Friedman’s dictum is finally laid to rest: so what’s the function of companies now?

Enrique Dans
Aug 30, 2019 · 4 min read

Milton Friedman, pictured above, one of the architects of neoliberalism, the father of the Chicago School, a Nobel laureate, dominated economic thinking in the second half of the 20th century. He is often remembered for his belief that a company’s sole function was to maximize shareholder profit. Outlining the “Friedman doctrine” in a 1970 article with the New York Times, he said “the social responsibility of business is to increase its profits.”

For the last twenty years, this has been the obsession, the mantra of the corporate world: generate value for shareholders. As long as it can be done within the law — and if necessary by stretching it — forget about generating value for anybody else: the workforce, suppliers, consumers, or society as a whole. Deliver value to the shareholder and, according to Friedman and his school, the market will take care of everything else.

Finally, too late, a growing number of US companies have realized that this is not the case. The market cannot perform miracles and the idea of ​​maximizing shareholder profit is not only ethically questionable, but unsustainable. Capitalism has succumbed to the tragedy of the commons and in its death throes is dragging the planet down with it: the Business Roundtable, the most important business lobby in the United States, represented by 181 CEOs of the largest companies with around a 30% of total market capitalization, has finally come to the conclusion that a company’s mission must go beyond making money for shareholders, and that the considerations of other stakeholders are much more important.

At their meeting on August 19, Business Roundtable CEOs authored a new mission for the company: they threw away the ridiculous, simplistic and harmful theories of neoliberal capitalism and the Chicago School, and replaced them with a text of three hundred words in which shareholders were mentioned tangentially at the end. Less concern for generating shareholder benefit, and much more for contributing to a better world, however idealistic and vague it may seem. Here’s the text:

Statement on the Purpose of a Corporation

The once-privileged shareholders do not appear until the penultimate paragraph, and with the generation of value always contingent on long term benefits. The document seemingly buries the principles of neoliberal capitalism, recognizing them as a huge and costly mistake.

In the real world, economic theories are not overruled with a simple declaration of principles. Sure, the document is important, but it simply a declaration of principles. It is important because of what it says and it is also important because of who says it. It is also important that the corporate world now understands that the principles it has operated on for so long are deeply harmful. The question now is how to put words into practice.

For decades, companies around the world led by supposedly intelligent people have caused incalculable damage to the environment and people’s lives, stretching and breaking the law in order to satisfy the supposedly sacrosanct principle of maximizing shareholder profit.

With time and perspective, if we survive long enough, Friedman will surely be seen as one of the great villains of the 20th century, a man who presided over an era in which the human species has created the conditions for its own annihilation.

There is little room for optimism, and well-meaning statements of principles are rarely worth the paper they’re written on. But for the men and women who began their managerial careers when Friedman’s pernicious principles were pretty much law, a change like this should at least lead to reflection and a much-needed change in attitude.

The Business Roundtable’s declaration of principles is now out there. It might be too little, too late, and it’s unlikely it will change the way companies’ success is measured, at least in the short term.

It’s right to be skeptical, but it is at least a clear admission of error. Time will tell.

This article was previously published on Forbes.

(En español, aquí)

Enrique Dans

On the effects of technology innovation on people…

Enrique Dans

Written by

Professor of Innovation at IE Business School, blogger at enriquedans.com and Senior Contributor at Forbes

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

Enrique Dans

Written by

Professor of Innovation at IE Business School, blogger at enriquedans.com and Senior Contributor at Forbes

Enrique Dans

On the effects of technology innovation on people, companies and society (writing in Spanish at enriquedans.com since 2003)

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