The Benefits and Costs of Socially Responsible Investing

by Alex Bryan for Morningstar

In 1970, Milton Friedman famously wrote, “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.” While that may seem like an extreme view, Friedman does have a point. As the owners of a firm, shareholders hire managers to act as their agents. When managers focus on profit maximization, they also tend to maximize shareholder wealth. If they choose, shareholders can then donate part of that wealth to social causes that are important to them.

To the extent that managers pursue objectives other than profit maximization, they may reduce shareholders’ wealth and effectively substitute shareholders’ priorities with their own. Profit maximization also tends to promote efficiency and accountability. In the pursuit of their self-interest, firms usually allocate scarce resources to their most productive uses. Read more here.

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