On September 13, 1970, the NY Times Magazine published an essay by University of Chicago economist and 1976 Nobel Prize recipient Milton Friedman - “The Social Responsibility of Business is to Increase its Profits.” Friedman’s essay turned out to be one of the most influential ever published in the world of business. To mark its 50th anniversary, the NY Times reached out to 22 business leaders and top economists and asked their opinion on what Friedman got right and wrong in his essay.
“Friedman, who died in 2006 at the age of 94, was no mere economist; he was a kind of celebrity,” noted Andrew Ross Sorkin, NY Times financial columnist and editor. “He became a regular on the talk-show circuit. PBS even gave him a 10-part series. His economic theories, among the most consequential of the 20th century, still hold sway over large parts of corporate America, maybe none more so than this 1970 manifesto on corporate governance.”
“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business,” wrote Friedman in his 1970 essay. “He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which 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.” Business concerns beyond making profit, - such as “promoting desirable social ends,” or “providing employment, eliminating discrimination, avoiding pollution and whatever else,” - amounted to “preaching pure and unadulterated socialism.”
To better appreciate the importance of Friedman’s essay, let’s take a brief look at the historical context around the time it was published.
From the 1930s to the 1970s, corporations were generally run for the benefit of all stakeholders. It was a time when the interests of business and society were closely aligned, resulting in both high profits and decent livelihoods, thus making it possible for large portions of the US population to achieve a middle class life-style and aspire to what we think of as The American Way of Life.
Keynesian economics, named for British economist John Maynard Keynes, was the prevailing economic model during this period. It was a pragmatic, mixed model of capitalism, based on a predominantly private sector economy but with an appropriate role for government, such as the New Deal during the Great Depression and the Interstate Highway System and GI Bill in the post-WWII years.
Keynesian economics started to fall out of favor with the ascent of the Chicago School of Economics in the 1970s, where Friedman was its most prominent member. Its views became highly influential over the next several decades, especially with former US president Ronald Reagan and Federal Reserve Chairman Alan Greenspan. Many business leaders also embraced these views. For example, in September of 1997, the Business Roundtable (BRT), - an association of CEOs of major US companies, - issued a Statement on Corporate Governance which argued that “the paramount duty of management and of boards of directors is to the corporation’s stockholders; the interests of other stakeholders are relevant as a derivative of the duty to stockholders,” - pretty much along the lines of Friedman’s 1970 essay.
Beyond the primacy of shareholder value, the Chicago School advocated a nearly universal trust in the inherent wisdom of markets, and a highly circumscribed role for government policies and regulations. These influential Chicago School views may well have contributed to the lack of government oversight that led to the 2008 financial crisis.
But, things started to change after the financial crisis. In August of 2019, the BRT released an updated statement on the Purpose of a Corporation, which overturned it’s 22-year old commitment to shareholder primacy to now emphasize a “Commitment to All Stakeholders” and to “An Economy that Serves All Americans.” This new statement places shareholder interests on the same level as the interests of all its other stakeholders, including customers, employees, suppliers, and communities. It essentially disavowed Friedman’s views, and has now been signed by over 220 CEOs.
Let me conclude by summarizing the opinions of seven business leaders whose views on Friedman’s 1970 essay are included in the NY Times 50th anniversary article.
Marc Benioff - CEO of Salesforce. Benioff said that he didn’t agree with Friedman’s essay when he first read it in business school in the 1980s. In his opinion, the essay “influenced - I’d say brainwashed - a generation of C.E.O.s who believed that the only business of business is business… Just look where the obsession with maximizing profits for shareholders has brought us: terrible economic, racial and health inequalities; 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.”
Martin Lipton - senior partner at Wachtell, Lipton, Rosen & Katz. Lipton wrote that “The Friedman doctrine precipitated a new era of short-termism, hostile takeovers, junk-bond financing and the erosion of protections for employees and the environment to increase corporate profits and maximize value for shareholders. This version of capitalism was ascendant in the 1980s and continued until the 2008 financial crisis, when the perils of short-termism were vividly illustrated and the long-term economic and societal harms of shareholder primacy were becoming increasingly urgent. Since then, the Friedman doctrine has been widely eroded, as a growing consensus of business leaders, investors, policymakers and leading members of the academic community have embraced stakeholder capitalism as the key to sustainable, broad-based, long-term American prosperity.”
Howard Schultz - emeritus chairman of Starbucks. What does it mean to say that “business” has responsibilities? “I’ve asked this question since opening my first coffee shop in 1986. My answer, a rebuke of Friedman’s single-minded focus on profits, appeared in our company’s original mission statement: ‘We wish to be an economic, intellectual and social asset in communities where we operate.’ We would do this not at the expense of profits, but to grow them… In 2013, I stood in front of Starbucks shareholders and posed this question: ‘What is the role and responsibility of a for-profit public company?’ Friedman’s flawed answer is not his legacy. His legacy is the question itself - which today’s leaders must answer with a renewed commitment to balancing moral purpose and high performance.”
Alex Gorsky - chief executive of Johnson & Johnson. “Friedman is owed respect for his analysis, but this highlights the ways in which investors and society have evolved over 50 years. Employees care about how companies function. Many of them are also a company’s shareholders, and they are calling on leadership to take action on societal issues… Revisiting this essay is a welcome exercise, and a reminder of the importance of self-scrutiny.”
Ken Langone - a founder of Home Depot. According to Langone, one of the most fundamental truths in capitalism is that in any voluntary exchange both parties benefit. “But if we ignore Friedman’s crystalline perception - that profits are the driving focus - then the entire mission, good will included, falls apart. When we turn the idea of profit into a callous slur, as Friedman’s laziest critics often do, we are demeaning the essential propelling force that enables all these interconnected good works to occur… The best way to understand Friedman and the enduring strength of his ideas is to realize that he is eloquently articulating what Americans have always known in our hearts and what made our country so resplendent.”
Larry Fink - chief executive of BlackRock. “Some historical context is critical to understanding Friedman’s opinions. This was a world that was significantly less transparent, across a wide range of business practices, and one that was profoundly U.S.-centric. His essay was penned in an atmosphere where potential constraints on free markets were very real… That was a very different world from the one we live in today, in which free markets, technology and globalization have lifted hundreds of millions out of poverty - but have also significantly increased inequality. With that in mind, and in a context where developed-market governments are far less interventionist, I think that companies can and must do more to contribute and serve all of their stakeholders… I don’t mean that companies should do this at the risk of their bottom line. If a company goes out of business, it can’t help anyone. But companies can and should find ways to align their own success with that of the communities where they operate.”
Darren Walker - CEO of Ford. “I am a proud capitalist. I believe in the market’s unique power to lift lives and livelihoods, especially when it’s fair and inclusive. After all, Adam Smith himself admonished that ‘no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.’ But ultimately Friedman ignored that in a democratic-capitalist society, democracy must come first. ‘We, the people’ grant businesses their license to operate - which they, in turn, must earn and renew.”
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