Merck and Corporate Social Responsibility

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 in his argument. Corporations have many stakeholders, of which the shareholders are just one group. There are also, for example, creditors, employees, suppliers and customers. In the case of pharmaceutical giants, society at large is also a stakeholder of a sort. The products a company like Merck develops improve the health and well-being of the population at large. Government can be said to be the stakeholder that represents this interest.

In the case of Mectizan, this may have been a significant factor in the decision to proceed with development. The development and free distribution of the drug generates goodwill on the part of Merck. That goodwill is an intangible asset. Merck relies on governments for a favorable legislative and structural environment in which to operate. It may be the case that the goodwill generated by the occasional apparent act of altruism allows for the perpetuation of that favorable environment.

Therefore, even though the hard numbers may have been unfavorable for the specific investment decision regarding the development of Mectizan, the investment decision may have been viewed by Merck to have a positive return once the intangible goodwill was considered. Such "socially responsible" actions as Merck's development and giveaway of Mectizan do not set a dangerous precedent for a free market society. Free markets are just that. Corporations are free to engage in whatever activity they choose, and investors are free to make investment decisions based on that.

A key concept in free market capitalism is transparency, and public companies like Merck are required to maintain a certain degree of transparency in their activities. This allows investors the opportunity to evaluate the company properly prior to making any investment decision. In this case, any investor in Merck will, if they conduct their due diligence, be aware of decisions such as that concerning Mectizan and can choose not to invest if they are uncomfortable with the company engaging in socially responsible practices.

Free market capitalism is not threatened by this. Rather, it is strengthened by this. The greater the diversity of investment opportunities available, the stronger the market. That some firms choose to.