On Instagram or TikTok, a Patagonia-clad finance bro ironically extolls his prowess at creating shareholder value. These self-deprecating jokes are pitched as a sort of catharsis, allowing the protagonists to rationalize the long hours spent away from family and friends. My life may be terrible, the posts say, but at least I’m helping my company’s shareholders get rich – and probably pocketing a decent salary for myself at the same time.
Milton Friedman’s doctrine
Friedman argued that any corporation spending money in the name of “social responsibility” will be taking that money from shareholders, employees, customers, or some combination of these groups. And the company is less qualified to know how to benefit society with this money than the shareholder, customer, or employee would be if they received the money instead.
In addition, corporate managers have little experience in how to allocate capital to social projects and corporations have none of the oversight given to governments, through elections or constitutional checks, to ensure they’re backing projects that the populace as a whole desires.
A company that spends its money on reducing pollution beyond the legally mandated minimum or paying employees more than the market rate will at any rate lose out to one that doesn’t, Friedman argued.
All this led the economist to conclude that, “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.”
The case against Friedman
Friedman’s pitch that businesses should obsess over profits to the exclusion of all other goals has some flaws.
For a start, there’s the instinctive ick factor. This is one of those times when an academic’s posture is at odds with the gut reaction of the vast majority. If a person behaved with this monomania about any topic, let alone the accumulation of money, we would instinctively shun them. So why should we give businesses a free pass?
It’s a short jump from “the social responsibility of business is to increase its profits” to Gordon Gekko’s jaw-dropping “greed is good” schtick in the movie Wall Street. Friedman’s doctrine presents the enemies of capitalism with an open goal.
My second charge is one of inefficiency. Friedman assumes that businesses and consumers have equivalent spending power and that a dollar in a shareholder’s or customer’s pocket is always worth as much as a dollar in the company’s coffers. Yet it will generally cost a company much less to prevent an oil spill than it would cost others to clear up that oil spill after the tanker’s hull has been breached. There are plenty of situations when a corporation can limit hugely expensive societal problems with relatively little outlay.
Freidman’s final troubling assumption is that shareholders care only about money, to the exclusion of all else. Yet shareholders are people too. They need a planet with clean air and water on which to live, they want to feel safe as they travel home from work, and they want people in their neighborhood to find gainful employment.
By assigning only one desire to shareholders, Friedman oversimplifies human nature.
The enduring appeal of a focus on profits
Yet for all the flaws with Friedman, his manifesto has a compelling simplicity.
For one, encouraging company managers to focus on the share price and then linking their pay to that share price – through awards of stock – brings clarity for CEOs. When Friedman published his NYT piece in 1970, only a tiny fraction of CEO pay in the US was through grants of shares. By the end of the century, equity-related pay had ballooned to make up the vast majority of compensation – and has remained near those levels.
For society as a whole – a mass of competing power bases including the government, legislatures, the judiciary, labor unions, the media, and many more – understanding that corporations will act to boost profits to the exclusion of other goals can also bring refreshing clarity. Do we really want companies to become black boxes whose motivations are mushy?
Friedman pushes the responsibility for forcing companies to think about more than profit to governments and regulators, insisting that corporations must obey the “basic rules of the society”.
And it’s true that changes in company behavior mainly come from government regulation. At the time when Friedman published his column, General Motors had been facing pressure to make their cars safer. Consumer advocate Ralph Nader led a “Campaign GM” movement that aimed to air these safety concerns at the car maker’s annual meeting of shareholders, in a pioneering example of so-called shareholder activism.
Yet he found greater success in changing auto giants’ behavior through legislative action, with his 1966 book Unsafe at Any Speed prompting the U.S. government to set up bodies overseeing vehicle safety for the first time.
A focus on profit as the true north star goal of a business also brings focus to managers’ decision-making. Every boss juggles dozens of competing metrics when deciding where to allocate resources. Understanding that profit is prime can help managers navigate the winds.
