PUBLIC RESPONSIBILITY IN THE PRIVATE

CORPORATION

by KENNETH R. ANDREWS

FOR the past 40 years, the enterprise system serving asthe engine of
the American economy has been increasingly modified by a doctrine
of social responsibility. By ‘social responsibility’ we mean voluntary
restraint of short-term profit maximization. This restraint, not
required by law, is purportedly exercised in the public interest. It
reflects a judgment by the managers of a corporation that their
powers are ultimately subject to public expectations that extend
beyond the stockholders’ interest in profit. The emerging doctrine
recognizes that the ‘invisible hand’ of competition, postulated in the
Wealth of Nations as the ethical balance wheel preventing the self-
seeking of men striving against each other from harming the public
does not adequately check the power of great corporations capable of
shaping their environments. A central assumption of this adaptation
of economic theory is that regulation by government, while to some
degree essential under imperfect competition, is not sufficiently
knowledgeable, subtle, or effective to reconcile the self-interest of
corporate entrepreneurship and the needs of a society being sore-
tried as well as served by economic activity.
I should like in this paper to acknowledge the difficulties of
specifying precisely this theory of social responsibility, to assert none
theless its powerful impact upon management behavior, to defend
its validity as a partial substitute for increased regulation of private
enterprise by the state, and to indicate how consideration of the
public interest is brought into the strategic planning and policy-
formulation processes of the professionally managed corporation.
The evolution of the American economic system, the security of the
franchise granted by the American public to the private firm, the
relationship between the individual and the company for which he
works, and the very quality of national life will be crucially affected
by the extension in practice of the concept of social responsibility.
The subject is above all controversial. The American public is
generating these days a passionate interest in consumer protection,
rescue of the environment from pollution, and social justice. Even
shareholder meetings are disturbed by insistence upon corporate
involvement in these movements. Although the proponents do not
command majorities in the voting of shares, they have alerted
institutional holders of corporate securities, who own 40 per cent of
securities listed on American exchanges, to the need to take stands.

‘35

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136 KENNETH R. ANDREWS

They have contributed already to new legal standards for corporate

activity and have influenced managements, not insensitive to the
future significance of today’s youth movements, to re-examine settled
policies and old industry practices. Themselves under no obligation
to produce return on shareholders’ investment, these critics expect
much greater investment in for example pollution control than
making a return adequate to satisfy shareholders and sustain growth
will allow. They generate resistance from people like the president of
General Motors not because of the direction recommended but the
speed expected.

THE CASE FOR AB5TENTION

Led conceptually by Milton Friedman, the opponents of the bur

geoning doctrine of social responsibility fight back. In Capitalism and
Freedom, Friedman argues that the doctrine of social responsibility is a
‘fundamentally subversive doctrine’ in a free society. In such a soci
ety, ‘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’.
The manager is the agent of the corporation’s owners; his primary
responsibility is to them. The desires of the stockholders are assumed
to be making as much money as possible while conforming to basic
rules. The manager who makes decisions affecting immediate profit
by reducing pollution, for example, more than present law requires
is in effect imposing taxes and acting without authority as a public
employee.
Friedman’s argument assumes that the stockholder is Economic
Man, interested only in maximum short-run profit with minimum
deference to legal and ethical restraints. American Courts, in up
holding against stockholder suits the legality of corporate contribu
tion to education, have suggested that stockholders themselves have
responsibilities as citizens. The legality of Corporate contributions to
the public welfare implies that the managers of corporations are
entitled to use their judgment in reconciling immediate return with
future growth, maximum present profit with future return, corporate
interests with the interests of the community. In actual practice, thc
stockholders of large publicly held corporations do not pick directors,
hire managers, or set the dividend rates. Except in recourse to their
legal powers in case of emergency or rebellion, stockholders and
institutional investors vote shares as management suggests. The
actual power of an individual stockholder to give effect to his preferC

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 THE LARGE FIRM IN MODERN SOCIETY 137

ence for maximum short-run profit is exercised not by changing

management policy but by selling his stock.
The notion that the shareholder of a large, publicly held corpora
tion is its owner grows increasingly indefensible. He owns shares,
which represent so small a commitment on his part that he may
through the mechanisms of the stockmarket shed it instantly.
Management, to whom has come a virtually permanent delegation
of authority for continuing direction of the publicly held corporation,
is still bound to run the company to serve shareholder interest. But
neither by law nor by custom does it have the simple obligation to
pursue maximum profit.
Beneath the argument that the corporate strategist should confine
himself to his economic function is often a bleak view of the typical
general manager’s personal values and capability. Ranging from
skepticism to contempt, this estimate of business leadership is
accompanied by the assumption that expertness in the social
problems partially caused by industry lies outside industry in the
universities or legislatures of the country. Even nearer the root of the
argument for isolationism is the undeniable central conflict in
responsibility between the need on the one hand to make and show
continually impressive profits in order to sustain price/earnings
ratios and the market values of stockholders’ equity, and the costs,
on the other hand, of dealing with such byproducts of economic
activity as water and air pollution. This conflict persists, long after
we condemn gross forms of greed and corruption.
The central conflict between self-interest and social concern
cannot be explained away. So long as it exists, it can be used with a
dash of cynicism to note that it is not easy to reconcile them nor
likely that business leaders should even wish to. If we add to the
difficulty of striking a balance between divergent interests the
problem of establishing standards for ethical behavior in complex
situations, we may conclude that those who wish to argue against
corporate involvement in noneconomic activities will always have
something to say. Piracy, hypocrisy, and naiveté can always be
alleged or detected in business activity.

THE CA5E FOR INVOLVEMENT

The arguments for the active participation of corporations in public

affairs and for the assumption of responsibility for the impact of
economic activity upon society are nonetheless gaining ground. It
appears to be propelled by four fundamental ideas. The first is that
government regulation, certainly essential for the provision of ground

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138 KENNETH R. ANDREWS

rules for competition and the prohibition of grossly improper and

dishonest behavior, is neither a subtle instrument for reconciling
private and public interests nor an effective substitute for knowledge
able self-restraint. The second proposition is that in an industrial
society corporate power, vast in potential strength, must be brought
to bear on certain social problems if they are to be solved at all. The
third proposition is that corporate executives of the integrity,
intelligence, and humanity required to run substantial companies
cannot be expected to confine themselves to narrow economic
activity and ignore its social consequences. Finally, the dangers and
problems of corporate participation in public affairs can be dealt
with through research, education, government control, and self-
regulation. To each of these propositions we must give some atten
tion.
The idea that businessmen should be free of the need for self-
restraint rests on the assumption that government regulation can be
sufficiently specific, knowledgeable, and timely to check or forestall
abuse without being damaging to initiative. We have had much
experience in the United States with regulation. Besides surveillance
of business activities by the courts and numerous administrative
agencies, we have the influential hearings into industrial activity by
the Congress.
Our national experience with government regulation should tell
us that necessary as is regulation it cannot possibly design the ideal
relationship between the corporation and society. Attempts to achieve
such an ideal lead quickly to diminishing returns. If corporate power
is to be regulated more by public law than by private conscience, a
large part of our national energy will have to be spent keeping watch
over corporate behavior, ferreting out problems, designing and
revising detailed laws to deal with them, and enforcing those laws
even as they become obsolete. Furthermore such a development
would stifle the entrepreneurial initiative on which our economic
system is based.
The alternative to much greater but still inadequate intervention
by the state in economic affairs is for businessmen to assume respon
sibility early as a matter of conscience rather than accept it late as a
matter of law. The principal justification for leaving corporate
power relatively unchecked is the emergence of the doctrine of
social responsibility. This doctrine is the only alternative we have to
an unworkable extension of the role of government in our economic
system. It will of course never be prudent to rely only on the con
science of individuals, to relinquish the role of fair and sensible
laws, or to suspend public criticism of business practice. We cannot

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 THE LARGE FIRM IN MODERN SOCIETY 139

dispense as Friedman would like us to with every form of regulation.

But to argue that a businessman should knowingly ignore the
consequences of his company’s impact upon its physical and social
environment until new laws are passed is in this day wantonly
irresponsible in itself
We turn now to the second proposition underlying the present
redefinition of corporate responsibility. It has become commonplace
to assert that in a corporate society corporate power is necessary to
solve problems beyond the reach of local and national government,
of non-profit organizations, and of individuals. In theJohnson and
Nixon Administrations, the invitation to businessmen and corpora
tions to move into the public arena has become more fervent.
Corporate involvement in public issues is increasing on two fronts—
educational activity as a contribution to community development
and entrepreneurial ventures in needed services expected to produce
some profit for the service rendered. Business has expanded its
search for opportunity to devise reclamation procedures for exhaust
gases, and for effluent and solid waste, entering into occasional joint
research contracts as in one instance to find for utilities a practical
way to recapture sulphur from the burning of fuel oil. Here, of
course, the economic compulsion is to make the process feasible—
i.e., at least profitable enough to justify investment in research and
equipment. But the principal motive clearly is to make economical
the reduction of pollution, rather than to seek profit as such.
The entry of a number of firms like General Electric, Litton
Industries, Westinghouse, and Xerox into education and the efforts
of Lockheed, Ford, and of many other companies to rehabilitate
housing, establish factories and training facilities in ghettos similarly
reflect a recognition of obligation even more than a search for market
opportunity. The quest to make these ventures profitable is to make
them effective and expansible, not to make money out of the mis
fortunes of the poor.
The suspicion that once would have attended corporate attention
to public problems is less virulent today. The arguments that a
company should pursue only those growth opportunities which pro
duce the greatest profit possibility are losing force. For even the most
successful company there is not much money to be made in the
ghetto; the hiring of persons from disadvantaged minority groups
does not increase productivity. The need to extend the benefits of a
technological—industrial system to these areas is seen as: important
enough, however, to justify corporate entry. Many social problems
are left unattended by medicine, the law, the church, and the schools,
and are beyond the reach of legislators. They are complex enough to

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140 KENNETH R. ANDREWS

be worthy of the highest technical, professional, and organizational

skills that business executives can muster.
Students of the corporation have noted with interest the transfor
mation of this institution. Under the steady improvement in the
ethical level of business practice, sociologists have noted the appear
ance within corporations of a system of private government which
regularizes and makes fair the impact upon individuals of managerial
power. The sociologist, Philip Selznick, for example, finds that ‘due
process’, which in civil life goes far beyond codified law to regulate
social behavior, is operative within corporations. A. A. Berle de
scribed this development as ‘constitutionalization’. Its impact is to
establish norms of what may or may not be done, to restrain actions
which curtail the rights of others, and to extend to all employees, for
example, the rights won by some in legitimate negotiations between
management and organized labor. In corporations of some size,
complexity, and visibility to the public, the need for its actions to
appear fair to its members and in fact to all its constituencies is a
powerful check on the irresponsible use of private power. The
reality of the corporate conscience, like that of the individual
conscience, is essential to an open society valuing responsible
freedom.
The third proposition, in effect that present-day corporate
executives are increasingly the kind of people who cannot be expected
to confine themselves to pursue economic activity while ignoring its
social consequences, means merely that managers will concern
themselves and their companies with social problems because they
find it stimulating to do so. It would be untactful for us to attempt to
document the progress asserted in this statement through the
appointments now being made to corporate high office in our leading
companies. But it could be done. Such men are more and more
attracted by the opportunity to apply corporate power to socially
desirable ends; they are aware that social, political, and economic
affairs are increasingly interrelated; they realize that a large ‘private’
corporation is a public institution and that its management is
conducted under the guidance of implicit moral values constituting a
corporate conscience.
Some executives feel that the corporation itself should be com
mitted to stands on certain public issues. Thus, Joseph Wilson, then
chief executive officer of the Xerox Corporation, said in 1964:
The Corporation cannot refuse to take a stand on public
issues of major concern; failure to act is to throw its weight on
the side of the status quo, and the public interprets it that way.

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 THE LARGE FIRM IN MODERN SOCIETY 141

Peter McColough, his successor as president and chief officer of the

company, has argued at annual meetings of shareholders, in supporl
of the same view, that individuals in the company must not be
prevented from expressing dissenting views so that the corporation
does not override their liberty. Similarly, he believes that if all
corporations were to take forthright stands on public issues, the
variety of opinions would be as great as among individuals, and the
public would be protected from overpowerful influence on public
opinion of a few powerful firms. If he were to be deprived of the
privilege of stating publicly his views on controversial questions or
to contribute to an official corporation position on the same issues, he
would lose interest in continuing to be an executive.
Whatever the problems of official corporate positions on contro
versial issues not directly related to the corporation’s own interests
may be, the improvement in the lawful, ethical, and humane quality
of corporate practice during the last 70 years is in any case quite
unmistakable. From close at hand the rate of progress, subject in
definition to contentious subjectivity, is harder to realize. Improve.
ment can be directly traced to the aspirations of men moving intc
top management positions and their sensitivity to public opinion.
As the levels of formal education and professionalization rise,
executives will turn to social problems as concerned individuals
simply because they want to. In recognition of their motives and
capability, their participation generally will be welcomed. A
concerned individual who is president of a substantial corporation
cannot act apart from it even if he would; he must bring at least the
prestige of his firm with him. To enlist its power by designing its
strategy to encompass a chosen set of social conditions is only a second
small step. The problem of bringing together personal and corporate
aspirations for a better world are attractive because to men who are
intelligent as well as concerned they are intellectually satisfying. Tc
populate an organization with younger people who are also intelli
gent and concerned becomes easier and henceforth will probably be
possible only if the stated objectives and observable behavior of the
organization include more than self-preservation and meeting the
economic needs of its customers and employees.
The fourth proposition supporting the participation of companies
in social problems is mostly an assurance that such activity, conducted
by the kind of generalists we are making way for, is neither impracti
cal nor dangerous. The competence to deal with the social conse
quences of strategic decision can be nurtured through education
experience, and proper selection; it is part of the unitary capacity foi
strategic planning. The other professions, including law and medicine,

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 142 KENNETH R. ANDREWS

distinguished by individual achievement and fully authorized to deal

in social problems, are not so far ahead that they are out of sight.
Every profession, to be sure, is subject to capture by complacency
with its own achievements or conventions about what is practical
or possible. In recent years each one has been shaken by its younger
members to reconsider its premises. The corporate conscience, the
inexorable clarification of due process supporting social justice within
the corporation as well as in society at large, the new muscularity of
government regulation, signs of industry self-regulation, the revital
ization of boards of directors, and the availability of criticism from a
pluralism of standards and prejudices in an open society are all
available to contain corporate power wrongly directed. The quality
of leadership available to the citizenry in other walks of life does not
suggest that the average will be lowered by corporate executives.
Up to this point, in fact, American society has been needlessly
deprived of the participation of some of its best qualified members.

THE CATEGORIE5 OF CONCERN

That the case for corporate involvement in social problems is steadily

winning converts among managers of private enterprises cannot be
disputed. You may attribute this development to recurrent melioris
tic optimism, to defensive ingenuity on behalf of capitalism, among
other possibilities, or to the professionalization of management
practice, as you like. Whatever its origins, we should in any case
proceed to examine the range of involvement available to a firm and
the considerations which guide its choice of opportunity. The admis
sion of opportunity to make more than economic social contribution
extends the range of strategic alternatives confronted by the general
manager. As we will see, this complication makes necessary a theory
of strategic decision which includes but is not confined to the
optimum combination of market opportunity and corporate re
sources which constitutes a firm’s economic strategy.
The problems affecting the quality of life in the society to which
the company belongs may be thought of as extending through a set of
spheres from the world community to the firm itself. For multi
national firms the primary economic opportunity to contribute to
industrialization of underdeveloped nations replaces irresponsible
exploitation. The potential for peace as well as economic develop
ment makes East—West trade under some conditions as much an
issue of responsibility as of economic return. The maturing of world
corporations into fully contributing institutions is assisted of course
by the realization that host countries will ultimately have it no other

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 THE LARGE FIRM IN MODERN SOCIETY 143

way. We have already said that responsibility entails doing early as a

matter of conscience what later may well be required by law.
Voluntary responsibility has, however, large dividends in public
acceptance, customer goodwill, and latitude preserved.
At the national or common market level, the choice of problems
susceptible to constructive attention from business firms is bewilder
ingly large. National firms tend to begin with the environmental
consequences of their manufacturing processes or the impact of their
products upon the public. Thus the Standard Oil Company of New
Jersey or General Motors has no doubt about what to work on—the
question then is how much and how fast. After such a company has
put its house in order or has begun a long program to make it so, it
may then take interest in other public problems, either within the
context of philanthropic contribution or through business operations
which in essence seek out economic opportunity in social need. Once
corporate concern for national problems like equal opportunity, race
relations, education, and poverty is recognized as legitimate, the
question becomes how does a company decide which ones it should
work on.
Besides world and national problems, a third category of concern
appropriate for all kinds of firms is the problems of the local com
munities in which the company operates. In the United States the
city has become the special focus of our national interest. Urban
problems like housing, unemployment, substandard medical care,
ineffective education, rampant ugliness, and defective transportation,
appeal to companies as the proper arena for economic and social
action because of their nearness and compactness. Because business
cannot remain healthy in a sick community, the problems of the
city, despite their complexity, will continue to dominate the social
action of corporations. Increasing sophistication will make it more
effective than it has been so far.
Within the firm itself finally, a company has attractive opportunity
for satisfying its management’s interest in social responsibility. The
quality of any company’s present strategy is always subject to im
provement as new technology and higher aspirations work together.
Here as in every other category of social issues, decision is difficult.
The kind of detached self-criticism essential to the perpetuation of
responsible freedom is especially rare within a business. The proper
role of the board of directors in supervising this function, long since
lost sight of, needs revitalization.
The actual quality of life in a business organization turns most
crucially on how much freedom is accorded to the individual. Cer
tainly most firms consider responsibility to their members a category

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144 KENNETH R. ANDREW5

of concern as important as to external constituencies. It is as much a

matter of enlightened self-interest as of responsibility to provide
conditions encouraging the convergence of the individual’s aspira
tions with those of the corporation, to provide conditions for effective
productivity, and to reward employees for extraordinary perform
ance. The degree to which an organization is efficient, productive,
creative, and capable of development is dependent in large part on
the maintenance of a climate in which the individual does not feel
suppressed, and in which a kind of freedom (analogous to that which
the corporation enjoys in a free enterprise society) is permitted as a
matter of course. Over-regulation of the individual by corporate
policy is no more appropriate internally than over-regulation of the
corporation by government. On the other hand, personal respons
ibility is as appropriate to individual liberty as corporate responsibility
is to corporate freedom.

THE PROBLEM OF CHOICE

What the corporate strategist has before him to be concerned with,

then, ranges from the most global of the problems of world society
to the uses of freedom by a single person in his firm. The problems of
his country, community, and industry lying between these extremes
make opportunity for social contribution exactly coextensive with
the range of economic opportunity before him. The problem of
choice may be met in the area of responsibility in much the same way
as in product-market combinations and in developing a program for
growth and diversification.
To guide the policy-maker in private business, a simple practi
tioner’s theory of general management has been developed. It
postulates that every firm, if it is not to be a ship adrift in economic
currents over which it has no control, must develop a corporate
strategy, oriented to the future, flexible enough to permit adaptation
but firm enough to establish a unique character for the firm and a
durable definition of its business. This strategy is developed by
matching corporate resources and distinctive competences to
imaginatively perceived opportunity in the company’s market
environment. This combination, a perception of how best a com
pany’s present and potential resources and capability can be applied
to changing opportunity, is bound to be affected by the personal
values and aspirations of the managers making the decision. What a
company might do in terms of available opportunity is matched with
what it can do in terms of resources; this choice is further narrowed
by what the managers of a firm want to do. This preference is modiC

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 THE LARGE FIRM IN MODERN SOCIETY 145

fled not only by responsibility—in the case of a publicly-owned

firm—to the shareholders but by a consideration of what the com
pany ought to do in the face of the ethical and moral concern pre
viously described in this paper.1 Since the identification of economic
opportunity, the determination of corporate capability, the personal
values of the senior management group, and their aspirations to
social responsibility might lead in four different directions, recon
ciling the outcomes in such a way as to leave the firm economically
viable and its leaders unfrustrated constitutes the art of strategic
decision.
From even this spare reference to strategy formulation, it is clear
that the choice of avenues in which to participate in public affairs
will be influenced by the personal values of the managers making the
decision. To be strategic rather than improvisatory, participation
must take place within a set of social and economic objectives which
reflects the company’s definition of itself not only as an economic
entity but as a responsible institution in society. Its social action
would include issues most closely related to the economic strategy of
the company, to the expansion of its markets, to the health of its
immediate environment, and to its industry and internal problems.
The extent of involvement relates importantly to the resources
available. A company struggling to avoid bankruptcy will omit
contributions to good causes. A company easily able to meet its
dividend and growth-in-earnings targets can be more generous not
only in its support of education and other acceptable causes but to
national and world issues not directly related to its economic
function.
We lack space here to elaborate the doctrine which makes
strategic the concern for social responsibility which (as we saw earlier)
is radically redefining the corporate manager’s view of his function in
circumstances where freedom of choice is open to him. We see that he
needs to relate his firm’s aspirations to social responsibility to a
predetermined strategy as explicit in its social as in its economic
terms and one presenting a clear view of the kind of organization it
intends to be and the kind of people it will enroll in its membership.
From this point of view, ‘social responsibility’ becomes strategic
corporate response to the needs of society.

HARVARD UNIVER5ITY

1 A fuller treatment of this idea may be found in the writer’s The Conceptof Corporate
Strategy, Homewood, Ill.: Dow Jones—Irwin, Inc., 1971.

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