It was possible, back in 1970, to read an essay by an eminent libertarian economist in the The New York Times Magazine. Milton Friedman’s byline appeared under a headline that both grabbed attention and accurately distilled his argument: “The Social Responsibility of Business Is to Increase Its Profits.”
The CEO is an employee of shareholders, wrote Friedman, and his “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.” He should be charitable on his own time, and with his own money.
Friedman’s essay remains influential 50 years later, but its ideas have always been contested. In August 2019, the Business Roundtable, a group of nearly 200 chief executives of the country’s top businesses, released a “Statement on the Purpose of the Corporation.” From 1997 onward, previous versions of the statement had endorsed the idea that corporations exist primarily to serve shareholders. The new statement omitted such language and instead affirmed a “commitment to all of our stakeholders” (emphasis in original): customers, employees, suppliers, “the communities in which we work,” and shareholders, all listed in that order.
The new statement has been drawing criticism ever since, from opposite directions. Some prominent conservatives and libertarians have criticized the Roundtable for abandoning Friedman’s wisdom and thereby aiding socialism and corporatism, and also for undermining managers’ accountability to shareholders. The Wall Street Journal has lashed the statement repeatedly, in one case running excerpts from Friedman’s essay as a rebuke. Contributors to National Review’s new “Capital Matters” project have taken the same view. Nikki Haley, widely considered a contender for the Republican presidential nomination in 2024, said that the Roundtable had turned its back on capitalism.
The other major line of criticism, mostly from the left but also from activists associated with populist nationalism, is that the CEOs haven’t changed enough. Their alleged commitment to employees hasn’t kept many of them from instituting large-scale layoffs during the pandemic. Even before then, Senator Elizabeth Warren (D., Mass.) had said that corporate commitments to stakeholders besides their shareholders should be put into law: We can’t trust CEOs “to make that change voluntarily.” To prove they mean what they say, she explains, the executives should support her “Accountable Capitalism Act,” which among other things requires that 40 percent of seats on corporate boards go to “worker representatives.”
The first group of critics takes vindication in the second: The business group, they say, is just encouraging the Left by surrendering capitalist principles. But both sets of criticisms are mistaken. They misunderstand the CEOs’ statement. The conservative critics make a deeper error, though, tying themselves to a view of business that is unrealistic and politically self-destructive.
The error about the statement is simple: The critics took it to be a repudiation of previous business practices and a promise of change. The conservatives were upset about the repudiation, and both sides were skeptical of the promise. These reactions ignored the Roundtable’s own explanation for its revision: It wanted to align its description of the purpose of a corporation with the actual views and behavior of its members. CEOs already saw themselves as serving their customers, employees, and so forth, as well as their shareholders. They weren’t pledging to start serving them.
A forthcoming study from the Harvard Law School Program on Corporate Governance aims to puncture the “illusory promise” of the statement but mainly succeeds in proving that it has an illusory premise. Two researchers contacted the companies whose CEOs signed the statement to see if their boards of directors had agreed to the decision. Only one of the 48 companies that responded said its board had done so. Their study concluded that the CEOs did not mean for the statement to lead to major changes in their conduct or their companies’ conduct. This finding should not be scandalous or even surprising, though, given that nothing in the statement suggested major changes were needed or on the way.
The Friedmanite criticism of the Roundtable is at least based on a core of real disagreement. There is no doubt that Friedman, whose essay accused businessmen who say that businesses have responsibilities other than making profits of “preaching pure and unadulterated socialism,” would have hated the organization’s statement. But one can admire much of Friedman’s career while thinking this essay was not his most rigorous work.
In the first place, even making allowances for hyperbole, it is simply and obviously untrue that our choices are either the single-minded maximization of profit by businessmen, or socialism. Jamie Dimon, the chairman and CEO of JPMorgan Chase and chairman of the Roundtable, can believe that providing useful employment is a worthwhile goal in its own right without believing that the government should own a significant number of businesses. He does not fall into logical incoherence in affirming the first view and rejecting the second.
Friedman wrote that a CEO who spends corporate money charitably is taking money that would otherwise go to shareholders, customers, or employees, “in effect” imposing taxes and acting as a civil servant. Among his examples of such misguided actions were attempts to reduce pollution “beyond the amount that is in the best interests of the corporation or that is required by law,” and “to hire ‘hardcore’ unemployed instead of better qualified available workmen.” This spending should, in Friedman’s view, be done either by the stockholders, employees, and customers on their own, or by a government operating under constitutional checks and balances.
But in some cases, companies can advance social goods more readily than either individuals or governments. Refraining from pollution may sacrifice less in profit to a company than funding a government clean-up effort would cost. A company might be better able to help people who have been unemployed a long time find productive work than the government or a non-profit group. Libertarians and conservatives ought to be open to this possibility if anyone is.
Recall that Friedman had written that corporate managers should follow shareholders’ wishes, which will “generally” be for financial rewards. Some shareholders may, however, have desires that include minimizing pollution or furthering a charitable project, and others may be indifferent to it up to a point. Friedman warned that stockowners may fire an executive whose sense of “social responsibility” reduces their net worth, and that customers and employees may desert him too. But this observation cuts against his argument, not for it. It means that there is an inbuilt restraint on corporate management’s do-gooding that undermines shareholders’ interests; and it means that the “tax” being imposed is voluntary, which is to say that it’s not very much like a tax.
After arguing on principle, Friedman turned to a point of political strategy. Businessmen who give speeches about social responsibility, he wrote, “strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats.”
The Roundtable statement does not, of course, suggest that seeking a return for shareholders is wicked; it reiterates the goal. But these words have not preempted the Friedmanite criticism. Four distinguished Hoover Institution fellows, including former secretary of the Treasury and secretary of state George Shultz, have suggested that instead of saying that they wish to serve employees, suppliers, and so forth, business executives should be explaining how the pursuit of profit for shareholders ultimately benefits everyone. Left unexplained is why they cannot do both. The stylized model of the purely profit-seeking enterprise is illuminating about the good it can do. But it is not a description of how businessmen actually operate, nor an ethical ideal from which all real-world departures should be condemned.
Haley, intending to critique the Roundtable statement, wrote that “a company that cheats its customers, mistreats its workers and abuses its community won’t be around long.” The statement is intelligible as a criticism, though, only if corporate executives are obliged on principle to stay confined to a rhetorical straitjacket: only if, that is, it is acceptable to say, “We will seek profit by treating our customers and employees well,” but unacceptable to say, “We will seek profit and treat our customers and employees well.”
Large businesses are complex social institutions that answer to multiple constituencies. Their leaders could pretend otherwise and declare that in their jobs they think only and ever about stock prices. Would that pretense make it easier or harder for them to resist the unwise demands of Senator Warren and her allies? Friedman’s latter-day disciples may find that they have undermined liberty and shareholders’ interests by defending them in too doctrinaire a fashion.
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