Friedman was right; stakeholderism is still not the answer
Author: Bas van de Mortel
March 2, 2021
The interest in Corporate Social Responsibility (CSR) is certainly not new. However, the past years there is a growing attention for the social and environmental impact of international business because of increasing awareness of global problems such as global warming and poverty. During the corona pandemic in which we still live, there is an even bigger call to change our way of living. “We should get out of this crisis sustainably”, is an often-heard phrase. Although a lot of people would approve this call, the question is where this responsibility of changing our collective behavior lies. Last year, it was half a century ago that the liberal economist Milton Friedman published a pathbreaking essay about CSR, in which he states that the only responsibility of business is “to use its resources and engage in activities designed to increase its profits…”. Is there a responsibility for business to change its operations to tackle growing social and environmental problems? Or was Friedman right in his view that the only responsibility for businesses is to generate as much money as possible?
Undermining the free society
“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business”. As an employee of the owners, one has the responsibility to serve their interests, the interests of the stockholders. Most of the time, the interest of the stockholders is to increase the value of the firm as much as possible. It is a straight-forward objective and there is a clearly defined contractual arrangement between the owners of the enterprise and the corporate executive.
If one claims that corporate executives have other responsibilities than serving the interest of their employers, the stockholders, then these responsibilities are against the interest of their employers. What are these social responsibilities and how should a corporate executive know them? Contrarily to the clearly defined responsibility towards their employers, these ‘social responsibilities’ are undefined and vague.
If businessmen have other social responsibilities, can they select themselves what the social interest is? If they choose these social interests themselves, they take over the responsibilities of the public servant, they take over the function of politics. Politics should balance the interests of people, planet, and profit. In a democratic society this public function should not be exercised by corporate executives who are chosen by private groups, without public mandate. Giving corporate executives other social responsibilities than acting in the interest of their stockholders would, according to Friedman: “…thoroughly undermine the very fundamentals of our free society…”.
The arguments used by Friedman are not less valid 50 years after they were published. One could even think that because of increasing polarization in society and a growing doubt about the concept of truth, businesses should not take other responsibilities on their shoulders than the responsibility to serve their stockholders.
‘Stakeholderism’ itself is the anger in societies which are divided by gender, race, and income inequality, since it is nearly impossible to balance all the different interests of people, especially if they are very divided. If a company executive tries to do good to the one, he harms the other.
Walk the talk
An interesting research last year found that many of the firms who signed the Business Roundtable declaration of August 2019 performed worse than their peers who did not sign this declaration. The declaration states that the signatory does not merely strive for maximizing profits but delivers value to all stakeholders. However, the signatories had higher rates of environmental and labor-related compliance violations and spent more on lobbying policy makers. Apparently, if corporate executives try to balance all different interests and their purpose is not just window-dressing, they perform worse than their peers.
Alex Edmans, a professor of Finance at the London Business School, published a book last year called “Grow The Pie'', in which he describes how companies can create both profit and social value. He describes how corporate executives can maximize their profits not by targeting profit directly, but by being driven by purpose, “the desire to serve a societal need and contribute to human betterment”. By focusing on growing the pie instead of wanting to have a bigger piece, the piece of everyone gets bigger. That is his main message. He supports his claims with rigorous evidence. Friedman does not oppose this claim but would doubt about the relevance of the defense since if the concept of CSR is the same as shareholder capitalism, the concept is unnecessary. The corporate executive must serve the interests of the stockholder and if it is in the interest of the stockholder to act as described by Edmans, this is what he must do.
In the end, Friedman was right in stating that the only responsibility of corporate executives is to listen to their employers, the stockholders. It would be damaging for our free democratic society if corporate executives would function as public servants without public mandate. It would increase polarization, since balancing highly diverse interests is impossible and one always must ‘pick a side’. And lastly, it seems to be that by striving to balance the different interests, one achieves the opposite. On the other hand, if it is in the interest of the stockholder to act socially responsible, this is what a corporate executive must do. So, if we hear the phrase again that “We should get out of this crisis sustainably”, we should knock on the doors of the politicians and make other decisions as consumers but we should not force businessmen to behave against their employers.
Want to stay up to date on the newest blog articles? Like the Off the Charts Facebook page!