A tidal wave is now beginning to sweep through the business world, washing away a popular and long-held model of corporate management. On September 13, 1970, The New York Times Magazine published an article by economist Milton Friedman, which essentially ridiculed the idea that a corporation had any kind of “social responsibility”, other than to make a profit. In fact, he went so far as to say that businessmen who failed to recognize this fundamental fact were socialists, and “unwitting puppets of the intellectual forces that have been undermining the basis of a free society”.
Friedman's article was widely read, and highly influential. Some thought it was a factor in his being awarded the Nobel prize for economics a few years later in 1976. In that New York Times Magazine article and in several books, Friedman argued that corporate managers are employees of the shareholders, and are therefore (only) responsible to advance the interests of the owners of that business. In a free society, he argues, "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, which is to say, engages in open and free competition without deception or fraud." The corporate goal was singular and easily stated: “maximize shareholder value.”
The problem with Friedman's view is that it relies on law for its only source of ethics (if any). Deception and fraud are legal terms, that define what society will not tolerate. The law defines what can be done, and short of that, Friedman's maximization of profits means operating as close to the line as possible without crossing the line, or at least not getting caught on the wrong side of it. The fuzzier the law, the wider the latitude to operate and compete with impunity.
The results of Friedman's style of thinking have been widespread and readily apparent for many years. We have seen wave after wave of corporate scandal. We have watched corporate profits expand, while the wages of working people (their employees) have declined in relative terms. Wealth has become more concentrated. The standard of living in most industrialized nations has not significantly improved over this period in any meaningful way. Clearly, the Friedman model does not work for most of the population.
You might think that CEOs and executives might be the last to see the problems with the Friedman model, but you would be wrong. Many iconic business leaders have challenged the model, and in fact, a tidal wave seems to be building that may eventually sweep this ridiculous idea away altogether. The idea has been trounced by John Mackay of Whole Foods, which is not surprising given his industry. But even Jack Welch, the iconic former CEO of General Electric, has called the goal of maximizing (only) shareholder value “the dumbest idea in the world”. In a 1979 Business Week article, Quaker Oats President Kenneth Mason wrote: “Making a profit is no more the purpose of a corporation than getting enough to eat is the purpose of life. Getting enough to eat is a requirement of life; life’s purpose, one would hope, is somewhat broader and more challenging. Likewise with business and profit.”
A little analysis shows that putting the shareholder first, puts the cart far before the horse. The first priority always has to be the customer, for without customers there can be no business. A business must always deliver more value than it gets in return, or eventually the customers will stop coming. The second priority has to be the employees, because without them, the business owner would be doing all of the business by himself, if at all. And again, the business must pay more than the employees can get elsewhere, or they too will leave. Labor unions and management can divide the revenues of the business at the expense of customers and/or shareholders, but if they do, the customers will eventually go elsewhere, and the shareholders will soon withhold the capital the business needs to grow. Finally, the business must make enough profit to ensure that the business can continue into the future, and attract the capital it needs for growth.
But there are plenty of other business risks that must be managed too. Over fishing the waters, polluting the air, poisoning the soil, or even just alienating future potential customers, is not good business in the long run, though it may be a temptation to those who can't see beyond the immediate and singular goal of “maximizing shareholder value”. Those who see enterprise as purely competitive, or as a zero-sum game, will be tempted to take these short-cuts; while those who seek to make the world a better and a richer place for everyone, will not.
It is high time we all gave Friedman and his corporate disciples the collective middle finger, and warmly embraced the longer, more ethical view. Corporations are really nothing more nor less than loose collections of human stakeholders-- customers, employees, vendors, and shareholders-- who all have ethical and social responsibilities. Leaders, by definition, must set those ethical standards for the group, by vision and precept as well as example. What do you stand for, and what ethical issues do you support?