Term Paper on "Merck and Corporate Social Responsibility"

Term Paper 4 pages (1169 words) Sources: 2 Style: MLA

[EXCERPT] . . . .

Merck and Corporate Social Responsibility

Merck's decision to proceed with the development of Mectizan violated its fiduciary duty to its shareholders, but did not violate its overall corporate responsibility. Merck has stakeholders other than its shareholders who benefited from this decision. Moreover, Merck's decision fell within the normal course of business for the industry, so it did not set an unusual nor dangerous precedent for a free market society.

Milton Friedman argues that the sole responsibility of business is to increase profits. The theory is that the profits are then distributed to shareholders, who in turn can do whatever they please with these distributions. Charity is an act that should be undertaken by the shareholders and may be encouraged by the government through its taxation and legal structure.

All investment decisions are made on the basis of return on investment. ROI is a key component of any corporation's fiduciary duty to its shareholders. The shareholders invest in companies specifically to gain a return. They have a dizzying array investment options and build their portfolios to maximize their risk-weighed returns. This is why Friedman states that profit is the sole responsibility of the corporation.

Merck would have done an analysis of the product's potential, including revenue projections weighed against their traditional hurdle rate. Merck knew from the outset that this drug was going to generate sufficient returns to justify the investment. The shareholders invest in Merck with the expectation that this due diligence will not only be conducted but the results abided by. In this instance, Merck did not abide by the results, as they proceeded with the investment in Mectizan despite it's poor prospects for profit. So in the Friedman sense, Merck did not fulfill its fiduciary duty to its shareholders.

Merck could have pursued other, less costly options. Knowing that they were unlikely to secure the funding from government they wanted post-development, they could have sought a partnership with a government-funded research facility during the development process in order to defray the cost of development. Another option would have been to lend the talents of Dr. Campbell to a government or university-sponsored research facility to take on the development of Mectizan, possibly in exchange for an equally talented researcher at a non-profit lab that possibly had a marketable product in development.

However, there are limitations to Friedman's theory. First, it assumes that profit is the only consideration of shareholders. The second assumption is that the shareholders are the only stakeholders.

Shareholders do value profit, but they often have other objectives. Some investors may prefer to offload the role of social responsibility onto the companies they invest in, rather than undertaking it themselves. It is often more efficient for corporations to engage in charitable acts, than to have individuals do so. Therefore it is reasonable for an investor to invest in companies that will perform this role. There may be fiscal considerations as well. Every investor has a unique financial situation. There may be cases where an investor gains more financially from investing in a company that extends some charity to the world. In recent years, the rise of so-called "ethical" mutual funds shows that many investors prefer to extend social responsibility to all facets of their lives, including their investments. They may feel that socially responsible firms deliver superior fiscal performance in the long run, or they may be willing to sacrifice performance in return for the non-fiscal gain that comes from feeling good about their investments. Friedman ignores the possibility of altruism… READ MORE

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