The Business Roundtable is a non-profit organization consisting of chief executive officers of major U.S. companies. For years they have advocated a shareholder theory of the corporation that places the interests of stockholders over the interests of other business stakeholders, such as employees or communities. Recently, the organization issued a statement that “Redefines the Purpose of a Corporation to Promote ‘An Economy That Serves All Americans’.” According to the organization, “Each of our stakeholders is essential.”
Many commentators hailed this change in language, some even going so far as saying it repudiates a position advocated by Milton Friedman nearly 50 years ago. For example, University of Chicago law professor Eric Posner, writing in The Atlantic, simply declared, “Milton Friedman was wrong.”
In an essay published in 1970 in the New York Times Magazine, Friedman wrote that “the social responsibility of business is to increase its profits,” which has become known as the Friedman Doctrine. This is what Friedman said:
“In a free-enterprise, private property system, a corporate executive is an employee of the owners of the business. He has a 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.”
Unfortunately, both business executives and critics of Friedman misrepresent his argument, suggesting that he advocates maximizing profits at any cost. For example, in his Atlantic essay, Posner writes “Friedman argued that because the CEO is an ’employee’ of the shareholders, he or she must act in their interest, which is to give them the highest return possible.” It’s the period after the word “possible” that is problematic. Placing a period before the qualification Friedman added implies he does not support any constraints on the profit-making activities of businesses, which Friedman never did. Simply stated, it is not true that Friedman’s essay “seemed to absolve corporations of difficult moral choices and to protect them from public criticism as long as they made profits,” as Posner writes. In contrast, business executives must consider the moral choices of their decisions.
First, Friedman said it’s “generally” appropriate to make as much money as possible, not absolutely required. Second, he adds the necessity of “conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” This second condition imposes considerable restraints on profit-making activities.
In an essay entitled “Smith, Friedman, and Self-interest in Ethical Society” published in the Business Ethics Quarterly, my colleague Farhad Rassekh and I complained about scholars and other writers who misrepresent Milton Friedman as well as Adam Smith. We wrote: “It is common in many business ethics textbooks to find Smith and Friedman interpreted as follows: People should pursue their self-interests; businesses should do whatever improves their financial position, even if others are harmed; and in some way the ‘invisible hand’ ultimately makes the effects of such actions right for society. Is this interpretation correct?” Our answer was a simple “no.”
Prior to publishing our paper, my co-author sent a draft of the paper to Friedman, who replied, “As you recognize, I have been very unhappy about some of the interpretations that have been placed on my position.”
After studying Friedman’s writings, Rassekh and I concluded the following:
“Although Friedman argues that business executives should focus on profit maximization, he does not condone all behaviors that increase financial returns. Quite explicitly, he places four restrictions on profit seeking: Business people must obey the law, follow ethical customs, commit no deception or fraud, and engage in open and free competition. The last restriction means political rent-seeking and anti-competitive behavior in any form must be avoided. For Friedman, social responsibility means pursuing one’s interests (such as making a profit) without adversely interfering with the freedom of others, so that everyone can freely enter into agreements ‘with their eyes open.'”
There are many things businesses have done in the interest of maximizing profits that Friedman would never have condoned because they violate ethical requirements or other conditions he places on businesses, such as mistreating workers, discharging harmful pollutants into the environment, withholding information about dangers created by their products, and abandoning communities in order to produce in lower-cost countries.
I wonder what would have happened if businesses in fact followed the Friedman Doctrine as Friedman actually declared it, and if commentators accurately represented Friedman’s position on the issue. I suspect the whole debate about stockholders versus stakeholders would have ended years ago and anything the Business Roundtable said today about the issue would have been a nonevent.