Many workers are employees of companies. These workers agree to do what the companies' owners tell them to do. In return, the companies pay the employees a wage or salary. This relationship, or contract, is an example of a principal-agent agreement: The company is the principal and the worker is the agent. The principal-agent agreement is the most common employment contract in capitalist countries. It is the basis of the economic model for businesses, most of which consider their sole purpose to be maximizing profits for owners. In a publicly traded company, the owners are the company's shareholders.
Advocates of corporate social responsibility argue that profit is essential to a business's well-being and continued existence, but profit should not entirely define the business's purpose. These advocates believe the principal-agent agreement also has a trust or fiduciary aspect that includes a set of expectations related to honesty, loyalty, obedience and the full disclosure of relevant facts. Workers have a fiduciary duty to their employer, for example, to obey the firm's rules. A company has a fiduciary duty to its shareholders to report financial data honestly. But advocates of corporate social responsibility believe that a firm's fiduciary duty extends beyond its shareholders to other stakeholders: employees, suppliers, customers, and the community.
The students read two viewpoints on the social responsibility of business: Milton Friedman, a Nobel laureate in economics, argues that businesses best fulfill their social responsibilities to society by focusing on increased profits. John Mackey, founder of Whole Foods Market, believes that a business's social responsibility goes beyond maximizing profits. The students evaluate these arguments and then decide whose opinion they support.
Social responsibility of business
Economics Content Standards
10. Institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and well enforced property rights, is essential to a market economy.
14. Entrepreneurs are people who take the risks of organizing productive resources to make goods and services. Profit is an important incentive that leads entrepreneurs to accept the risks of business failure.
The students will:
1. Describe the principal-agent agreement that governs most employment.
2. Compare and contrast two views on the social responsibility of business.
3. Analyze the reasoning behind different views on social responsibility of business.
Time Required: 60 minutes
1. Visuals 1 and 2
2. One copy of the Handout for each student
3. Five sheets of paper with "1" written on one, "2" on another, "3" on another, "4" on another and "5" on another.
1. Tell the students they are going to investigate whether businesses have a social responsibility beyond making profits for the company owners, or shareholders. Some people believe businesses best serve society by increasing profits--as long as they adhere to the laws and ethical customs of society. Others believe businesses have an obligation beyond maximizing profits: to improve the economic and social lives of the communities in which they operate.
2. Give each student a copy of the Handout. Tell the students that the authors they are going to read are notable figures in the debate about corporate social responsibility. Milton Friedman won the 1976 Nobel Prize in economic sciences. …