The author, former editor of the FT, is head of industrial policy at Policy Exchange
Was Milton Friedman right when he said in 1970 that corporate social responsibility was to make as much money as possible for shareholders? An influential group of critics, in business and academia, think he was fundamentally wrong.
Friedman’s harmful influence, these critics say, is partly responsible for causing or aggravating some of the world’s most serious problems, including environmental degradation and rising inequality. This will only be corrected, they say, if the shareholder primacy doctrine is abandoned.
This issue has come to the fore as the debate over what interests corporations should serve has intensified. Unilever, for example, has been attacked for emphasizing environmental and social issues at the expense of shareholder value. Larry Fink, boss of BlackRock, the US institutional investor, has been accused of a ‘wake-up call’ for insisting that companies should pay more attention to the interests of stakeholders, such as employees, local communities and society as a whole.
Undeniably, public expectations of how companies should behave have changed. Big, publicly traded companies are under pressure from investors, customers and employees to do more to protect the environment and help fight other social ills.
There was a famous case in 2018 when Google pulled out of an artificial intelligence contract with the Department of Defense after protests from employees that the technology could be used in a way that violates human rights. of man. If companies want to retain a loyal and engaged workforce, they must demonstrate that their values are aligned with those of their employees.
In response to these pressures, many companies are moving in a more stakeholder-friendly direction, unhappy with those who think they are going too far, as in the case of Unilever, without satisfying those who want them to go much further. Some members of the anti-Friedman camp favor an overhaul of corporate law, forcing corporations to adopt a social purpose that goes beyond profit.
One model is the public benefit corporation, a new American legal form, which allows corporations to focus on broader social goals, as outlined in their founding charter, rather than profit maximization. Some proponents argue that PBC status, which has been adopted mostly by private companies, should be extended to all major publicly traded companies. The aim is to deflect business from shareholder primacy, which has long been a central feature of corporate law. Would such a change be good for society? The answer is: almost certainly not.
Shareholder capitalism, with competition among for-profit enterprises as its driving force, is the means by which society’s resources are used in the most productive way for all. At the heart of the system is corporate accountability to shareholders; the measure of success is their ability to maximize long-term shareholder value. This does not mean that companies are run solely for the benefit of shareholders. This means that administrators have a clear criterion to guide their decisions, and that this criterion is not so restrictive as to cause them to behave in an “antisocial” way. It is good for companies to have a raison d’être, linked to their activity and more likely to excite employees than “maximizing shareholder value”, but this can be done within the current legal framework.
Shareholders are often accused of encouraging short-termism, but excessive long-termism — sticking with an underperforming company for too long — is at least as serious a problem. This is where shareholders, including activist hedge funds, can play a helpful role. Freeing companies from shareholder pressure would weaken a source of dynamism in the market economy.
Letters in response to this article:
Shareholder capitalism is the opposite of competition / By Jose Milheiro, Porto, Portugal
Redefining the role of business in society enjoys broad support / By Chris Turner, Campaign Manager, Better Business Act, London E1, UK
Social responsibility is how companies become a force for good / By Klaus Schwab, Founder and Executive Chairman, World Economic Forum, Geneva, Switzerland