Two Cheers for the Socially Irresponsible Corporation

Let’s hope that the U.S. CEOs who said they want to stop focusing solely on the bottom line don’t take themselves too seriously

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Do you want a kinder, gentler surgeon or an expert who does the job?
Do you want a kinder, gentler surgeon or an expert who isn't afraid of blood and does the job?Credit: Tomer Appelbaum

When some 200 top U.S. executives declared last week that “the purpose of the corporation” should no longer be the single-minded pursuit of profits for shareholders, the nasty screech of the opioids affair couldn’t have been far from their minds.

It’s not as if corporate America hasn’t had its fair share of run-ins over ethical issues, but the opioids affair is in a league of its own. It wasn’t about riding roughshod over privacy rights, outsourcing jobs or getting caught flat-footed on diversity or pay issues. Here was a case of companies (including Israel’s Teva Pharmaceuticals) earning huge profits from a drug whose abuse led to more than 400,000 deaths between 1999 and 2017. 

The opioid case couldn't be a better example of how the pursuit of profit – aka “shareholder value” – can lead to perverse results. What would the legendary economist Milton Friedman, who died in 2006 just as the opioid addiction as starting to grow, say about it all?

Greed was always good in the business world, but it was Friedman who gave it academic and ideological respectability. In a 1970 essay for The New York Times Magazine, "The Social Responsibility of Business is to Increase its Profits" -  he declared that a corporation had no right to involve itself in “social causes.” If companies spent money cleaning up industrial waste, running programs to help women or minorities, or keeping a factory open rather than outsourcing manufacturing abroad where wages were lower – they were effectively spending other people’s money.

That could be the customers' money (because the result would be higher prices), employees (lower wages to cover the company's additional costs) or shareholders (in lost profits).

In any case, it was losses to shareholders that Friedman was concerned about. Since they own the company, management should do their bidding, which he assumed was to earn the highest possible returns.

In fairness to Freidman, he wasn’t just Gordan Gekko with a Nobel Prize. He said corporations had to confirm to the “basic rules of society,” not only its laws but what he called “ethical custom.”

“Ethical custom” would for instance look askance at encouraging addiction to dangerous drugs. That part of Friedman’s theory didn’t get much attention, perhaps justifiably, because it is hard to square the ethical proviso with the thrust of his theory.

In any case, shareholder value became the law of the land on Wall Street and in boardrooms.

Quarks vs. quirks

But Friedman’s theory was fundamentally flawed. It exemplified mainly the attempt to make the workings of the market and business into a quantitative science, measured by returns on capital and other hard numbers. It was a way for economists to flatter themselves, imagining they were as science-oriented no less than physicists.

The problem is that corporations and markets aren’t like particle accelerators: they are composed of human beings with all their faults and prejudices, and don’t work according to immutable laws like a lepton or a quark. Nor do companies and markets operate in isolation. They loom large over society -- creating jobs, supplying the products and services we use, and impacting the environment. They are too big, too powerful and too ubiquitous to be absolved of all responsibility.

If Friedman were to rise up from the dead, he might defend himself vis a vis the opioids crisis by saying the giant lawsuits the drug makers are now facing is how society gets paid back for corporate abuse. A wise and forward-thinking shareholder would have realized that peddling opioids would in the long run hurt the company.

But such shareholders are rare, if for no other reason that their stake in the company is small and fleeting. They’re interested in the next quarter’s earnings, not the fallout that might happen in the next decade.

There’s been no shortage of cynical reactions to the Business Roundtable declaring the end of the era of shareholder value. But they’re premature. The shareholder value idea changed the world starting with nothing more than an essay. It may now die with a declaration.

What we should be concerned about now is not that business won’t change but that it will change too much.

The socially responsible corporation that many corporate critics dream about would not lead to a much better world. Friedman was correct that if companies do things like address climate change, raise pay, keep factories open when they should be closed and engage in other nice policies, it will come at a cost.

It’s a fantasy that the cost can be covered by taxing billionaires and slashing CEO pay. It reflects a crude notion that success in business is all about exploiting workers and customers so the 1% can upgrade to bigger yachts.

Business is really about controlling costs, innovating, and generally keeping a step ahead of your competitors. To achieve that, companies often have to be ruthless, otherwise they grow flabby and the consumer will feel it. Eventually so will the employees, if the business shrinking or starts losing money.

A company is like a surgeon. You might appreciate one who’s a sensitive soul that blanches at the sight of blood, but in the end, you want one who can open you up expertly, ignore the gore and do the job.

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