Summary List Placement
Fifty years ago Sunday, an economist by the name of Milton Friedman wrote an essay in The New York Times Magazine that would profoundly influence business leaders up to the present.
He argued that the sole purpose of a company is to serve its shareholders and lampooned the idea that business has any responsibility for “providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.”
In the essay, Friedman pitted the idea of “social responsibility” against the interests of shareholders in a zero-sum game, with shareholders winning. Business leaders listened, and took note.
Responsibility and primacy
Today, while climate change is causing California’s biggest forest fire in an era rife with them, Americans protest racial injustice in unprecedented numbers, and even corporate leaders sound the alarm on economic inequality, more and more voices are declaring Friedman’s shareholder primacy what it is: dangerous. The surprise now is that these voices include many of the leading executives that embraced the theory in past decades.
Eroding business regulations and worker protections accompanied the rise of Friedman’s philosophy in the ’70s and ’80s. Many laws passed during those decades chipped away at collective bargaining rights, which undermined pay growth for the middle class, according to the Economic Policy Institute, a left-leaning think tank. But a whole host of analyses have found that inequality has risen over the same period.
Friedman became a regular on TV, appearing in a 10-part show on PBS, and he advised President Ronald Reagan, who largely opposed federal environmental regulation and research. In a move heavy with symbolism, Regan removed the solar panels that President Carter had installed on the White House’s roof.
Along with the president, the business community at large embraced shareholder primacy. Academic research published at the time suggested that to ensure CEOs focus on making money for their shareholders, they be awarded large amounts of stock, something executives welcomed, Steve Jennings, author of “The Age of Agile,” writes in Forbes.
General Electric CEO Jack Welch, a dominant figure in ’80s business, was an exemplar of the theory in practice, aggressively cutting costs (and jobs) to maximize shareholder profits. Business Insider’s Shana Lebowitz reported upon Welch’s death earlier this year that other executives are only now starting to move on from the Friedman-Welch legacy.
“In his two decades at the helm, GE met Wall Street expectations almost every single quarter. A $14 billion company became a more than $400 billion behemoth. Welch himself made nearly a billion dollars,” Marketplace reports.
After he left GE, Welch renounced the theory, calling shareholder primacy “the world’s dumbest idea,” saying in a 2009 interview with The Financial Times, that a company must also value its customers and its employees, and strive for long-term growth.
But Friedman’s ideas continued to influence policy nevertheless.
President George W. Bush, in a 2002 speech celebrating the economist, said, “His work demonstrated that free markets are the great engines of economic development.” In 2016, The Economist …read more
Source:: Business Insider