Milton Friedman was Wrong

Obsessing over just short-term shareholder value is bad business…and big investors are finally figuring that out

New diet fads come and go. Avoid fat. No, actually eat only fat and avoid carbs. Now avoid all sugars. Wait, drink only juice to cleanse. Eventually health advice settles back into some version of “most things in moderation.” Over time, people realize that focusing on any single number is unproductive.

And yet in business, we’ve been stuck for nearly a half century with a one-number obsession: shareholder value.

The idea that companies should only maximize investor value, and specifically not care about societal issues, evolved over years. But the tipping point has been credited to one man, Milton Friedman. As the Nobel-prize-winning economist famously wrote in 1970, the “one and only social responsibility of business [is]…to increase its profits.” His work was a driving force behind the idea of shareholder primacy.

Like all stories that win narrative battles in the world, the idea is not without merit. After all, companies that focus on shareholders do provide jobs, tax revenues that support society (that is, when they don’t hide all their profits elsewhere), and help people improve their quality of life by providing goods and services at reasonable, market-clearing prices. But none of that means that pursuing shareholder value above all will actually yield optimal societal or corporate health.

The debate about what defines corporate success has raged for a long time. But it reared its head again last month when the CEO of asset manager Blackrock, Larry Fink, sent his annual missive to all S&P 500 CEOs. To recap what caused a stir, Fink said that to prosper, a company “must not only deliver financial performance, but also show how it makes a positive contribution to society.” I’ve already written about my optimistic skepticism about the impact of the letter, but I respect and take seriously his intent and logic.

The movement accelerated a couple weeks later when Bill McNabb, chairman of Vanguard, announced plans for another letter, this time from 10 asset managers representing $15 trillion. According to coverage in the Financial Times, these big investors want CEOs to “talk about long-term growth plans and risks, ‘with a minimum five-year trajectory’, including their interactions with society.”

They’re delivering this message about the benefits of long-term thinking at the CECP: The CEO Force for Good event in New York at the end of the month (I’ll be taking part in this meeting as well). The FT’s Gillian Tett writes that, with this new investor letter, “Friedman’s vision of capitalism is starting to look almost as passé as big shoulder pads.”

In business, we’ve been stuck for nearly a half century with a one-number obsession: shareholder value.

But even so, after nearly 50 years of focusing on one simple goal, corporate executives could be excused for some discomfort with the idea of broadening their focus. In some circles, there was excitement over a Wall Street Journal editorial that fought back against the Fink letter. The op-ed is a perfect representation of the “shareholder value above all” logic, with heavy helpings of snide thrown in. I’ve heard arguments like these for a long time, and they focus on a few issues.

First, they claim, as the WSJ piece does, that “countless investors, believe it or not, are willing to accept lower returns.” The accusation in the article is clear: Blackrock, which shepherds $6 trillion of other people’s money, is apparently seeking lower returns on its money. Sorry, but that’s ludicrous. Fink is making the case that pursuing strategies to create long-term value protects and enhances returns…and that addressing ESG (environment, social, and governance) issues and focusing on corporate purpose are profitable strategies. It’s possible that Fink is wrong in this assessment of what drives value. But how can someone honestly believe he wants to sacrifice returns?

Pursuing strategies to create long-term value protects and enhances investment returns

Second, point out that some companies do not care about sustainability and do just fine. It’s a classic strawman. The WSJ article focuses on Amazon’s success, for example. I’ve heard many times that ExxonMobil has been very profitable while not caring about climate change. On the other hand, I could throw back at them that there are companies that mint money and don’t seem to care about investors much. The world’s most valuable company, Apple, focuses on innovation and customers not shareholders…and I think investors are doing just fine with Apple. Or I could point to sustainability success story Unilever which, since the arrival in 2009 of CEO Paul Polman, has seen its stock rise far faster than the FTSE or key competitors. But it’s a useless argument. All we learn from this kind of cherry-picking is that companies can take different paths to success. And that some have been able to offload costs onto society really well. Yeah, no kidding.

Third, the most important point that these arguments make is that the socially responsible investing (SRI) movement must have captured anyone like Fink that mentions broader goals. Let’s stipulate that, yes, some people put money into SRI funds to prioritizing social outcomes over short-term financial ones. But many of us in the sustainability field have made the case for years that pursuing environmental and social objectives is not at odds with financial profit. On the contrary, they go hand in hand.

I won’t rehash the decades of studies and debates about this issue (but see one recent report in the Financial Times about purpose-driven firms being more profitable). So, let’s just focus on what Fink is asking of companies and see if it seems anti-profit. He does indeed talk about “responsibility”, using the word 7 times. But it’s not about responsibility to society.

Fink mentions Blackrock’s “fiduciary responsibility” to manage clients’ assets well, and to vote its shares and proxies in the service of long-term value creation. He also talks about companies’ responsibilities, but focuses on the “responsibility to explain to shareholders how major legislative or regulatory changes will impact not just next year’s balance sheet, but also your long-term strategy for growth.” He’s talking, in this case, about the big U.S. corporate tax cuts of 2018. But it’s easy to see the connection to many other legislative pressures, such as laws around the world to reduce carbon emissions (climate change is something Fink has stressed many times over the last few years).

But to be clear, nowhere in this letter — or any of his letters from previous years — do we hear anything about philanthropy or the polar bears. Fink is the steward of trillions of dollars, and he’s expressing legitimate concern about what he previously called a “quarterly earnings hysteria” that eats away at long-term value creation. He fears that short-term focus has suppressed the investments companies must make to stay competitive in a rapidly changing world.

Ok, let’s step back. Imagine for a moment that Fink had written to CEOs about any other big shift he identified as important to value creation. What if he wrote about the need to embrace and invest in artificial intelligence across the business. Or if 20 years ago, someone like Fink pressed companies to take IT and the internet seriously. Would investors and pundits be so offended?

The war for talent and customers is being waged on a field of purpose.

What the critics miss, but Fink and leading CEOs like Polman have figured out, is a deep truth. These big environmental and social issues (called ESG in investing circles) tie directly to business value. On a philosophical level, without the environmental and social underpinnings of society — e.g., a stable climate, clean air and water, natural resources, and social capital like an educated workforce — there is no economy. So of course it’s in a company’s self-interest to steward these resources.

But more tactically, companies will be less competitive if they do not (a) develop strategies to control the risks that environmental and social issues bring, and (b) innovate to take advantage of the opportunities inherent in solving the world’s challenges — i.e., multi-trillion-dollar markets in the clean economy and sustainable products. And keep in mind that there’s a deep generational shift in the works as Millennials and Gen Z demand that companies stand for something. The war for talent and customers is being waged on a field of purpose.

In time, the deep suspicion of thinking strategically about environmental and social impacts — and about a company’s role in society — will fade away as it becomes clear that the companies doing it well are thriving. They’re the ones understanding and taking advantage of seismic changes in the world.

But here’s the interesting thing: Milton Friedman’s famous quote had more to it. After saying that the only goal was to increase profits, he added “so long as it stays within the rules of the game.”

Well, the biggest asset managers in the world are telling CEOs that the rules of the game have changed.


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Andrew Winston advises many of the world’s leading companies on how to navigate and profit from solving humanity’s biggest challenges. He is a globally recognized speaker and writer on business strategy and mega-trends. Andrew is the author of The Big Pivot and co-wrote the international bestseller Green to Gold. You can find him at and on Twitter@AndrewWinston.