It has become fashionable lately to bash Milton Friedman’s doctrine, the essay that argued the sole objective of a business ought to be to maximise shareholder profit; publications ranging from the clickbaity Business Insider to august defenders of the neoliberal world order such as the FT have published opinion pieces suggesting Friedman is outdated.
Increasingly, journalists, academics, and activists are talking about ‘stakeholder capitalism’, and it seems businesses are taking note — witness P&G’s (the world’s largest advertiser) Like a Girl or We Believe campaigns, Ben & Jerry’s political tweets, or Google’s News Initiative.
But is Friedman outdated?
A critique of the critiques
The majority of the criticism levelled at Friedman rests on variations of three arguments.
The first, quoted in the BI article I shared earlier, goes like this:
To reverse inequality, companies must embrace stakeholder capitalism, Henderson said. She suggested that doing so could also help a business’ profits, contrary to Friedman’s argument.
Basically, critics argue that focusing on profit is short-termist, and is, in fact, against the shareholders’ interests. Now, there is nothing more frustrating than someone pointing out an alleged weak point in your argument, when you have explicitly addressed it:
Of course, in practice the doctrine of social responsibility is frequently a cloak for actions that are justified on other grounds rather than a reason for those actions.
To illustrate, it may well be in the long‐run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government. That may make it easier to at tract desirable employes, it may reduce the wage bill or lessen losses from pilferage and sabotage or have other worthwhile effects.
Friedman never argued companies should maximise their profit for the next quarter. If social responsibility and profit maximisation are aligned, the Friedman doctrine is all for it.
The second, and at first glance more robust challenge, is that made by Martin Wolf in his FT piece. What his argument boils down to is that companies have too much power: they can influence government & public opinion, and so they create an uneven playing field. He goes as far as to argue that corporate power is the driving force behind populism (actually, most companies value stability, and are therefore not crazy about populists — even more so when right and left-wing populists alike advocate policies such as immigration control and protectionism); Wolf therefore concludes that companies have a responsibility to use their power for the greater good, and not solely to maximise profit.
This is where we need to look for the nuance in Friedman’s argument. First of all, what do critics like Wolf mean when they talk of ‘companies’? In today’s world, large companies are rarely run by their shareholders (big Tech is the exception, not the rule); instead, they are run by managers who do not own the company. So the first issue that arises is that when managers try to do things for the benefit of the greater good instead of with a view to maximising their company’s profit, they are doing charity with other people’s money; in Friedman’s terms, they are levelling a tax on shareholders (and often other stakeholders — e.g. workers or consumers). By what right do they do so? If we as a society feel that shareholders are not taxed enough, then we have the right and the power to vote for a government that will raise taxes — by what principle do people like Wolf argue that random individuals should be given the power to levy their own taxes?
Things are different when a company’s shareholder pursues corporate social responsibility. In such cases, the shareholders are using their own money to serve their own purposes, which is fine — but here, the question that arises is, who guarantees that a business owner’s policy objectives are socially desirable? From their viewpoint, the Koch brothers are absolutely doing corporate responsibility when they fund deregulation initiatives— they believe this will ultimately benefit society. Should we be encouraging more of this? And even when business owners pursue universally approved policies (if such thing exists), who says they know how to do it?
It feels very strange to me to argue that (1) companies have too much power and influence, therefore (2) we should encourage companies to exercise their influence in ever-widening spheres. If we believe companies have too much power, the right response is to vote in governments to check it, not to mandate that they set their own arbitrary definitions of ‘greater good’ and work towards that.
Finally, the third argument against the Friedman doctrine is that we face unprecedented challenges, including rising inequality and climate change, which require urgent action; we must demand such action from corporations. Again, Friedman addressed this:
What it amounts to is an assertion that those who favor the taxes and expenditures [to address the urgent challanges] in question have failed to persuade a majority of their fellow citizens to be of like mind and that they are seeking to attain by undemocratic procedures what they cannot attain by democratic procedures.
In other words: the argument that companies should act because governments don’t is undemocratic. Perhaps, pragmatically, it’s the right thing to do: perhaps, given the risk posed by climate change, and the fact that a large number of citizens do not seem to recognise this risk, it is the right thing to do to demand institutions to work outside the normal democratic framework. But critics of Friedman who advance this line of argument should be explicit and honest with themselves: they are advocating replacing democracy with technocracy, a system where the resolution of the challenges facing humans are best left to unelected experts.
CSR, Corporate Identity, & marketing
Regardless of whether Friedman’s critics are right, more and more companies are using the language of social responsibility. Are they doing so on principle, or (as Friedman suggested) are they just doing marketing?
In my experience, the answer is a bit of both. There is definitely principle involved: the people who run campaigns such as Like a Girl are not being cynical. They genuinely believe the campaign has a positive effect on society, and are proud to work on it (I know because I worked with these marketers; I myself felt proud to work on the Always brand at the time of this campaign). At the same time, these campaigns would never see the light of day if the managers responsible did not believe they would also have a positive impact on sales. So, no, managers are not just cynical marketers; but nor are they genuinely principled, because what they are doing is not costing them anything.
What about companies such as TOMS that make charity a core element of their strategy & brand identity, or with companies that sign up for voluntary standards (e.g. Fairtrade)? These approaches are not marketing campaigns, but more akin to luxury brands deciding to incur higher costs to produce higher-quality goods. You can evaluate whether a marketing campaign was successful or not, but it’s much harder to determine whether a brand’s overall positioning is profit-maximising (LVMH may be exceptionally successful, but so is Zara); it is therefore difficult to say whether these companies would persist in their philanthropic endeavours if it turned out these endeavours were costing them money. I think the founders of such companies are trying to do good; still, one would have to be incredibly naive to not realise that the charitable component of their companies is a point of difference vs incumbents, and appeals to their demographics.
… It seems to me that Friedman was basically right. To argue that companies should exercise social responsibility to the detriment of their profit is to suggest unappointed bureaucrats should spend other people’s money for their own purposes — even when they lack the expertise to do so (after all, who says that a marketeer selling ice cream is best-placed to make policy on non-ice cream related matters?).
Again, that’s not to say companies should not be attempting to do ‘what’s right’; but it should be the companies’ owners who make this call, not the employees (this is, in my opinion, the only weak point in the Friedman doctrine: he is against shareholder activism too — but I don’t see why it’s an issue if the majority of a company’s shareholders decide to require the company to use, say, alternative energy sources; Friedman says that this is again a case of levelling taxes on minority shareholders, but that’s not fair: any capital allocation decision can be seen as levelling taxes — shareholders who do not agree with the majority have every right to sell their shares, or try to convince their fellow shareholders to vote their way). And if the founder of a new company wants it to have a social mission, kudos to them (though again, the public should really think whether they want policy to be left in the hand of unelected executives).
Finally, let’s look at all this another way: when we say that companies ought to operate towards some social good, there are two cases: either there is broad agreement on what is socially good, or there isn’t. In the former case, and regardless of whether the consensus is objectively right or not, there would be legislation in place — in the way we have laws against child labour, or in support of a minimum wage. So then there is no additional requirement on corporations other than to operate within the parameters of the law. In the latter, if there is no consensus, what ‘good’ are companies meant to be working towards?