This piece in Bloomberg defends Friedman’s position by saying doing what is good for stakeholders strengthens the business eg, earns workers’ loyalty, enhances the brand in the eyes of consumers, lowers regulatory or legal risks, etc and hence benefits shareholders eventually in the long run. For a more detailed or perhaps harsher critique of progressive capitalism or focus on ESG (Environmental, Social, Governance), read Aswath Damodaran’s take on the subject here
“Fifty years ago this month, the economist and Nobel laureate Milton Friedman published his famous essay in the New York Times Magazine arguing that, as the headline writer put it, “The social responsibility of business is to increase its profits.”
This view — that business leaders should focus on creating as much value as possible for the owners of their company rather than on improving outcomes for a broader set of stakeholders like workers, suppliers and society as a whole — is now under attack. But it is well grounded in solid economics, common sense and practical considerations. It is often misunderstood, and it admits nuance and a role for public policy. Corporations that have publicly moved away from this position are inadvertently demonstrating its durability.
Friedman’s characteristic bluntness makes his ideas easy to caricature, even though he was (more or less) correct. It’s understandable that many readers tend to miss the subtleties when he instructs executives that their responsibility “generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
shareholder capitalism does not argue for the pursuit of short-term value over long-term value. There is much debate over the appropriate time horizon for business decisions and the extent to which companies are excessively focused on short-run profits, but putting long-term value ahead of immediate gains is perfectly consistent with shareholder capitalism as a management strategy.
To maximize value over longer time horizons, corporations must treat workers, customers and suppliers fairly. Some corporations may have enough market power to earn monopoly profits and to mistreat workers. But the extent to which these are problematic is exaggerated. Especially over a longer time horizon, it is in a corporation’s interest to treat close stakeholders well.
Maximizing shareholder value over the long term does sometimes mean engaging broader social and political issues. I wish the business community had been more outspoken over the past several years during periods of social unrest, in part because basic social stability is necessary for a productive business climate. Businesses should defend the liberal international order against attacks, including from the White House. Those institutions, norms, and culture have been a bedrock of prosperity for seven decades.
In addition to treating workers well, it may be in business’ long-term interest to invest more in worker training than is standard practice. Some businesses — for example, Walmart — are paying workers more and building their skills in part because it might increase their profits. These experiments, if successful, could lead to better management practices that help workers and are consistent with shareholder capitalism.
Business policy can help align shareholder capitalism with broader social objectives. As a way to align management decisions with long-term, rather than short-run, corporate and social interests, economists Sanjai Bhagat and Glenn Hubbard suggest compensating senior corporate executives with shares of stock that can’t be sold, and with options that can’t be exercised, until a year or two after executives leave their company. Shareholders could also require managers to study how issues like climate change affect long-term value to improve business decisions in a way that could also benefit the environment.
There is more debate about what corporations should do than about what they are doing. But I suspect that many corporate leaders who are announcing a move to stakeholder capitalism are doing so for one reason: Given the preferences of their customers, this corporate branding will increase their profits. That irony helps prove the rule.”
If you want to read our other published material, please visit https://marcellus.in/blog/
Note: the above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India as a provider of Portfolio Management Services. Marcellus Investment Managers is also regulated in the United States as an Investment Advisor.
Copyright © 2022 Marcellus Investment Managers Pvt Ltd, All rights reserved.