I’m no economist. This doesn’t seem to deter my daughter from seeking my help with her Economics A level homework – much to her detriment when I offer a view and it invariably turns out to be incorrect. But, I re-state – I’m no economist, so when I received the Thinking Ahead Institute’s[1] Twitter notification this week, announcing the winner of the @savvyinv awards winning paper – “Milton Friedman’ hazardous feedback loop” by Duncan Austin[2] – I was in two minds as to whether I should explore further. But I was curious, so explore I did and was glad as the paper – and further digging around it – uncovered a debate that I do find both important and interesting: should companies be managed for the benefit of shareholders, or should they consider the interests of a broader set of stakeholders when setting their policy?
Austin’s article considers a paper authored by Friedman 50 years ago and published in the New York Times under the heading “The Social Responsibility of Business is to Increase its Profits.” One quote from Friedman’s piece perhaps explains the contention: “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…” Further, it is argued that companies should lobby government if by so doing they can change a policy which, in turn, would lead to greater profitability and with that profitability the scope to lobby for even more change – the hazardous feedback loop of the article’s title. If all companies do this, each with their own profit-maximising agenda then where is the scope for government consideration of social and environmental initiatives that are not profit-seeking in their nature?
In Friedman’s defence Austin contextualises the thinking prevalent at the time of the NYT piece as one characterised by ‘complete markets’ where it is deemed there is certainty and order in the way things are done; where simplicity and linearity are sought out of complexity. (As an aside, for a fuller defence of Friedman and interesting historical reading I recommend “Stop Blaming Milton Friedman”.[3]) By contrast, today’s thinking recognises complexity and the interplay and conflicts of the multiple actors in a system – a challenge that Austin refers to as ‘fixing the “in-between-ness” of a system.
The 50th anniversary of the publication prompted a number of articles and Andrew Hill of the FT observed in his piece “When Milton Friedman, prophet of profit, met a pandemic”[4] that it is a curious year to observe corporate behaviour, given the very divergent outcomes facing businesses. Some companies are well positioned to go above and beyond their ‘business as usual, profit maximising’ remit to support those companies facing ruin. He also noted the pandemic’s focused attention on the relationship between companies and governments – where some companies have stepped up to fill the void left by political inaction.
The role companies play in society is an important one and it is fitting that this issue continues to be debated. I do believe the pace of change in boardroom thinking seems to be accelerating, as evidenced in a number of issues such as diversity in all its forms and matters relating to ESG. The challenge is to ensure that this is not simply lip service; that there is a genuine intention to reflect the interests of a much broader constituency when forming corporate strategy and that the search for pure profitability is not to the detriment of society or, indeed, result in the tragedy of the commons.
[1] @InstituteTAG
[2] https://www.responsible-investor.com/articles/duncan-austin-milton-friedman-s-destabilising-feedback-loop
[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3552950
[4] https://www.ft.com/content/10ac7863-2b3e-46a1-866b-2576b3be2d95, FT Oct 22 2020
