(Bloomberg Opinion) -- Milton Friedman famously wrote that the sole purpose of a business is to generate profits for its shareholders. This week, leaders of many American companies begged to differ. In a Business Roundtable “Statement on the Purpose of a Corporation,” they affirmed that “each of our stakeholders is essential.” The accompanying press release sums it up crisply: “Updated statement moves away from shareholder primacy,” it says.
The sentiment guiding this rethink — the notion that firms should strive to help their customers, workers, suppliers and surrounding communities, and not just serve their owners — is admirable in its way. No question, companies ought to be good corporate citizens; and, yes, as with ordinary citizens, there’s more to that than merely following the law. Even so, depending on exactly what it means, “moving away from shareholder primacy” raises a few awkward questions.
The first and biggest concerns the underlying assumption — namely, that the search for profit is somehow at odds with advancing those other goals. It isn’t. In fact, the opposite is closer to the truth. The most successful firms have satisfied customers; loyal, trained and adequately motivated workers; reliable supply-chain partners; and supportive communities. These economic necessities make the search for profit by competent, farsighted managers a more effective guarantee of wider social benefits than any number of Business Roundtable undertakings, laudable as those might be.
Some of the statement’s signatories, one suspects, might agree. Jamie Dimon, head of JPMorgan Chase and chairman of the Business Roundtable, said: “Major employers are investing in their workers and communities because they know it is the only way to be successful over the long term.” Exactly. In a private-enterprise economy, the effort to deliver long-term results for shareholders isn’t just consistent with those other advances, it’s the very thing that drives them.
Perhaps the Business Roundtable statement and others like it should therefore be seen as concessions to current political realities, rather than as a serious economic reappraisal. Certainly, American capitalism is under unusually fierce attack at the moment. It could use some skillful defenders. But does suggesting, falsely, that the interests of shareholders and stakeholders are basically in conflict really serve that purpose? Hardly. It concedes most of what the fiercest critics of the corporation allege. And if shareholder capitalism is so fundamentally flawed, one might ask, why trust CEOs, why trust even members of the Business Roundtable, to put things right?
That’s a fair question — and it suggests something else for the signatories to ponder. What’s the right division of labor between corporate boards (accountable to shareholders) and governments (accountable to voters)? Nobody in the U.S. is advocating unfettered, unregulated capitalism. Governments rightly intervene to correct market failures and to advance all manner of social purposes. Yet how ambitious and intrusive these efforts should be is an intensely political question. Corporate executives might be wise to pause before taking up this function for themselves and trying, in effect, to privatize public policy.
Delivering long-term gains for shareholders is a demanding enough task in its own right. Indeed, better aligning the incentives of corporate managers with that aim is a worthy ambition for tax and corporate-governance reformers. The pressures to neglect the traditional purpose — to stress short-term gains over long-term, for example, or take undue tax-preferred risks by borrowing excessively — are real. There’s a strong public interest in making capitalism more patient and farsighted, and good reason for enlightened executives to make this case to their investors and the public at large.
However, calling for an end to shareholder primacy is not the way. It’s unwise to blur the line between politics and business. Capitalism’s best defense is successful companies that put their owners first — and because of that, not despite it, serve their stakeholders as well.
Editorials are written by the Bloomberg Opinion editorial board.
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