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The Business Roundtable, an association that includes among its members the CEOs of some of America's largest open companies, announced this week a fundamental shift in its new definition of a company's purpose.
Traditional genuflexed media. Milton Friedman turned in his grave.
Motivated by profit
The Nobel Prize-winning economist and best-selling author helped to create the prevailing view that the goal of a company, especially a large publicly traded company, is to increase its profits. To quote Friedman:
There is only one and only corporate social responsibility: to use its resources and carry out activities to increase its profits, as long as it respects the rules of the game, that is to say engage in an open and free competition without illusion or disappointment. fraud.
In fact, the fundamental principle of corporate finance, present in every collegiate textbook, states that the role of the financial manager is to increase shareholder value.
Not according to this enlightened group. According to their progressive definition, a society should not seek profit independently, but rather seek a profit consistent with the social good.
RELATED: "Should companies consider" stakeholders "other than shareholders?"
It's as if profit-seeking was somewhat immoral, the goal of increasing shareholder value did not require the attention of customers, employees and suppliers, and our Free market system had not generated more prosperity for more people than any other economic system. in the history of humanity.
Social responsibility
So who decides on the definition of social responsibility? What parameters determine whether C Suite executives achieved their annual goals? That the profits are cursed, we reduced our carbon footprint by 2%, we saved four polar bears and made the world a better place for our children by 0.002% last year.
We can only imagine the subjective claims of success announced by these modern CEOs.
In his monumental essay of The New York Times On September 13, 1970, Friedman stated:
Discussions on "corporate social responsibilities" are distinguished by their analytical flexibility and lack of rigor.
It is also possible that CEOs who have subscribed to this modern business "manifesto", which includes 181 of the 188 members of the Business Roundtable, are trying to appease the current wave of progressive political voices.
Or a less cynical point of view might be that it was an attempt to seek relief or approval from activist investors who constantly waved public companies through protests at shareholder meetings, etc. Both groups became increasingly hostile to capitalism. If this is true, group thinking is worse than we thought. You know what they say: if you give a cookie to a mouse, he will soon want a glass of milk.
Social activism of the company
We have witnessed this experience of social activism in business – let's just say it – with devastating effects on corporate reputation and shareholder value. Starbucks under Schultz, Target Corp., Dick's Sporting Goods, IBM, Disney ESPN, Kellogg's, etc.
In his essay, Freidman's words were prescient.
This short-term vision is illustrated in the business men's speeches on social responsibility. This can give them short-term congratulations. But this helps reinforce the already widespread view that the pursuit of profit is bad and immoral and must be controlled and controlled by outside forces. Once this point of view is adopted, the external forces that slow down the market will no longer be the social consciences, even the most developed, of the pontificating rulers; it will be the iron fist of government bureaucrats.
Abandoning a 50 year old vision of the reason for being a company also undermines belief in the markets themselves. In this regard, Professor Friedman warned:
[T]The doctrine of "social responsibility" implies acceptance of the socialist view that political mechanisms, not market mechanisms, are the appropriate means of determining the allocation of scarce resources to alternative uses.
A simple twentieth-century review should convince us that this is not a road we want to take.
The impact of the free market on shareholders
Fortunately, a handful of leaders reprimanded the business roundtable. The institutional investor council was one of these groups. "There is no accountability mechanism to others," said board director Ken Bertsch. "They are CEOs who like to control and who do not like to be subject to the demands of the market."
RELATED: "Should companies consider" stakeholders "other than shareholders?"
In The Wall Street JournalMichael Bordo, a professor of economics at Rutgers University and a former student of Friedman, said the new position of the Business Roundtable would force corporate executives to act as regulators. "That's not what business is; that's what the government is, "he said. "I still think Friedman was right."
Directors have the fiduciary responsibility to protect these assets … and perhaps even the entire free market system.
However, there is a remarkably absent voice in dissent. Where are the independent members of the board? After all, CEOs are employees who work under the direction of directors and shareholders.
The resources these CEOs propose to devote to the pursuit of social good are not theirs. These resources are capital invested by shareholders; not by the growing category of "stakeholders", these modern CEOs seem so determined to please.
Directors have the fiduciary responsibility to protect these assets … and perhaps even the entire free market system.
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