demands) should be allowed to control the
property of the shareholders. It seems Mackey’s philosophy is more accurately
described by Karl Marx: “From each according to his ability” (the shareholders
surrender money and assets); “to each according to his needs” (the charities,
social interest groups, and environmentalists get what they want). That’s not
free market capitalism. Then there is the
arrogant proposition that if other corporations would simply emulate the higher
corporate life form defined by Whole Foods, the world would be better off.
After all, Mackey says corporations are viewed as “selfish, greedy, and
uncaring.” I, for one, consider free market capitalism to be a high calling,
even without the infusion of altruism practiced by Whole Foods. If one goes beyond the
sensationalistic journalism surrounding the Enron-like debacles, one discovers
that only about 10 to 20 public corporations have been justifiably accused of
serious wrongdoing. That’s about 0.1 percent of America’s 17,500 public
companies. What’s the failure rate of the publications that demean business?
(Consider the New York Times scandal involving manufactured stories.)
What’s the percentage of U.S. presidents who have been forced or almost forced
from office? (It’s 10 times higher than the failure rate of corporations.) What
percentage of our congressmen have spent time in jail? The fact is that despite
some well-publicized failures, most corporations are run with the highest
ethical standards—and the public knows it. Public opinion polls demonstrate
that fact by routinely ranking businessmen above journalists and politicians in
esteem. I am proud of what the
semiconductor industry does—relentlessly cutting the cost of a transistor from
$3 in 1960 to three-millionths of a dollar today. Mackey would be
keeping his business records with hordes of accountants on paper ledgers if our
industry didn’t exist. He would have to charge his poorest customers more for
their food, pay his valued employees less, and cut his philanthropy programs if
the semiconductor industry had not focused so relentlessly on increasing its
profits, cutting his costs in the process. Of course, if the U.S. semiconductor
industry had been less cost-competitive due to its own philanthropy, the food
industry simply would have bought cheaper computers made from Japanese and
Korean silicon chips (which happened anyway). Layoffs in the nonunion
semiconductor industry were actually good news to Whole Foods’ unionized
grocery store clerks. Where was Mackey’s sense of altruism when unemployed
semiconductor workers needed it? Of course, that rhetorical question is
foolish, since he did exactly the right thing by ruthlessly reducing his
recordkeeping costs so as to maximize his profits. I am proud to be a free
market capitalist. And I resent the fact that Mackey’s philosophy demeans me as
an egocentric child because I have refused on moral grounds to embrace the
philosophies of collectivism and altruism that have caused so much human
misery, however tempting the sales pitch for them sounds. Profit Is the Means, Not End John Mackey Let
me begin my response to Milton Friedman by noting that he is one of my personal
heroes. His contributions to economic thought and the fight for freedom are
without parallel, and it is an honor to have him critique my article. Friedman says “the
differences between John Mackey and me regarding the social responsibility of
business are for the most part rhetorical.” But are we essentially in
agreement? I don’t think so. We are thinking about business in entirely
different ways. Friedman is thinking
only in terms of maximizing profits for the investors. If putting customers
first helps maximize profits for the investors, then it is acceptable. If some
corporate philanthropy creates goodwill and helps a company “cloak” its
self-interested goals of maximizing profits, then it is acceptable (although
Friedman also believes it is “hypocritical”). In contrast to Friedman, I do not
believe maximizing profits for the investors is the only acceptable
justification for all corporate actions. The investors are not the only people
who matter. Corporations can exist for purposes other than simply maximizing
profits. As
for who decides what the purpose of any particular business is, I made an
important argument that Friedman doesn’t address: “I believe the entrepreneurs,
not the current investors in a company’s stock, have the right and
responsibility to define the purpose of the company.” Whole Foods Market was
not created solely to maximize profits for its investors, but to create value
for all of its stakeholders. I believe there are thousands of other businesses
similar to Whole Foods (Medtronic, REI,
and Starbucks, for example) that were created by entrepreneurs with goals
beyond maximizing profits, and that these goals are neither “hypocritical” nor
“cloaking devices” but are intrinsic to the purpose of the business. I will concede that many
other businesses, such as T.J. Rodgers’ Cypress Semiconductor, have been
created by entrepreneurs whose sole purpose for the business is to maximize
profits for their investors. Does Cypress therefore have any social
responsibility besides maximizing profits if it follows the laws of society?
No, it doesn’t. Rodgers apparently created it solely to maximize profits, and
therefore all of Friedman’s arguments about business social responsibility
become completely valid. Business social responsibility should not be coerced;
it is a voluntary decision that the entrepreneurial leadership of every company
must make on its own. Friedman is right to argue that profit making is
intrinsically valuable for society, but I believe he is mistaken that all
businesses have only this purpose. While Friedman believes
that taking care of customers, employees, and business philanthropy are means
to the end of increasing investor profits, I take the exact opposite view:
Making high profits is the means to the end of fulfilling Whole Foods’ core business
mission. We want to improve the health and well-being of everyone on the planet
through higher-quality foods and better nutrition, and we can’t fulfill this
mission unless we are highly profitable. High profits are necessary to fuel our
growth across the United States and the world. Just as people cannot live
without eating, so a business cannot live without profits. But most people
don’t live to eat, and neither must a businesses live just to make profits. Toward the end of his
critique Friedman says his statement that “the social responsibility of
business [is] to increase its profits” and my statement that “the enlightened
corporation should try to create value for all of its constituencies” are
“equivalent.” He argues that maximizing profits is a private end achieved
through social means because it supports a society based on private property
and free markets. If our two statements are equivalent, if we really mean the
same thing, then I know which statement has the superior “marketing power.” Mine
does. Both capitalism and
corporations are misunderstood, mistrusted, and disliked around the world
because of statements like Friedman’s on social responsibility. His comment is
used by the enemies of capitalism to argue that capitalism is greedy, selfish,
and uncaring. It is right up there with William Vanderbilt’s “the public be
damned” and former G.M. Chairman Charlie Wilson’s declaration that “what’s good
for the country is good for General Motors, and vice versa.” If we are truly
interested in spreading capitalism throughout the world (I certainly am), we
need to do a better job marketing it. I believe if economists and business
people consistently communicated and acted on my message that “the enlightened
corporation should try to create value for all of its constituencies,” we would
see most of the resistance to capitalism disappear. Friedman also
understands that Whole Foods makes an important contribution to society besides
simply maximizing profits for our investors, which is to “enhance the pleasure
of shopping for food.” This is why we put “satisfying and delighting our
customers” as a core value whenever we talk about the purpose of our business.
Why don’t Friedman and other economists consistently teach this idea? Why don’t
they talk more about all the valuable contributions that business makes in
creating value for its customers, for its employees, and for its communities?
Why talk only about maximizing profits for the investors? Doing so harms the
brand of capitalism. As for Whole Foods’
philanthropy, who does have “special competence” in this area? Does the
government? Do individuals? Libertarians generally would agree that most
bureaucratic government solutions to social problems cause more harm than good
and that government help is seldom the answer. Neither do individuals have any
special competence in charity. By Friedman’s logic, individuals shouldn’t
donate any money to help others but should instead keep all their money
invested in businesses, where it will create more social value. The truth is that there
is no way to calculate whether money invested in business or money invested in
helping to solve social problems will create more value. Businesses exist
within real communities and have real effects, both good and bad, on those communities.
Like individuals living in communities, businesses make valuable social
contributions by providing goods and services and employment. But just as
individuals can feel a responsibility to provide some philanthropic support for
the communities in which they live, so too can a business. The responsibility
of business toward the community is not infinite, but neither is it zero. Each
enlightened business must find the proper balance between all of its
constituencies: customers, employees, investors, suppliers, and communities. While I respect Milton
Friedman’s thoughtful response, I do not feel the same way about T.J. Rodgers’
critique. It is obvious to me that Rodgers didn’t carefully read my article,
think deeply about my arguments, or attempt to craft an intelligent response.
Instead he launches various ad hominem attacks on me, my company, and our
customers. According to Rodgers, my business philosophy is similar to those of
Ralph Nader and Karl Marx; Whole Foods Market and our customers are a bunch of
Luddites engaging in junk science and fear mongering; and our unionized grocery
clerks don’t care about layoffs of workers in Rodgers’ own semiconductor
industry. For the record: I don’t
agree with the philosophies of Ralph Nader or Karl Marx; Whole Foods Market
doesn’t engage in junk science or fear mongering, and neither do 99 percent of
our customers or vendors; and of Whole Foods’ 36,000 employees, exactly zero of
them belong to unions, and we are in fact sorry about layoffs in his industry. When Rodgers isn’t
engaging in ad hominem attacks, he seems to be arguing against a leftist,
socialist, and collectivist perspective that may exist in his own mind but does
not appear in my article. Contrary to Rodgers’ claim, Whole Foods is running
not a “hybrid business/charity” but an enormously profitable business that has
created tremendous shareholder value. Of all the food
retailers in the Fortune 500 (including Wal-Mart), we have the highest
profits as a percentage of sales, as well as the highest return on invested
capital, sales per square foot, same-store sales, and growth rate. We are
currently doubling in size every three and a half years. The bottom line is
that Whole Foods stakeholder business philosophy works and has produced
tremendous value for all of our stakeholders, including our investors. In contrast, Cypress
Semiconductor has struggled to be profitable for many years now, and their
balance sheet shows negative retained earnings of over $408 million. This means
that in its entire 23-year history, Cypress has lost far more money for its
investors than it has made. Instead of calling my business philosophy Marxist,
perhaps it is time for Rodgers to rethink his own. Rodgers says with
passion, “I am proud of what the semiconductor industry does—relentlessly
cutting the cost of a transistor from $3 in 1960 to three-millionths of
a dollar today.” Rodgers is entitled to be proud. What a wonderful
accomplishment this is, and the semiconductor industry has indeed made all our
lives better. Then why not consistently communicate this message as the purpose
of his business, instead of talking all the time about maximizing profits and
shareholder value? Like medicine, law, and education, business has noble
purposes: to provide goods and services that improve its customers’ lives, to
provide jobs and meaningful work for employees, to create wealth and prosperity
for its investors, and to be a responsible and caring citizen. Businesses such as Whole
Foods have multiple stakeholders and therefore have multiple responsibilities.
But the fact that we have responsibilities to stakeholders besides investors
does not give those other stakeholders any “property rights” in the company,
contrary to Rodgers’ fears. The investors still own the business, are entitled
to the residual profits, and can fire the management if they wish. A doctor has
an ethical responsibility to try to heal her patients, but that responsibility
doesn’t mean her patients are entitled to receive a share of the profits from
her practice. Rodgers probably will never agree with my business
philosophy, but it doesn’t really matter. The ideas I’m articulating result in
a more robust business model than the profit-maximization model that it
competes against, because they encourage and tap into more powerful motivations
than self-interest alone. These ideas will triumph over time, not by persuading
intellectuals and economists through argument but by winning the competitive
test of the marketplace. Someday businesses like Whole Foods, which adhere to a
stakeholder model of deeper business purpose, will dominate the economic
landscape. Wait and see. |