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> “There is one and only one social responsibility of business,” the economist Milton Friedman famously wrote in 1962. And that is “to use its resources and engage in activities designed to increase its profits.”

It's strange to me that Friedman is viewed (at least by economists and "business" folk) as a paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology. There are tons of reasons why the quoted statement might be false whether you're a policy maker (negative externalities) or even the most cold-hearted capitalist (short-term incentives).

Perhaps relatedly, it's actually not true that corporate responsibility to profit is codified in the law. See e.g. https://en.wikipedia.org/wiki/Shlensky_v._Wrigley (discussed further in https://www.amazon.co.uk/Shareholder-Value-Myth-Shareholders...)




Friedman is of course right, whether lawmakers and jurists have tried to codify rules allowing directors to betray shareholder interests.

A single business is not responsible for externalities, any more than a single citizen is. We are ALL responsible for negative externalities like pollution and have to solve those problems together, using the political process and sharing the costs among everyone.

And his statement isn't specific to the short term. Increasing profits is maximizing total profits. Making of ton of profits today and none thereafter is in no way as good as making a ton more profits over time.

Imagine you can invest your life savings of $100,000 and a lot of sweat equity to build a business (including the opportunity cost of giving up your $100k a year job). You estimate it will fail half the time and you will lose your life savings. But the other half of the time you estimate will make $500k a year in profit, after paying all employee compensation, taxes and other costs.

Then you are told that if you succeed, you can't have the $500k a year. That half of that has to go to the employees who risked nothing and got market wages from you for helping build the business (and quit whenever they pleased for better compensation elsewhere). And another half has to go to the "community" to help support the arts, or some other noble cause that did nothing to help you start or grow your business.

You still want to risk your life savings?

Companies are owned by shareholders. Property rights are one of the most fundamental liberties we have. I don't go into your house and raid your fridge whenever I feel like it. Why should you be able to go into my business and tell me how I need to spend my money?


You're correct that ultimately, at the end of the day, the shareholders are the owners of the business, and should have ultimate control over how their resources are allocated or spent. That doesn't mean that the shareholders interests are necessarily for profit above all else. If your shareholders were perfectly happy with being ecologically conscious and providing an above-average place of business for employees irrespective of profit, wouldn't demanding focus on profit above all else be working against the shareholder's interests?

I think this is especially true in the case of Etsy, which as the article points out, is registered as a B corporation and so arguably has agreement from the shareholders that benefiting society is part of the mandate of the company.


> If your shareholders were perfectly happy with being ecologically conscious and providing an above-average place of business for employees irrespective of profit, wouldn't demanding focus on profit above all else be working against the shareholder's interests?

This argument of shareholders wanting to be ecologically conscious is such a privileged idea. The majority of money in the stock market doesn't come from the rich who can afford to be flippant with their stock returns. It comes from people relying on consistent equity appreciation so they can afford to retire.

We already know how to deal with negative externalities such as pollution. Evaluate how much it costs society and tax it accordingly.


>We already know how to deal with negative externalities such as pollution. Evaluate how much it costs society and tax it accordingly.

I don't understand this, can it not be the case that the companies can 'afford' to keep polluting, even if paying the tax? Especially if pollution "cost on society" is relatively constant or not increasing according to profit. How is this cost on society determined, and what if I think that the cost is too high, even for taxation to deal with it?

This seems like a band aid on one of the problems inherent with the profit motive.


If you are a shareholder and want to spend some of your profits on ecologically conscious activities, no one can stop you. But that doesn't mean you should force the other shareholders to do the same.

And Etsy isn't a B corporation. It's CEO tried to make it one and failed.


Etsy is currently a B corporation. They're likely to not remain one. The article clearly points this out, but it's easily verifiable as well:

- https://www.bcorporation.net/community/etsy

- https://blog.etsy.com/news/2012/etsy-joins-the-b-corporation...

- https://www.etsy.com/ca/mission


It's a process the CEO tried to start, never became binding because they are incorporated in Delaware which doesn't recognize B corps, and can't finish because he doesn't have buy-in from the owners of the company.

So it's temporary status doesn't belie the fact it's not going to be one and shouldn't be treated as one.


Delaware absolutely does incorporate Public Benefit Corporations. Kickstarter is one example.


This is way outside of my expertise or experience, but this thread got me curious.

Here's what 3 minutes of googling indicates:

* most states have b corps * most states that have b corps based them on the Model Benefit Act, drafted by B-Lab * Delaware has b corps, but they are not based on the Model Benefit Act * whether the Model Benefit Act was used affects all sorts of things (requirements, reporting, standards, decision makers, enforcement…)

So it seems fair to say that delaware has b corps, but they are not like the others.


How is that different than saying, "If you are a shareholder and you want to make as much money as possible regardless of social costs, no one can stop you. But that doesn't mean you should force the other shareholders to do the same"

If we go by your logic, then the only thing people are allowed to pool their money together for is to make the most money possible. Am I not allowed to incorporate a public company that has another purpose? A company is, and should be, controlled by the shareholders, since they are the owners. If those shareholders want to do something besides maximize their profits, they should be allowed to do that.


In theory, you can organize a public company around any principles you want.

And then, when other people buy a controlling interest in your company, they are just as free to change it. Public companies do what a majority of their shareholders want, and people who buy stock are overwhelmingly interested in profit.


Right, but that isn't what the person I was responding to was saying. They said shareholders had no right to demand anything besides maximum lifetime profit. I was simply saying that they were within their rights to ask for something different, if a majority of shareholders felt that way.


>And Etsy isn't a B corporation. It's CEO tried to make it one and failed.

Their website says Etsy has been a certified B Corp since 2012: https://www.bcorporation.net/community/etsy


It's headquartered in Delaware. It's B Corp status isn't binding there, and never will be, because they chose to IPO and sold much of the company to investors who don't want that.


Your post reads a bit contradictory. The only way we can all be responsible for negative externalities is if we each individually choose to be responsible, or if lawmakers force us all to be responsible. I honestly don't know what your view on this subject is, because you seem to be deriding any possible solution to the problem of negative externalities.


Well, one example would be if you are CEO of a car manufacturer. Your engineers design two catalytic converters, one that meets all government regulations/requirements, and another that does substantially better, but reduces horsepower and drivability significantly.

If you are environmentally conscious and decide to standardize all your cars on the cleaner catalytic converter, and consumers react poorly and sales suffer, you aren't serving your shareholders. It's not a problem your company can or should solve, you are part of a shared organizations and your ownership doesn't trump your shareholders.

Instead you should take your share of the profits and your massive paycheck and work to get cleaner and more intelligent exhaust standards put into law, so that all new cleaner catalytic converters are as clean as you think they should be. Or find alternative and better ways to reduce emissions.

But you can't steal profits from your shareholders to fit your own agenda.


But in practice, what we get is VW.

It is "contra-survival" to poison the air. You cannot breath profits.

The world is bubble-shaped, and we are all trapped together sandwiched between hard vacuum and molten rock.

Poisoning in the short-term to make money to make laws to stop poisoning in the long-term is a poor strategy, and I think we as sentient human beings can do better.

"Never let ideological purity interfere with effective action."


VW's approach clearly wasn't business optimal, given it almost bankrupted them.


I'm suggesting that overemphasis on the "profit motive" affected the strategic judgement of the VW corporation as a whole.

Whether your metric for this disaster is cash or clean air I think the proximate cause was profit-seeking to the exclusion of other values.


It is a beautiful example of dogma. It has some meaning but can be bent and molded to fit almost any argument.

The obvious argument, especially in Etsy's case is 'well, this works for the short term but can mean no profits in the long term as you commoditize your business and what makes a company like Etsy, Etsy fades into market oblivion.'

To which the next statement is 'Oh. Well, Friedman meant all expected profits even into the long term.' which may even be true, but the statement is used to justify all sorts of business behavior that is not in keeping with that idea.


Yea, if you twist Friedmans meaning you can make all sorts of nonsensical arguments. Value is profits extending into the long run forever, he spoke and wrote clearly enough that he doesn't have to spell that out for you.

In Etsy's case, paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers, paid for out of shareholder accounts. Etsy didn't get the best web site or software out from it, they got rampant entitlement and sub-par work.


>paying above market wages and benefits does nothing for the company and it's shareholders

Again, we can use Friedman on both sides of the argument (which was my original point as to the meaningless of the statement if not in original intent then in popular application).

I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time.

I'm not saying that's what I believe but let's assume it is true.

Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits.

I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps.


> paying above market wages and benefits does nothing for the company and it's shareholders, it's just a gift from the CEO to workers

The real problem in compensation is executive pay, which reaches extraordinary levels, explicitly rewards failure (Yahoo passim) and tends to be a gift from the CEO to themselves.


>he spoke and wrote clearly enough that he doesn't have to spell that out for you.

Death of the author. Most people who read, and quote, Friedman's quote, haven't read Friedman's other writings or watched his speeches. People can't apply context that they don't have.


"I could argue under the same statement that such a move would do plenty for the company in establishing itself as a very good place to work making it likely to attract and retain top talent. "

Market value means that your turnover should already be low, your employees can't leave for better paying jobs. Obviously there is more to retainment than just wages, there is managerial competency and how you treat people. Bad workplaces have to pay more than market to retain people, good workplaces shouldn't.

But again, it's a silly argument that paying substantially more than market is going to benefit shareholders in some obtuse way. There are as many disadvantages as advantages, such building a complacent, insular underperforming culture just like that Etsy appears to have.

And another is using excess comp to build a "cult of personality" so the CEO can be worshipped, and those are terrible for business/shareholders.

"It could also make individuals 'hand crafting' items to sell, who are more likely to be a conscientious lot, feel good about continuing to do business with Etsy. These factors could lead to a more solid niche in the market, longer company survival, and more consistent profits over time. I'm not saying that's what I believe but let's assume it is true."

Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?

"Since long term profit projections get hazy, the safer bet almost always is to follow a short term profit argument and take surer profits as soon as possible even though, in perfect hindsight, a long term approach would have yielded greater overall profits."

Do you really think Etsy's massive admin spending, far higher than similar companies, is really translating into long term value and higher profits? This is money not spent on partners or customers or brand, but internally.

"I'd bet this happens a lot and this idea that everything is subservient to profits paradoxically hurts value more than it helps."

The easiest response is to ask you to read some Warren Buffett. All his shareholder letters are free to read going back to the 1970s on Berkshirehathway.com. Long term value in a business is created by building a unique and defensible product offering, a brand, a technology, etc.

It's not from throwing more employee parties and increasing employee compensation. Employees can walk out the door at any time, even the CEO. One of Warren's favorite quotes is you want a business any fool can run, because sooner or later a fool will be running it.

In Etsy's case, it needs to be the best source/destination for it's unique crafts. To do that it needs to provide a viable market place to it's partners. Otherwise it's entire business will just dissipate to Amazon and Ebay and the Kum ba yah nirvana will disappear anyways.

Paying engineers $200k a year when they would be content if they made $150k a year is simply wasting $50k each on something that doesn't add value to the business. That excess comp would be far better spent hiring more people to build more and better competitive advantages, or marketing campaigns to get more partners and better build Etsy's brand, or kept in the bank to safeguard against rainy days, or returned to the shareholders as dividends and better support the value of it's stock.


>Market value means that your turnover should already be low, your employees can't leave for better paying jobs.

The curve isn't flat.

>Do you really think those people are going to leave Etsy because it no longer has the CEO's cult cheerleader squad decorating the offices?

I think people that spend their time learning a craft then peddling hand crafted objects for, let's face it, love over money, will not want to work for anything approaching a Wal-Mart or other 'soulless corporation'. Speaking generally, of course.


>The easiest response is to ask you to read some Warren Buffett.

I've read plenty of Buffet, Munger, Graham, Dodd and the rest. Pretty common knowledge.

What you are missing in your analysis is that Buffet et. al. invest in very well understood businesses (hell, they didn't even touch Amazon). Very well understood businesses tend to have very well understood systems (including the people and their roles and contribution to those systems. They have settled to a point where they /are/ interchangeable. They also tend to be boring and have well understood moats like huge capital or regulatory requirements. They can thrive in the fat part of the curve (or even a bit below it if they have stellar management).

Etsy is none of those things. They are carving out a new niche (or an very old niche with very new scope) with new technology in a constantly changing landscape that, really, anyone with a laptop and some free time could monkey. They will die if they try to live with average, interchangeable parts. No doubt about it.


If Etsy's management didn't understand their business, they shouldn't have been it's management.

But truth is, their business isn't from Mars, it's easy to understand, even if it's not easy to optimize. And if they truly need special custom development, why are they so poor at doing it? Where are the benefits of all that admin spending?

And BTW, I can't think of one Berkshire business that has any significant moat from "like huge capital or regulatory requirements". In Insurance their real moat is either the direct cost model (GEICO), or their underwriting discipline and long term thinking.

Etsy should know what makes it special to customers. Why isn't it more efficient at delivering that?


>Etsy should know what makes it special to customers. Why isn't it more efficient at delivering that?

It is a Very Hard Problem and I don't envy them at all.

Verification of authenticity. I honestly wouldn't know where to begin. Spot check with live people? Expensive and begging for errors. Have sellers document their process? Easy to fake and expensive to check. Have a hair trigger for banning people that are clearly breaking the rules?

They also have the structural problem that Painstakingly Crafted generally takes time. That means less throughput.

And all of that is on top of the general problems of running an internet retailer with global reach.

Because of all of the pressures of throughput and the cost of verification they decided to ignore all of that and just give up, for the most part. And now it is a race to find a new 'quirky stuff that looks crafty' niche like an online Hobby Lobby to live in or lose their brand completely. I don't think it will work in the long term and I think we are witnessing a slow motion Pets.com.

Probably, what they'd need to do is split what they are doing.

One side would be how most of Esty is right now: a bunch of Hobby Lobby level quality crafty looking things that aren't actually hand crafted in any meaningful sense. It would be the place to go to get cheap, somewhat unusual gifts.

On the other side would be high end items. Hand crafted $2000 rocking chairs, for example. Something that can be marked up significantly and that it is worth it to go the extra mile by Etsy and sellers to verify is handcrafted. Maybe video walkthroughs of the process, spot checks, samples sent in to Etsy to be examined by experts etc.

Sellers can exist in both areas or one. The Verified Crafted side would buttress the Crafty but not Crafted side brand wise and the Crafty side would have a larger, more predictable income stream to make sure Verified Crafted can tackle the sticky problems it faces.


> But truth is, their business isn't from Mars, it's easy to understand, even if it's not easy to optimize. And if they truly need special custom development, why are they so poor at doing it? Where are the benefits of all that admin spending?

Speaking of Buffet, this sounds a little bit like his explanation of the "Institutional Imperative" http://www.berkshirehathaway.com/letters/1989.html (just above the 'miscellaneous' section at the bottom)


The curve isn't flat, but the benefits are massively disproportionately expensive the farther up it you go.

This isn't an argument about making the company "soulless". You can still have a great and fun work environment without spending 25% of sales on admin. And much of what makes work enjoyable isn't benefits, but leadership. Having management that is competent, humble, approachable, and driven to empower employees can change a lot.


No argument here but what do you mean by 'admin'?


"Etsy’s general and administrative expenses amounted to 24 percent of total revenue. (EBay and MercadoLibre.com, the Latin American online marketplace, each spend about 10 percent of revenue on such expenses.) "

I should have said G&A (general and administrative expenses). Essentially the cost of your workforce, the offices, benefits, etc. Etsy's is huge compared to any reasonable comp, and nowhere has anyone explained why it must be so.

Ebay has bigger economies of scale, so maybe Etsy can't really get to 10% with their smaller sales, but it should be in the 10-20% range. If it's "correct" number for G&A is 14%, they are essentially taking 10% of every sales dollar to spend on a party for the employees.

It also means their total compensation per employee might be as much as 70% higher than market. Total comp is pay, payroll taxes, benefits such as medical/dental/parking/mass transit/etc. Probably not, since it also includes office expense such as the cost of the CEO's merry band of office decorators. But it's not hard to imagine that they might be 40-50% over market in employee comp, plus spend way too much on office costs.


Interesting.

So you are talking about executive management, finance, and other overhead staff not developers or product development.

I asked because you mentioned developer salaries earlier in the thread.

24% does seem awfully high.


"Brand" is the key thing here. There's obviously an upper level where increased pay / perks becomes excessive, but for the type of customers / sellers that Etsy wants to attract the line is FAR above "as little as possible to make employees not leave". Etsy has to, more than most other companies, maintain an image of not being a soulless corporation as much as humanly possible.


I disagree. Friedman's statement isn't a justification for decisions and it doesn't determine which specific decisions are right or wrong. It determines which justifications are right or wrong.

"We made this decision because it improves environmental sustainability" may or may not be a prudent decision depending on whether the justification of environmental sustainability correlates positively or negatively with financial success.

Clearly running your business into the ground through over-spending, even if it generates modest short-term results, is a poor application of Friedman's idea.


I'd disagree with the generalization that Friedman is viewed as the paragon of logical reasoning and empiricism by economists.

This might be a case of where there's a vocal minority who like to quote Friedman when it's convenient for their political position, so I do understand why it is hard to avoid the impression you have.

His academic contributions to the field are recognized when they've held up, but his views and who he sided with is not without criticism.


> It's strange to me that Friedman is viewed (at least by economists and "business" folk) as a paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology.

In the U.K. at least his views, along with Hayek's, tend to be associated indelibly with Margaret Thatcher. If there's someone who is seen as a paragon of reason whilst being actually quite ideologically biased, it's Adam Smith.


> paragon of logical reasoning and empiricism, all the while his views reek so strongly of ideology

Motivated reasoning is a very powerful force. Of course people with the same ideology are going to hold up someone who supports them as a paragon of reason, and use him as protective camoflage for policies harmful to the rest of us.


I don't get how it's compatible with the idea that corporations are people. If people act like dicks there is one and only on social responsibility for the other people around it, and that is to call them out and make them stop. But obviously we expect every one to behave, and generally people do.

I don't know exactly what it'd look like if a man on the street started acting like Shell is acting in the Arctic, but I'm quite sure there would be severe and immediate consequences.


You did cut off half the sentence, it concludes, " so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." But beyond that, that one sentence doesn't come close to summarizing his view which is nuanced, and more about corporate governance. If you can suffer through the bad OCR, this old NY Times Magazine article covers it.

http://www.nytimes.com/1970/09/13/archives/a-friedman-doctri...




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