Let’s Make a Sustainably Better Future

What is the Social Responsibility of Business?

Milton Friedman was right. Why increasing profits helps us all.

We already have a framework that allows businesses to efficiently decide among competing priorities.

In this series, I explore the current best hope of the ESG movement, stakeholder capitalism. Its advocates want stakeholder capitalism to replace shareholder capitalism as the driving factor behind corporate actions.

But are we pinning our hopes on a doomed strategy? Doomed why? Read on to find out. This is the Stakeholder Capitalism series, Part 6.

Milton Friedman said it first and said it well

It was 1970, and famed economist Milton Friedman published an article in the New York Times Magazine entitled “The Social Responsibility of Business is to Increase its Profits.”

To say it made waves is an understatement.

Friedman had actually formulated some of his ideas already in 1962 in his book Capitalism and Freedom, but the article got wider distribution. In it, Friedman said:

There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Under Milton Friedman’s formulation, broadly followed by corporations in the West these last fifty years, the “whom” corporations are responsible to is crystal clear: shareholders.

Shareholders own the company. As managers, we are the agents of shareholders, and we are legally bound to further their interests.

Why is shareholder capitalism better than stakeholder capitalism?

Shareholder capitalism has two very significant advantages over the bloodbath that otherwise awaits us down the stakeholder way. For more on that dark path, see Why “Do the Right Thing” is a Ridiculous Motto.

Firstly, shareholder capitalism is the current approach consistent with the Rule of Law and required by our legal system, at least in the United States. The Chief Justice of the Delaware Supreme Court has put it this way:

Within the limits of their discretion, directors must make shareholder value their sole end, and other interests may be taken into account only as a means of promoting shareholder welfare.

And the second advantage is that shareholder capitalism solves the very real problem of competing priorities because it puts shareholders first.

Shareholders First provides an organizing principle and rationale for how to allocate resources and set priorities

Now, this creates an easy objection. Remember when President Trump caused outrage by saying America First?

People assumed America First means America Alone. But that’s not what it means, and Trump said at the time that’s not what it means.

Similarly, Shareholders First does not mean Shareholders Alone. You will never find a CEO who says they can succeed without the active and engaged participation of their employees, suppliers, and customers.

Companies already identify many stakeholders as key to their success. The point is that companies pay attention to stakeholders insofar as it supports delivering shareholder value. No more, but also no less.

How a good corporation should behave in a stakeholder world

Remembering that your obligation is to deliver shareholder value, ask what stakeholders are most critical for you to do that and then ask what actions will have the greatest impact on each stakeholder group.

Anyone who has gone through a so-called Materiality Assessment as part of their company’s corporate social responsibility program knows exactly what I’m talking about: who is most important to your success, and where can you have the greatest impact?

• If you are a consumer goods company, you are highly exposed to public perception, and so you must manage your brand image carefully. Thus, if you are Nike and you get a reputation for making your products in sweatshops, you destroy shareholder value, so you do something about it.
• If you are Nestle and seen as being a major contributor to plastic waste in the world, you do something about it, because if your brand becomes tarnished, you won’t deliver shareholder value.

This dynamic of responding to stakeholder concerns to drive shareholder value is not new, by the way. It’s been with us continuously for decades. The Nike example is from more than 25 years ago.

We know how to manage corporations to deliver shareholder value while also meeting key stakeholder needs. We just need to let companies do it.

Be well.

James Bellerjeau, JD, MBA, ran the global sustainability program of an S&P 500 company. He also served as General Counsel for twenty years.

About James Bellerjeau. More of my articles. Let’s connect on LinkedIn!

Get the inside scoop and access all writers on Medium. Join with my referral link and you’ll help ensure that authors get paid for their work.