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Weekend Briefing No. 345
Welcome to the weekend.
This week marked the 50th anniversary of a seminal moment in the world of business: the publication of Milton Friedman’s essay in The New York Times Magazine entitled “The Social Responsibility of Business Is to Increase Its Profits.”
This essay has shaped a generation of business leaders who have set a singular metric for success in business: increasing stock price. This perspective is known as shareholder capitalism. That narrow focus on shareholder value has come at a social and environmental cost.
My whole career has been about challenging Friedman’s perspective. I believe in a broader metric of success for business, which includes profit, people and planet. This is known as stakeholder capitalism or social entrepreneurship.
I believe business can be a force for good. I believe in the power of the marketplace to generate positive social and environmental change. I believe that the best solutions to complex challenges create long-term prosperity, not only financial but also social and environmental.
More personally, I’ve recently become a dad, so my conviction has deepened as I think about the legacy my generation will leave his. I know that capitalism must evolve if my son’s generation is going to have a shot at thriving.
So, this week I’m going to do something different. I’m going to focus on business leaders’ reaction to Milton Friedman 50 years on. What did he get right? What did he get wrong? The New York Times had a special issue with perspectives from 22 experts. It’s worth reading all of them, but I’ll highlight seven below.
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1976—Milton Friedman won the Nobel Prize in Economic Sciences, the sole recipient for 1976, "for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy."
189—The Chicago Boys were a group of Chilean economists that studied under Friedman at the University of Chicago. The group prepared a 189-page "Program for Economic Development" called El ladrillo ("the brick") that became the basis of Augusto Pinochet’s economic policy.
108—Milton Friedman wrote 108 books and articles.
Mark Benioff / CEO, Salesforce
I didn’t agree with Friedman then, and the decades since have only exposed his myopia. Just look where the obsession with maximizing profits for shareholders has brought us: terrible economy, racial and health inequalities, and the catastrophe of climate change. It’s no wonder that so many young people now believe that capitalism can’t deliver the equal, inclusive, sustainable future they want. It’s time for a new kind of capitalism—stakeholder capitalism, which recognizes that our companies have a responsibility to all our stakeholders. Yes, that includes shareholders, but also our employees, customers, communities and the planet. New York Times (32 minutes)
Marianne Bertrand / Economics Professor, University of Chicago
Why did this view become so dominant? One rationale was a practical one. Rather than being asked to balance multiple, often conflicting, interests among stakeholders, the manager is given a simple objective function. More important, though, was the naïve belief, dominant in the Chicago school at the time, that what is good for shareholders is good for society—a belief that rested on the assumption of perfectly functioning markets. Unfortunately, such perfect markets exist only in economics textbooks. To be fair, Friedman was most likely well aware of this shaky premise. This is probably why he writes “make as much money as possible while conforming to the basic rules of the society” rather than “make as much money as possible, period.” The idea is that laws will be written to fix the many market imperfections, laws that would help realign profit maximization with social welfare. Yet we clearly don’t have these “correcting” laws. Weak antitrust enforcement has led to monopsonistic power in the labor market and squeezing workers’ wages while polluting activities remain broadly untaxed, ravaging our planet. The government should be passing laws to discipline profit-maximization behavior, but too many lawmakers have become the employees of the shareholders—their electoral success tied to campaign contributions and other forms of deep-pocketed support. New York Times (32 minutes)
Daniel S. Loeb / CEO, Third Point
Friedman’s timeless essay resonates today as Corporate America embraces “stakeholder capitalism,” a popular concept that is inconsistent with the law. Stakeholder capitalism distorts the incentive that prompts investors to risk their capital: the promise of a profit on their investment. So, I share Friedman’s concern that a movement toward prioritizing ill-defined “stakeholders” might allow some executives to pursue personal agendas—or simply camouflage their own incompetence (until it is starkly revealed by poor shareholder returns). This is not to say that the principles of environment, social and governance (E.S.G.) have no place in corporate culture or strategy. In my experience, high standards in these areas are almost always found in great companies. New York Times (32 minutes)
Erika Carp / CEO, Cornerstone Capital Group
Friedman makes the mistake of not including two words: “long term.” Had he talked about “long-term principle and long-term consequences,” businesses might be more thoughtful about deploying financial capital, natural capital and human capital. Respect for the value of each form reinforces the long-term value of the other. Friedman also talks about “the rules of the game”—and in 50 years, the rules have changed. The emerging discipline of analyzing Environmental, Social and Governance (E.S.G.) factors in evaluating the prospects for corporate success is essential to profitability—in the long term. E.S.G. analysis is not an investment style or strategy or asset class: It is a tool for predictive insight. Friedman once said: “Governments never learn. Only people learn.” And so, investors and corporations have learned a better and more holistic way to serve our shareholders for the long term. That is free-market economics for the 21st century. New York Times (32 minutes)
Joseph Stiglitz / Nobel Prize 2001
Friedman’s position is based on a misconception of both economics and the democratic political process. Yes, in an ideal world, Congress would pass legislation to ensure that one way or another private returns and social returns to any corporate activity were perfectly aligned. But in a democracy where money matters—clearly true in this country—it is in the private interest of corporations to do what they can to make sure that the rules of the game serve their interests and not the interests of the public at large. And they often succeed.
Today the downside of Friedman’s perspective is even darker: Is it Mark Zuckerberg’s social responsibility to allow wanton disinformation to roam over his social media platform? Is it Zuckerberg’s responsibility to lobby to get rid of a pesky foreign competitor while fighting for his company to be free from anti-competitive restraints and any accountability, so long as it increases his bottom line? Friedman would say yes. Economic theory, common sense and historical experience suggest otherwise. It is good that the business community has awakened. Now let’s see whether they practice what they preach. New York Times (32 minutes)
Leo Strine / Former Chief Justice, DE Court of Chancery
In the past 50 years, instead of gains for stockholders and top management tracking gains for workers—as characterized by the period when Friedman wrote—the returns of our capitalist system became skewed toward the haves. From 1948 to 1979, worker productivity grew by 108.1 percent and wages grew by 93.2 percent, with the stock market growing by 603 percent. By contrast, from 1979 to 2018, worker productivity rose by 69.6 percent, but the wealth created by these productivity gains went predominately to executives and stockholders, with worker pay rising by only 11.6 percent during this period, while C.E.O. compensation grew by an enormous 940 percent and the stock market grew by 2,200 percent. To reverse the Friedman paradigm, companies should embrace an affirmative duty to stakeholders and society. But that’s only half the battle. Business leaders must support the restoration of fair rules of the game by government; respect the need for strong and resilient public institutions to govern a complex society; pay their fair share of taxes; and stop using corporate funds to distort our nation’s political process. New York Times (32 minutes)
Anand Giridhardas / Author, Winners Take All
Here’s the thing. Friedman militantly condemns the businessperson who enters the public realm to be charitable, to be kind to employees, to invest in the commons because he wants all of these functions to be left to government. Tragically, Friedman neglects to condemn the other, more significant way in which businesspeople enter into the public sphere: not in the spirit of charity, but in the spirit of rigging through lobbying, campaign contributions, thought-leader patronage, philanthropic reputational laundering and penance by naming rights. In fact, he endorses this intrusion. He speaks of how a company can “generate good will as a byproduct of expenditures that are entirely justified in its own self-interest”—a.k.a. neoliberal do-gooding—and says it would “be inconsistent of me to call on corporate executives to refrain.” Friedman’s vision could have worked if companies actually stayed in their lanes, leaving robust public and civic sectors free to create rules that harness the energies of private enterprise to the maximum good of all. Instead he gave companies moral cover to be ruthless and not worry about the public good—while leaving them scot-free to meddle in the public sphere for the sake of rewriting the rules. New York Times (32 minutes)
I don’t usually plug my own stuff, but it feels appropriate today. If you’re interested in exploring these concepts deeper, you might enjoy my book Profit & Purpose by Kyle Westaway. Why has Warby Parker been able to make such dramatic inroads against the behemoths in the long-established eyeglass market? How has Method revolutionized the soap aisle? Amid the cacophony of online retailers, why has Etsy seen such explosive growth, with annual sales north of $1 billion? These companies all have been disruptive because they are operating from a strong social/environmental purpose. They are proving a counterintuitive truth—purpose can drive profits. But it’s not just innovative startups that are getting in on the action. Blue chip companies such as Nike, Coca-Cola and IBM are innovating within their organization to create a positive social and environmental impact globally. This is not a trend. It’s the future of business. Based on in-depth interviews with founders, Profit & Purpose profiles a number of the most successful pioneers of this new way forward, telling the stories of 13 social enterprises ranging from non-profits like charity: water and DonorsChoose.org; for-profits like Method and Burt’s Bees; startups like Etsy and Warby Parker; and multinational corporations with market capitalizations in the hundreds of billions like Coca-Cola, IBM and Nike. I dig beneath the public stories of these organizations’ success to reveal how they have harnessed the power of purpose. Taking readers behind the scenes, I show how these leading social enterprises progressed from concept to scale, how they overcame common pitfalls, and how they managed to find an optimal balance between their mission and their business mandates. I reveal that though there is no magic bullet formula that guarantees success, there are seven core practices that distinguish these market leaders from the pack of contenders. Profit & Purpose takes the literature on social entrepreneurship an important step forward, providing practical tools for turning good intentions into breakaway success. Amazon
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Shareholder value is the dumbest idea in the world. –Jack Welch
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