Sean Lloyd






International relations


Sep 2018 - May 2020

By Sean Lloyd

Shareholder value: Friedman gets floored?

Last month the Business Roundtable, a group of the US’s most powerful CEOs, appeared to overturn decades of commitment to the belief that the primary purpose of a corporation was to provide ‘shareholder value’. Instead, they broadened the concept to capture ‘stakeholder value’, including employees, customers, suppliers and communities. Much of the concept of shareholder value derives from Milton Friedman’s seminal 1970 article for the New York Times, where he declared the sole responsibility of a business was “to make as much money as possible while conforming to the basic rules of society”. As it happens, we recently discussed that very article during a well-timed Governance & Ethics class at Oxford.

Unsurprisingly, the statement has attracted extensive comment and controversy. Conservative-leaning commentators have tended to take the statement to task, hewing to Friedman’s original prescription as the greatest source of economic uplift in human history. More liberal commentators have applauded a purportedly belated recognition of the social responsibility of a business – ‘profits with purpose’, as some have called it.

So does the Business Roundtable statement really overturn decades of orthodoxy? Perhaps because I come from a career working for the ‘national interest’ (also a somewhat difficult concept to define at the best of times), it seems to me that a better question might be to ask whether that orthodoxy ever existed outside the narrow confines of ideological debate. There’s little doubt that businesses need to turn a profit to be a going concern (although these days, Uber and WeWork seem to challenge that concept). But equally, corporations have never been divorced from the context in which they operate – despite what may be seem to be suggested in coldly philosophical analyses of shareholder value.

EMBA lecture theatre

Businesses have always operated in an ecosystem, influenced by their surrounding communities, the preferences of their customers and, as is important in this new statement, the employees they rely upon. Sometimes the difference lies in the timeframe upon which a business views the concept of value. To hark back to one of my previous blogs on shareholder value and its relationship to government regulation, it’s hard to argue that Vale’s tailings dam disaster in Brazil provided good shareholder value. In the short-term, the cost saving on building a weaker structure might have seemed to provide shareholder value. You’d want to have sold out of Vale shares shortly after, however – the long-term value damage will be much more significant. The impact on communities of horrendous pollution from “cost-cutting measures” isn’t generally a good source of long-term shareholder value.

The same practical considerations apply to the desires of customers. It is easy to sit in the newspaper editorial room and argue that businesses should stay out of social issues. But when a significant proportion of your target customer base wants to see more commitment to certain values from your business, what provides best shareholder value? Taking a purist line and potentially watching your customers walk to another provider who will commit to those values? That seems a strange conception of shareholder value. Some have argued Gillette’s “the best a man can be” campaign over-catered to a noisy customer segment at the expense of driving others away. It will be interesting to see how that argument that plays out over the longer-term – CEOs should always have an eye to the future, not just the present. That is their job. And a lot of that ‘noisy segment’ were a younger generation of buyers representing a shifting social attitude and a long-term customer base.

Employees are perhaps the most controversial stakeholder. Google has been a high-profile casualty of employee uprisings and walk-outs over values issues. Should a company reflect the values of its employees? It’s a challenging ethical issue. There is a symbiotic relationship between corporate values and employee values. It is again, easy to sit in the editorial room and opine on the need for Google to stand up to dissident employees and do what’s in the best interest of the company from a profitability perspective. But this ignores another essential point: the labour market, particularly at the skilled end of the market, is tight. What company can afford to let a series of skilled employees switch to a firm they feel better represents them? It might be easy to suggest Google calls the bluff of its picketing employees. But even if only a fraction leave, they take combined years of experience and corporate knowledge with them. This isn’t a defence of a company caving in every time an employee complains they don’t like something – that clearly isn’t the right result either. But equally, it’s also important to recognise the point is far more nuanced than many commentators accept and that shareholder value can easily be damaged by employee drain. This has never been more true than in the new tech economy.

Friedman’s central point is often reductively quoted to omit the “conforming to the basic rules of society” rider. The reality is, Friedman’s article was written in 1970. Social values can change quickly – look at the last decade in Australia – and we certainly live in a very different world than 1970 when it comes to a range of laws, values and institutions. It’s quite reasonable to argue that the basic rules of society have changed. So perhaps recognising how customers, employees and communities interact with shareholder value isn’t necessarily inconsistent with Friedman’s central thesis – and while Friedman himself may not have agreed, does that really matter? After all, value is in the eye of the beholder, not the economist in the editorial room.

Author’s note: The views expressed in this blog are my own and not as a representative of the Australian Government.

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