Tom Rippin
Sep 25 · 3 min read

On the 22nd August, in the wake of 181 US CEOs of the Business Roundtable declaring that the purpose of their companies is to serve all stakeholders, the Economist magazine asked itself: What are companies for?

In light of the climate emergency and the recent (and upcoming) days of action, this question takes on even greater importance. We can’t make progress on the climate emergency without changing our economy and the organisations it comprises.

The Econmist article warns of the dangers of straying from the Friedman doctrine of shareholder primacy and makes three points: First it allows companies to evade accountability, second it will stifle dynamism through diminishing competition and third a company’s goals should not be set by its employees of CEOs as they have no democratic mandate to do so.

The argument made is not only porous but also insiduously reinforces the (usually unspoken) assumption that any viewpoint that does not align with neo-liberal thinking must, a priori, be unsound. I penned a letter pointing out where I see the logical flaws that author has made. As it’s still to be published, we thought we’d put it out here to share and discuss with as many people as we can.

Please let us know your thoughts.

Milton Friedman, who championed the idea of shareholder primacy (Picture credit)

The raison d’être of companies is to execute the will of their owners (“What companies are for”, August 24th, 2019). And the lack of accountability and dynamism inherent in collective capitalism (as the less narrow capitalism endorsed recently by 181 American corporate leaders is labelled), will lead us into decline.

Three misapprehensions hide within this prediction. First, a broader form of capitalism lacks accountability. Quite the reverse is true. Shareholder primacy has created a narrow accountability that avoids much of the effect companies have in the world. Rather than eroding accountability, a broader capitalism will allow for fuller accountability. Measuring what matters — as this accountability requires — is, of course, difficult. But better to see the whole picture approximately, than accurately to see only one colour.

Second, a more holistic approach to capitalism will lack dynamism due to a loss of competition. As for accountability, broader corporate purpose can stimulate more competition, and on issues more important than total return to shareholders. More fundamentally, the myth of private sector competition creating all innovation and dynamism has been debunked and should be invoked with greater nuance than it is here.

Third, a broader capitalism means ordinary people will not have a voice when CEOs decide their companies’ agendas. I share this concern. But I fail to see why owners have greater legitimacy than executives. An appropriate discernment of purpose cannot come down to the opinion of a single, necessarily self-interested, group. We must find and agree the fundamentals for doing business in a healthy way that generates an economy that works for all. Only then will we see what we should compete on and how truly to hold each other accountable.

Broadening corporate purpose is a step in the right direction.

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