
Milton Friedman's "Shareholder" Theory Was Wrong - dredmorbius
https://www.theatlantic.com/ideas/archive/2019/08/milton-friedman-shareholder-wrong/596545/
======
michael_j_ward
Matt Levine has an worthwhile take on the new "stakeholder" mission statement:

""" It is productive—not 100% accurate, but a useful heuristic—to assume that
all corporate governance debates in the U.S. are about whether shareholders or
managers should have more power to control the corporation. There are other
stakeholders, sure, but they are mostly tools in the shareholder/manager
fight, not power centers in themselves. 6 So when an association of big
public-company CEOs gets together and declares that corporations should serve
the community, take care of the environment, and be responsible to employees
and customers, not just shareholders, that might be because the CEOs have
thought it over and decided that employees and the environment are getting a
raw deal, but it is also possible that the CEOs have thought it over and
decided that shareholders are annoying. """

[1]
[https://www.bloomberg.com/opinion/articles/2019-08-19/maximi...](https://www.bloomberg.com/opinion/articles/2019-08-19/maximize-
shareholder-value-top-ceos-might-be-opting-out)

~~~
dredmorbius
Levine's focus on the principle-agent and manifest vs. covert aspects of
short-term vs. long-term returns hits on a theme of _risk_ in economic
activity that I've been noodling at.

In one sense, Levine's argument is for better tools for making, and costing /
pricing in risks and rewards of future activities. Or perhaps he's observing
that a bird in the hand wins over two, or four, or four hundred, in the bush,
no matter what.

Given that risk, uncertainty, imperfect, and nonuniformly unveiled and
available information are givens in the real world, this is a bit of a stumper
for economics.

Alternatively, imposing obligatory constraints through other mechanisms --
say, competing and equally-considered stakeholder demands from employees,
business partners, government, and community -- might be an alternate
approach. Effectively removing some of the near-exclusive power now claimed by
shareholders.

------
dragonwriter
> On Monday, the Business Roundtable, a group that represents CEOs of big
> corporations, declared that it had changed its mind about the “purpose of a
> corporation.” That purpose is no longer to maximize profits for
> shareholders, but to benefit other “stakeholders” as well, including
> employees, customers, and citizens.

CEOs are employees. A group of employees just voted that they aren't
responsible to the people that pay their salary, but to their impression of
the interests of other people who don't.

You can bet if it was a group of middle managers at any of the firms those
CEOs run that made that declaration, they’d very concretely stop being
responsible to their employers before the ink was dry.

Which isn't too say that corporations, which are publicly chartered and
granted public privileges, shouldn’t be answerable to someone other than the
shareholders: they clearly should be accountable to the public by way of the
chartering government. But that's not what these CEOs are saying, which is
just “We shouldn't be responsible to the only people who are positioned to
hold us accountable, to be vague amorphous interests that we interpret for
ourselves, and which have no accountability mechanisms.”

~~~
manicdee
This was not about responsibility and accountability, but mission and
direction.

A company should be able to state that its mission is (for example) to deliver
the best electric cars in the world, and be able to do so without pressure
from shareholders to fire the CEO when the CEO focuses on building production
capacity instead of maximising quarterly profits.

~~~
dragonwriter
> A company should be able to state that its mission is (for example) to
> deliver the best electric cars in the world, and be able to do so without
> pressure from shareholders to fire the CEO

“A company” is an abstraction. Who is declaring the mission? The shareholders?
Or the CEO?

Yes, if the _shareholders_ declare a mission, the CEO shouldn't generally be
fired for pursuing it effectively.

If _the CEO_ declares a mission, and the shareholders don't agree that it
represents their interests for the firm, they absolutely should create
pressure for the CEO to either reverse course or be removed.

~~~
manicdee
Why should the shareholders have any determination of direction? They are
there to invest in a company, not run a business. If they don’t like the
direction they can invest elsewhere.

------
donatj
> “short-sighted and muddle-headed” in matters of public import.

vs

> Many business executives realized that wage and price controls would serve
> their business interest (no doubt by holding down the cost of labor and
> other inputs) and didn’t care whether they harmed the economy at large.

Those are the same thing. They were short sighted because price controls would
serve their business interest in the short term.

~~~
btomtom5
Yea, I also took issue with this point initially, but I think the author was
pointing out that Friedman's complaint of CEOs "short-sightedness" at its core
was asking CEOs to exhibit a sort of social responsibility--the very same
responsibility that he criticizes.

------
uknowmejoe
How does this prove it was wrong? The end goal is still to maintain long term
profits. Once a company becomes unprofitable it dies. Friedman gets credited
with it, but it's basic econ.

~~~
bassman9000
This. Plus, if the way to be long term profitable is to be more socially and
ecologically responsible, because that's what the market is asking for, then
corporations will adapt or die.

~~~
viklove
The problem is that they're currently in the process of dying, but they're
bringing (quite literally) the entire planet down with them. That is not an
acceptable outcome. The market cannot regulate itself.

------
Ma8ee
I don't think any part of this should be controversial. The purpose of a
business can be whatever you want it to be, whether it is to make money or
make the world a better place. But either way, the corporation is a part of
society, and reaps the benefits from that, but also has responsibilites to it.
That means that all the stakeholders should have some influence. And
stakeholders are everything from shareholders to employees to the local
community to the environment.

------
tengbretson
Tools tend to work best when they have one job and do it well. A company is a
tool for generating profit for shareholders. If we need tools for social good
that's fine, we should absolutely make them, but forcing one tool to be used
for a purpose it wasn't designed for sounds like a great way to get no social
good or profits.

------
travbrack
What are the chances that corporations will actually behave any differently
because of this? My uninformed guess would be slim to none, but maybe I'm just
cynical.

~~~
dredmorbius
That's one of author and law professor (and son of jurist Richard) Eric
Posner's arguments:

"this new philosophy will not likely change the way corporations behave. The
only way to force corporations to act in the public interest is to subject
them to legal regulation."

~~~
PeterStuer
Which carries the implicit assumption legal regulation does serve the public
interest and is not captured by _other_ interests.

------
mikedilger
I thought you couldn't maximize for more than one variable, and so if society
wants other outcomes such as low pollution laws need to tie high fines to it.

~~~
bassman9000
_laws need to tie high fines to it._

Which Hayek was fine with (as shown in The Road To Serfdom).

[https://www.dailykos.com/stories/2013/09/27/1241729/-The-
Roa...](https://www.dailykos.com/stories/2013/09/27/1241729/-The-Road-to-
Serfdom-actually-supports-regulations-worker-safety-and-extensive-social-
programs)

I don't know if I buy the whole social program thing, but the quote is
correct. Reader's Digest: [https://mises-
media.s3.amazonaws.com/Road%20to%20serfdom.pdf](https://mises-
media.s3.amazonaws.com/Road%20to%20serfdom.pdf)

------
tolmasky
These are arguably identical statements. I think Milton Friedman's "Theory"
was descriptive, not prescriptive: ultimately shareholders can sway a
corporation, and thus the corporations' "duty" is "to" them. If public opinion
moves in a way that makes it so a corporation would become unpopular and
unprofitable by harming customers and "stakeholders", then they are
effectively "harming" their shareholders, who would be the ones that then say
"we should take these concerns into consideration".

This may seem perhaps a pedantic or semantic way of looking at it, but I do
think it somewhat gets to the heart of many of Friedman's beliefs regarding
incentive structures. By understanding that corporations are ultimately
_essentially_ accountable to their shareholders, you can develop a model where
the shareholders goals are aligned with the customers'. Some would argue that
this is always the case given enough time, others would argue that it isn't
and you thus need additional laws to create the alignment of goals (if you go
to jail for harming your customers, then your shareholders all of a sudden
have the goal of not harming your customers). The main distinction I'm trying
to make is that this is a description of where agency lies, vs. pretending
corporations have some "decision" as to who they are responsible to. I promise
you that if tomorrow they decided they're all actually accountable to me, the
CEOs would get fired and that would reverse fairly quickly.

The most interesting place this comes up IMO is in the emergent behavior of
collective shareholders. Many people may believe they would tell Phillip
Morris to behave a certain way, and yet, without knowing it, they actually
indirectly tell them the opposite. If their retirement plan unbeknownst to
them is invested in Phillip Morris, and Phillip Morris starts making decisions
that are good for customers but lower profits, and thus random people get
angry at their retirement fund managers and those managers pull money out of
Phillip Morris and into some other venture that is more profitable, without
knowing it they have sent a clear signal that "Phillip Morris is ACTUALLY
accountable to shareholders, and in particular the money they make". This is
the _default case without actively doing any extra work_. It is absolutely the
case that if enough education is employed that people start _choosing_ to tell
their retirement funds to not invest in Phillip Morris _because_ they are
profitably harming customers, then you can have the more socially desirable
effect of forcing them to behave in a way that doesn't harm customers. But
again, the goal is to understand that "steady state" of this relationship.

~~~
Gibbon1
> By understanding that corporations are ultimately essentially accountable to
> their shareholders

No. Corporations are ultimately accountable to and exist at the pleasure of
the state, full stop.

~~~
PeterStuer
Are you sure you do not have that backwards? One could argue that in practice
in many democracies politicians, executives of 'the state', seem to exist at
the pleasure of the corporations that fund their election. The idea that 'the
state' and 'corporations' are two fully separate entities is an
oversimplification that is so far from reality that it is an unuseful model
for reasoning.

------
cs702
This short piece is a response to the recent statement by the Business
Roundtable, a group that represents CEOs of big corporations, about the
"purpose of a corporation."

This piece is also the best takedown I've seen so far of Milton Friedman's
influential article, "The social responsibility of business is to increase its
profits."[a]

Key passages:

> ...if the purpose of a business is to “increase its profits,” as Friedman
> argued, then it is not only “clear-headed,” but also justifiable for a
> business to use its political influence to dismantle the free market that
> Friedman cherished.

> ...the notion that the big public corporations are tribunes for the free
> market is quixotic. Big corporations are islands of socialism within our
> market economy: Their bigness protects them from competition for customers
> and workers.

> ...[Businesses] can (like Facebook) break promises to respect their
> customers’ privacy. They can (like Twitter and Google) generate ad revenue
> by facilitating the transmission of hate speech. They can (as Exxon used to
> do) propagandize against climate science. They can (like Jimmy John’s) use
> illegal contract terms to deter their low-skill workers from quitting low-
> paying jobs. They can (like the tobacco companies and now the tech
> companies) push addictive products onto children, or (like Purdue Pharma)
> create a generation of drug addicts. And they can engage in corporate
> lobbying. The biggest problem with Friedman’s theory is that corporations
> can—and, according to his theory, should—use their influence in Congress to
> block laws that stop corporations from causing such harms.

> ...Nor was Friedman correct that business executives are the employees of
> the shareholders. Legally, business executives are employees of the
> corporation, which—crucially—they, not the shareholders, control. The
> shareholders have a contractual relationship with the corporation that
> entitles them to a share of its profits and a vote on certain major
> corporate decisions. Time and again, CEOs have used their power over the
> corporation to bat away shareholders when they propose that the corporation
> should act in a socially responsible way. When an employer says “jump” to an
> employee, the employee jumps. When shareholders say “jump” to the CEO, the
> CEO sues them.

The author is Eric Posner.[b]

Go read it.

[a]
[https://timesmachine.nytimes.com/timesmachine/1970/09/13/223...](https://timesmachine.nytimes.com/timesmachine/1970/09/13/223535702.html?pageNumber=379)

[b]
[https://en.wikipedia.org/wiki/Eric_Posner](https://en.wikipedia.org/wiki/Eric_Posner)

~~~
dredmorbius
Would you happen to have a non-paywalled version of the original Friedman
article?

Update: this appears to be a LaTeX-generated PDF based on the original column:
[http://umich.edu/~thecore/doc/Friedman.pdf](http://umich.edu/~thecore/doc/Friedman.pdf)

(From Matt Levine's Bloomberg article.)

~~~
bhalithan
check paywallnews com maybe.

~~~
dredmorbius
See my update above :)

------
Simulacra
I'm not an economist, but I disagree. The purpose of a corporation is to make
money. Money benefits the shareholders. If its purpose was to benefit the
"stakeholders" then it would be a nonprofit. Stakeholder sounds good for
public relations, but I don't see it truly occurring in practice.

~~~
dredmorbius
Incorporation, and the legal protections extending from it, are extended by
the state, to provide value, ultimately to the state as a whole (e.g., not
just the government, but the people).

You'll find a form of this expressed in Adam Smith's _Wealth of Nations_ ,
though he speaks here in terms of the entire field of political economy:

 _POLITICAL œconomy, considered as a branch of the science of a statesman or
legislator, proposes two distinct objects: first, to provide a plentiful
revenue or subsistence for the people, or more properly to enable them to
provide such a revenue or subsistence for themselves; and secondly, to supply
the state or commonwealth with a revenue sufficient for the public services.
It proposes to enrich both the people and the sovereign._

[https://oll.libertyfund.org/titles/smith-an-inquiry-into-
the...](https://oll.libertyfund.org/titles/smith-an-inquiry-into-the-nature-
and-causes-of-the-wealth-of-nations-cannan-ed-vol-1#lf0206-01_label_892)

Of incorporated firms -- joint-stock companies -- Smith is markedly less
enthused, and limits them to serving in insurance and banking, major civil
engineering, and public works projects.

 _The only trades which it seems possible for a joint stock company to carry
on successfully without an exclusive privilege are those of which all the
operations are capable of being reduced to what is called a Routine, or to
such a uniformity of method as admits of little or no variation. Of this kind
is, first, the banking trade; secondly, the trade of insurance from fire, and
from sea risk and capture in time of war; thirdly, the trade of making and
maintaining a navigable cut or canal; and, fourthly, the similar trade of
bringing water for the supply of a great city._

[https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_V/...](https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_V/Chapter_1)

This is also the major thrust of Matt Levine's Bloomberg article on the
Roundtable announcement commented elsewhere in this thread:
[https://www.bloomberg.com/opinion/articles/2019-08-19/maximi...](https://www.bloomberg.com/opinion/articles/2019-08-19/maximize-
shareholder-value-top-ceos-might-be-opting-out)

~~~
18pfsmt
Smith wasn't some prophet. He got some things right, and some things wrong. He
was trying to imagine a world he couldln't possibly imagine from a point in
time when slavery was rampant across the world, there were nobles and
monarchs, and power was as centralized as the technology would allow. Free
enterprise is not intuitive because tribes were so small and the world was so
sparsely populated, they never had the issue.

Edit: spelling.

~~~
dredmorbius
You're saying he was ... a loss?

~~~
18pfsmt
Care to address the substance? HN rules say to respond to the strongest
possible argument. You are failing to comply.

~~~
dredmorbius
Sure: Smith was responding to, and opposing, concentrations of wealth and
power and their negative, distortionary and discriminatory impacts on the
economy.

His harshest criticisms were against those concentrations and abuses of power.
His strongest and most heartfelt arguments were for the common man. He wasn't
some wealth gospel preacher, despite often being portrayed as such. And his
attacks on the power and dangers of corporations were well taken.

J.K. Galbraith's _The Age of Uncertainty_ explores this in depth. As does much
of the writing of Emma Rothschild. Among many others.

