Last week I met up with Cindy, a successful singer and talented entrepreneur. She's got three albums behind her, and over 15 years of experience in the music industry. Cindy is starting her own record label and wanted to make sure she presented her business to investors in the best possible manner. Over a cup of coffee she pulled out a stylish investment memorandum for me to read.

For those of you unfamiliar with the ways of raising capital, the first pages of your ordinary investment memorandum contain basic information about the nature of the business and how much money it aims to raise from investors. In Cindy's case though, things looked completely different. The first page was titled "Committed to Kind Business", followed by a list of these commitments. They include tree planting in Mozambique for every CD manufactured, packaging sourced from sustainable forests, and printing services from companies that use water-free printing techniques. There's even a commitment to donate 5% of all profits to Greenpeace.

What's going on here? Where are the days when an investor was asked to invest in a business, not a cause? I suggested to Cindy that she reorganize her memorandum and put the touchy-feely stuff at the end, if at all. "The stuff about Greenpeace——I'd take it out altogether," I said.

Milton Friedman, who won the 1976 Nobel prize for Economics, would have gone a lot further. In an influential article, from which the opening quote of this newsletter is taken, Friedman argued vehemently against businesses getting involved in social affairs. "When I hear businessmen speak eloquently about the 'social responsibilities of business'... that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords...they are...preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades."

Friedman doesn't stop there. The only "social responsibility" a business has, according to Freidman, is to increase its profits (so long as it doesn't break the law). Any attempt to extend the responsibility of a business beyond turning a profit is deemed by Friedman as a "fundamentally subversive doctrine". Strong words from a man who is regarded as one of the dominant economists of our generation. But is Friedman right?

If they choose to divert the corporation's funds to causes other than increasing profits, they are, in fact, imposing a tax on the owner of the business, as well as deciding how this tax is distributed.Taxation, argues Friedman, is the responsibility of the government. Charity is the responsibility of the individual. Corporations should steer clear from both.

Much has changed since Friedman published his article in 1970. In 1971 Greenpeace was launched and with it, the conviction that corporations don't exist in a vacuum. Today, companies as diverse as Cisco, Nike and Merck invest millions of dollars in promoting diversity, sustainability and social responsibility.

Not all businesses act out of pure altruism, though. In fact, it's become increasingly difficult to tell when business are engaging in social responsibility because they believe it will improve their competitive advantage and when they do so simply to get good press. Take Philip Morris, for example. In 1999 the tobacco giant gave away $75 million to charity. How much money did Philip Morris spend on advertising this act of charity? $100 million.

But what's wrong with companies blindly giving away money to charity? At the end of the day isn't it better than not giving? Not necessarily. There are two main problems with companies jumping on the corporate responsibility bandwagon:

1. Giving away shareholders' money because "it feels good" is not a strategy. Many companies give money to charity because they feel pressured by activists to do so. In other cases, company executives simply select charities they are fond of. Neither approach, argues Harvard's Michael Porter, is sustainable. "If we want to make sure that companies – not leaving it to individual leaders – are to maintain an interest in corporate social initiatives, we have to provide the rationale for them as to why they should be doing it... Giving money away is easy," claims Porter, "but if that is all, it is going to create cynicism – among shareholders, managers and employees."

2. Many companies use "corporate responsibility" to mask their own negative impact on the environment. By showing governments and activists that they are "already doing good" they aim to fend off additional regulation and probing into their own activities. Citing companies such as Coca Cola, Shell and British American Tobacco, a recent report by Christian Aid shows that often the "loudest" donors have the most negative impact on their environment.

3. Indiscriminate giving to charity only increases the confusion over how and who to give to. This confusion seems to be already taking its toll: According to research done by Michael Porter, US corporations are now giving 50% less than they did 15 years ago (measured as a percentage of profits). The reason, claims Porter, is that more and more corporations feel that whatever they do, they'll still be criticized. Take Nike for example. Over the past five years, the company contributed over $100 million to social causes, and Nike's community affairs program is second to none. Yet the term "sweatshop" is still thrown at the company over and over.

So why bother? Maybe it's time to reconsider corporate responsibility and let investors decide what they want to do with the profits corporations earn?

Pfizer invested millions of dollars to team up with various world health organizations and create the infrastructure to distribute Zithromax, in many cases giving the medicine away for free. An easy route to good press? Maybe. But in the process of doing good, Pfizer also created a low-cost distribution infrastructure that will enable it to promote and sell its other products for years to come.

Another way of integrating social responsibility with corporate strategy is exemplified in Cisco's Networking Academy. Cisco's academy has provided over 450,000 students around the world with basic IT skills, many of which cover aspects that have nothing to do with what the networking giant produces. Last year Cisco opened an academy in Afghanistan, a country with one of the least developed telecommunications infrastructures. Why? Because Cisco understands that in order to increase future demand for its products and improve the quality of its workforce, it has to invest in developing countries and provide basic training for the local population.

When companies do good because it sounds good, they run the risk of alienating their customers, employees and shareholders, not to mention exposing themselves to increasingly hostile activist groups. But when companies do good because it's also good for business, they not only make the world a better place to live in, but discover a new source for improving their competitive advantage.

--> Nike has the most advanced corporate responsibility program.

--> Friedman's 1970 New York Times article can be found here.

--> Michael Porter's article "The Competitive Advantage of Corporate Philanthropy" can be found here.

--> Read The Christian Aid report "Behind the mask. The real face of corporate social responsibility".