What's Business's Social Responsibility?
“There is one and only one social responsibility of business–to use it 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.”
Milton Friedman said this back in 1970, over a half-century ago, but most Americans have been taught capitalism means, “Greed is good,” the notorious line from the movie, Wall Street.
The implication is that capitalism must always bad, that businesspeople never serve their customers, always break the law and are never philanthropic. Friedman strongly disagreed with this point of view and, despite his mild disposition, had to endure countless personal attacks as he asserted that capitalism is, rightly understood, a moral good for society.
It looks much more certain now than just a year ago that US icons like Apple, the NBA and Tesla may have to withdraw from the Chinese marketplace as its leadership’s re-coronation of President Xi Jinping means it’s decided to fully abandon Friedman’s capitalist principle of “engaging in open and free competition without deception or fraud.”
Call it slavery or genocide, but China’s government has been abusing basic human rights of the Uyghurs. Many of its own successful entrepreneurs have already been silenced and countless American firms have been burned, as their Chinese counterparts ignore fundamental contractual obligations, disrespect business tort law and steal high-tech patents.
Some of China’s neighbors like India and Vietnam will replace China as quality manufacturers with inexpensive labor but in the meantime how will those investments already made in China pan out? Since 1990, capitalism has brought over 500 million Chinese people out of desperate poverty—an astounding achievement—but it only works when the rule of law is enforced.
A year ago, BlackRock, the world’s largest asset manager, was the first foreign firm given approval to offer investment products to Chinese citizens—while at the same time advising investors to triple their asset allocations there. That may have seemed a bit reckless to some, given the drastic pandemic restrictions, overleveraged real estate sector, demographic problems featuring too few young workers (already hurting from a 20% unemployment rate), a rapidly increasing debt burden and of course, a confirmed hostile Cold War stance against the US. regarding Hong Kong and Taiwan.
Blackrock is also a big booster of ESG—Environmental, Social and Corporate Governance—which at first blush may not appear as dangerous as trade with China, but the investment risks associated with it could be.
The mix of 1) climate change, pollution, energy efficiency, water management, 2) diversity, equity and inclusion and 3) cyber security, employment practices and corruption make for several complicated challenges.
Last July, The Wall Street Journal’s Andy Kessler compared two of BlackRock’s ESG Funds:
“BlackRock’s ESG Aware MSCI USA ETF has almost the same top holdings as its S&P 500 ETF with Apple, Microsoft, Amazon, Alphabet, Tesla, Nvidia, JP Morgan Chase, Johnson & Johnson and United Healthcare, dropping Berkshire Hathaway and moving Meta and Home Depot to higher weightings.
Fees on ESG Aware are 0.15%, or 15 basis points. BlackRock’s plain-vanilla iShares Core S&P 500 ETF index fund charges only 3 basis points. That’s right, BlackRock charges five times as much for juggling a few names and slapping ESG on the name.
Capitalists indeed. As of June 30, ESG Aware was down 23.7% vs. down 20% for the S&P 500 index”
Kessler then cites a scathing study by CU professor Sanjai Bhagat from a recent issue of the Harvard Business Review:
“Companies publicly embrace ESG as a cover for poor business performance. It makes sense. When earnings are bad, companies cite their focus on ESG. When earnings are good, they drop ESG references. Actually, this is dangerous as ESG metrics drive overinvestment by ESG funds in companies bragging about their credentials right as their financials turn south.”
In Mr. Friedman’s moral universe, while that may not be fraud per se, it certainly could qualify as deception.
Greedy capitalism’s definition of social responsibility suddenly sounds more just, as Friedman’s phrase, “…so long as it stays within the rules of the game” means investors must learn the hard way sometimes that asset managers might be playing from a different rule book.
Prudence today looks like staying out of China while seeking a diversified portfolio of the lowest-cost index-based ETFs. And thinking of Milton the next time you’re watching one of those “Greed is good” Hollywood movies.