The 50th anniversary of the publication of Milton Friedman’s essay advocating profit (within the law) as the primary purpose of the corporation in the New York Times was observed with reactions and responses from a range of experts. In our view, most missed the point. Unless otherwise explicitly noted and disclosed to investors in the initial public offering documents or in a structure like a public benefit corporation the corporation’s primary purpose is to create sustainable shareholder value over the long term. That requires careful attention to employees, customers, nd suppliers as well as risk management that considers supply chain, climate change, and, as we have now learned, pandemics.
ESG concerns are the result of increasing awareness of the inadequacy of GAAP in helping investors and boards manage risk. And we can never put corporations in the position of making decisions that can only be made by government. Accountability to the market is ideal for some decisions, but others can only be made by those accountable to voters.
We like Binyamin Appelbaum’s response, explicitly addressing the superficial and insincere promises of stakeholder considerations from the Business Roundtable last year. [Emphasis added]
Instead of redefining the role of the corporation, we need to redefine the role of the state. Friedman’s essay was part of his broader campaign to revive faith in the power of markets. He and his intellectual allies argued that if corporations focused on making money, and government got out of the way, the economy would grow and everyone would benefit.
For decades, policymakers have embraced his advice. They have slashed taxes; sought to undermine unions; and reduced some kinds of regulation, notably in financial markets. Regulators made it easier for companies to shovel money to shareholders by repurchasing their own shares, and companies increasingly compensated their executives with shares of company stock, aligning their financial interests with those of the company’s other shareholders.
It’s been an experiment on a grand scale, and the results are depressingly clear. Growth has slowed, and much of the available gains have been pocketed by a small minority of very wealthy Americans. The shareholding class keeps getting richer; the rest of the nation is falling behind. There is an air of desperation about the incessant efforts to address these problems by jawboning corporations to be better citizens: the pleading with Facebook to take responsibility for the filth it publishes; the campaigns to convince banks to steal less money from customers; the public shaming of restaurants that refuse to give paid leave to sick employees.
There may be some value in challenging executives who are careful to tip their waiters handsomely, who reliably put water bottles into recycling bins, who think of themselves as committed to social justice, to bring those values to the office. But promises are cheap, and corporations are particularly likely to abandon benevolence during downturns — just when it’s needed most. Last August, with great fanfare, the Business Roundtable revised its statement about the purpose of corporations, acknowledging obligations to employees, suppliers and the broader community. But Tyler Wry, a professor at the University of Pennsylvania, found that companies that had signed the Business Roundtable statement were more likely than other big companies to announce layoffs in the early months of the coronavirus pandemic — even as they paid out more money to shareholders.
Government remains the most powerful means to express our collective will. The necessary solution is to create stronger incentives for good behavior and laws against bad behavior. Instead of urging power companies to burn less fossil fuel, tax carbon emissions. Instead of pleading with McDonald’s to raise wages, raise the federal minimum wage. Instead of shaming Amazon for squeezing small business, enforce antitrust laws. Government also needs to do more to support economic growth. Friedman’s negative vision of government has helped to obscure the ways the public sector can help the private sector, for example by investing in education, infrastructure and research.
The outsize political influence of corporations — and of those made wealthy by corporations — is certainly one reason for the widening gap between what the law requires and what many Americans would like the law to require. But there is no sense in waiting for corporations to disarm voluntarily. The rules must be changed, and the process begins at the ballot box. Corporations have a valuable role to play in American society, and they contribute primarily by trying to make money. Friedman’s narrow point is mostly correct.
The missing part is the role of government in ensuring that those profits do not come at the expense of society. The economist Robert Solow once observed that when he listened to his liberal colleague John Kenneth Galbraith complaining about the flaws of markets, he found himself reminded of the virtues. When he listened to Friedman, by contrast, he was reminded of the flaws. After 50 years of listening to Friedman, it’s time to do something about the flaws.Opinion | 50 Years of Blaming Milton Friedman. Here’s Another Idea. – The New York Times