JP Morgan Chase, the nation’s largest bank, recently announced that it would give activist groups a say in where the bank lends its money. While this action drew praise, it violates the tenets of capitalism. And among capitalism’s adversaries, perhaps none is more effective than the self-designated “socially responsible” corporation.

Elevated by the public to enlightened status, the socially responsible business marries company policy with social causes. It is extolled for looking beyond prices and earnings and aiming for the common good, whatever that may be.

It may mean corporate contributions to organizations active in a particular issue. Or it could include the adoption of new forms of production that are more in line with a group’s objectives.

Wanting to do their part, many business executives are eager to use company resources to solve global problems. But such deeds, whatever the intention, do more harm than good.

Most recently, the common good has been interpreted to mean environmentally conscious business practices. After a lengthy campaign by green activists, JP Morgan agreed in late April 2005 to adopt a new company policy banning loans to international businesses with projects in certain ecological areas. Hailed as an environmental victory, JP Morgan’s action has serious drawbacks.

It limits the businesses access to capital, impacting production and employment. This is devastating to poorer countries where unemployment and poverty are rampant. Of course, limiting production also hurts the American consumer who relies on low-cost imports.

Worst of all, the decision hurts the bank’s stockholders. JP Morgan’s withdrawal of funds from various countries will leave a financial vacuum possibly filled by competitor banks. As their rivals profit from lucrative investments, JP Morgan will be left behind, decreasing its attractiveness in the equities market. This corporate neglect of shareholders goes against the tenets of capitalism.

As owners of the corporation, shareholders have a say in corporate policy. Executives who work for them must respect their wishes. When executives deviate from that principle, they are reneging on their fiduciary responsibility. Treating outside activists like shareholders violates the property rights of those who own the company.

This common-sense theory, astutely presented by Nobel laureate economist Milton Friedman, has been superseded by the belief that, as a social institution, the corporation has an obligation to society. But as Friedman pointed out, the corporation is an artificial construct and has no natural responsibilities. The one and only social responsibility of business is to increase its profits. A growing number of individuals however, think corporations can do both.

Not content with lobbying corporations from afar, activists are now using the market itself to implement corporate change. Many are investing in stock-market instruments known as “socially responsible funds.” These investors are using their clout as shareholders to direct companies to address social issues.

An estimated $35 billion has been invested in social-activist funds, and they are increasingly getting their way. Besides JP Morgan, other high-profile companies such as General Electric, Ford, and Citigroup have adjusted their policies to meet the demands of activist investors.

Protectors of the free market can counteract such anti-business sentiment with a new weapon: pro-capitalist mutual funds. These investments not only seek profitable returns, but also use their influence to sway corporate executives away from appeasement of outsiders.

Milton Friedman stated that business executives who preach social responsibility are unwittingly supporting the demise of capitalism. Astute executives and investors should end such corporate confusion.