National Post January 18, 2019
Milton Friedman is right, profit is a company’s only purpose
Terence Corcoran takes on the Nobel economist’s growing league of critics, arguing companies that focus on making shareholders money are just what society needs
In his inimitable way, and with a Canadian union twist, Jerry Dias is on a mini-crusade to overturn the foundations of modern corporate capitalism. As the president of Unifor ratchets up his actions against General Motors Co. over its plan to close the automaker’s Oshawa, Ont., assembly plant, he is deploying some of the ideas from the burgeoning movement to replace profit maximization with a greater focus on employees, communities, social issues, national impacts and global concerns.
By attacking GM’s profits and plant closures as manifestations of corporate greed, Dias is promoting principles long advocated by social and economic theorists who want to reform the corporate model. Instead of pursuing shareholders’ interest in achieving ever-higher profits, as GM is alleged to be doing, they believe corporations should adopt higher moral purposes and objectives.
At the other end of the corporate power structure, but on the same subversive ideological page, is Larry Fink, head of BlackRock Inc., the world’s largest fund management firm. “Companies serve a social purpose,” he has said. Governments, apparently, are no longer able to protect the environment, engineer social equity, alleviate poverty and solve broader societal challenges.
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In a new letter to the world’s chief executives, posted on Thursday, Fink seemed to channel Dias. “Workers, not just shareholders, can and will have a greater say in defining a company’s purpose, priorities, and even the specifics of its business.” Reiterating a theme he launched last year, he added, “Stakeholders are pushing companies to wade into sensitive social and political issues — especially as they see governments failing to do so effectively.”
Supporting Fink is a long list of academics, consultants, business leaders and politicians — many of them Canadian — who want to overthrow the idea that a corporation’s primary purpose is to make shareholders money.
In making their case, these corporate revolutionaries find it essential to first knock down one of the great proponents of the primacy of shareholder capitalism: Milton Friedman, the late Nobel economist who in 1970 wrote a seminal essay titled The Social Responsibility of Business is to Increase its Profits.
Like the gangs of activists fighting to tear down statues of historical figures in cities across North America, corporate reformers are trying to drag down and bury Friedman through the pages of their books and papers. Their efforts, though, effectively propose to destroy one of the engines of economic growth and rising human living standards.
Once asked to comment on greed, Friedman said the only cases in recorded history in which the masses have escaped from gruelling poverty “are where they have had capitalism and largely free trade.” In his 1970 corporate essay, he explained in detail why the doctrine of social responsibility is “fundamentally subversive” to the foundations of the market economy that have delivered prosperity and rising living standards.
All of this is ignored by Friedman’s critics. The latest academic attack on Friedman, who died in 2006, comes from Colin Mayer, an Oxford University business professor and long-time proponent of shaking up corporate dogma.
In Mayer’s new book, Prosperity: Better Business Makes the Greater Good, he grabs a sledgehammer on page two and begins to demolish “the Friedman doctrine. One of the book jacket blurbs even brags that it “marks the final nail in Milton Friedman’s intellectual coffin.”
The message of his book, Mayer said, is that “the Friedman doctrine is not a law of nature. On the contrary, it is unnatural; nature abhors it, if only because it has become the seed of nature’s destruction.”
The longer society supports the Friedman view of the corporation as a profit-maximizing institution, Mayer continues, “the greater will be the damage it inflicts on our societies, the natural environment, and ourselves.”
Then, wielding a rhetorical pickaxe into the heart of Friedman’s effigy, the Oxford prof deals a final blow against one of the 20th century’s greatest economic thinkers: “Few social science theories are both so significant and misconceived as to threaten our existence but that is precisely what the Friedman doctrine is doing in the 21st century.”
Since its publication last November, Mayer’s book has been repeatedly hailed by writers at Financial Times of London. A “remarkable and radical new book,” said Martin Wolf in a column that added, “We must rethink the purpose of the corporation.” Another FT writer called Prosperity an “influential new book,” while an FT reviewer said the book is “a resounding paean and radical road map towards a bright future for the corporation and capitalism.”
Mayer’s vicious Friedman takedown is just another in a long line of glib putdowns and one-note dismissals that fail to deal with the fundamentals of Friedman’s well-articulated objections to installing corporate social responsibility and other “purposes” into the corporate model.
In a 2016 book of papers by various contributors — Re-Imagining Capitalism, co-edited by Canadians Dominic Barton, former global head of McKinsey & Co., and Dezsö Horváth, dean of York University’s Schulich School of Business — half a dozen references dismiss Friedman’s idea on the role of corporations without even mentioning his reasoning.
The lead essay in Re-Imagining Capitalism is by Paul Polman, the recently departed chief executive of Unilever NV who spent a decade preaching corporate do-goodism. As CEO, he racked up big shareholder gains before facing investor discontent last year for warding off a lucrative takeover bid from Warren Buffett’s Kraft-Heinz Co. and his plan to move the company’s consumer goods group’s headquarters to the Netherlands from London.
Polman is a legend among corporate reform advocates and often hailed as a pioneer. “Those companies that fail to see that business has a much larger social purpose and value than making money will struggle to survive. Society will reject them,” he writes in Re-Imagining Capitalism. “But in the right hands, the purpose of business can move beyond just private financial gain. We can be a real force for good.”
Polman, Barton, BlackRock and other executives and corporations also make cameo appearances in Mayer’s book, mostly for being among the few high-profile promoters of a new corporate model in which the pursuit of profit is replaced by the pursuit of “doing good.” The corporation, Mayer writes, has “the power … to be our saviour and source of social as well as economic well being.”
The slogans for this new corporation-as-saviour model have changed and expanded over the years, but their underlying subversion of the principles of a market economy are identical.
Indeed, the message has been the same for decades, from the rise of stakeholderism in the 1990s and the corporate social responsibility (CSR) craze a few years later to the “triple bottom line” gimmick and the current fixations on ESG (environmental, social, governance) policies and “impact investing” — which is officially described as investments made in “companies, organizations, and funds with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return.”
There is nothing in the redefine-capitalism movement that was not identified almost 50 years ago by Friedman as a danger to markets and economic freedom. The concepts and principles reviewed in his 1970 essay, ignored by Mayer and all the reformers, are as relevant today as they were then.
Friedman warned that business executives such as BlackRock’s Fink who call for corporations to adopt social purposes help “to strengthen the already too prevalent view that the pursuit of profits is wicked and immoral and must be curbed and controlled by external forces. Once this view is adopted, the external forces that curb the market will not be the social consciences, however highly developed, of the pontificating executives; it will be the iron fist of Government bureaucrats. Here … businessmen seem to me to reveal a suicidal impulse.”
In other words, corporate backers of feel-good social capitalism are likely to get more than they bargained for, including increased government intervention.
For example, U.S. Senator Elizabeth Warren, the Democratic senator from Massachusetts and presidential hopeful, last August introduced an Accountable Capitalism Act, which would force corporations to lump shareholders in with employees, workforces, community and societal concerns, suppliers, customers, “local and global” environment conditions and “other general public benefit purpose.”
Nobody should be surprised by this creeping push for more government control over corporations and the market in the name of making them more socially, political and environmentally responsible. Certainly not readers of Friedman’s 1970 essay. He warned against “the short-sightedness” of business executives who may gain “kudos in the short run” but pay big in the long run.
Generally, Friedman would have no problem with corporations that engage in virtue signalling. For example, Gillette’s “toxic masculinity” ad is an obvious attempt to sell products by piggybacking on a controversial social issue. Gillette is acting out of self-interest.
Friedman declined to denounce such corporate attempts to “generate goodwill” and draw attention to their products, although he warned that the strategic pursuit of social approval and conflict amounted to “hypocritical window-dressing.”
One wonders, though, what Friedman would have made of Canadian corporations that, as part of their social responsibility efforts, backed and even funded environmental activist groups calling for a shutdown of the oilsands.
Throughout the 20th century, corporations have been vilified for their alleged failures and for concentrating on profit-maximization at the expense of society. These claims continue to be aggressively promoted today based on invalid descriptions of the role of corporations in the economic history of the U.S., Canada and much of the world.
It is utterly false to portray corporations as manufacturers of profits at the expense of society. Today’s corporations, from Microsoft Corp. to GM to Amazon.com Inc., survive by producing goods and services that feed, clothe, transport, entertain and otherwise provide benefits to billions of people.
The corporate adoption of social purposes would take focus away from these core business purposes. Worse, expanding the number of corporate purposes places an undesirable undemocratic framework on corporate executives. As Friedman saw it in 1970, giving social and political responsibilities to business leaders installs unelected corporate managers in positions of unelected power.
In Prosperity, Colin Mayer proposes a new corporate statement of purpose: “Doing well by doing good” — a slogan fit for any power-seeking politician. But corporations already do good under their current underlying profit-seeking mandates.
Corporations do good by doing well within a mostly free market context. We should leave it that way.