2012 sees the 50th anniversary of Milton Friedman’s book Capitalism and Freedom. The book covers a number of topics from floating exchange rates, social welfare to the deregulation of the medical profession. Amongst the subjects covered is Stockholder Theory (or Shareholder Value to many). In the following quote Friedman makes the point that a CEO has only one social responsibility and that is to maximise returns for the company’s owners:
The view has been gaining widespread acceptance that corporate officials and labour leaders have a ‘social responsibility’ that goes beyond servicing the interest of stockholders or members. This view shows a fundamental misconception of the character and nature of free economy. In such an economy, there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in open and free competition, without deception and fraud (p133).
In the early 1980s Jack Welch of GE made shareholder value his number one priority. Within the wider economic context of free markets Welch’s statements and actions were the catalyst that brought about a radical change in corporate culture that we still see today.
Critics of shareholder value make the point that it is silent to the accountabilities we owe to future generations and the planet (in the use of resources, environmental damage and climate change) and our current responsibilities (our neighbourhoods, child labour, employment and so on). However, in looking at that above quote Friedman makes an important condition that is often not spoken of. In order for shareholder value to ‘work’ organisations must: 1) comply with the laws of the land; and 2) there must be free and fair competition, in other words a level playing field. Over the years we have seen the rules of the game broken; most spectacularly and visibly by Enron and WorldCom. It also assumes that large organisations won’t assertively lobby governments to skew policy and legal frameworks to the detriment of open and free competition.
Perhaps from one individual organisation to another a focus on shareholder value might not matter in the great scheme of things. However, there are accumulative effects from one sector to another, one country or region to another and the wider global economy. These effects are felt in wider corporate culture, government policy and thereby the wider connection of how individuals and organisations are socially accountable to each other.
I’m not offering any solutions but I think the 50th anniversary of Friedman’s contribution to shareholder value offers an important opportunity to rethink what really matters.