The Friedman Doctrine - Corporate Governance

The Hedgehog Review published Kyle Edward Williams' The Myth of the Friedman Doctrine: And the stubborn persistence of a powerful idea. Here are my notes.

Americans were once deeply worried about the danger posed by powerful corporations. They may be useful, wrote James Madison to a friend in 1827, “but they are at best a necessary evil only.”1 This was an old republican intuition: Concentrated power in whatever form threatened the body politic. In recent years, however, business leaders have come to believe that what Madison considered a “necessary evil” is actually the last great institution capable of making the world a better place. For Silicon Valley entrepreneurs no less than Fortune 500 CEOs, the bottom line is out, and amelioration is in. Call it conscious capitalism. Or corporate social responsibility or environmental, social, and corporate governance (ESG) investing. Many consumers, regulators, and activists expect big-business executives to act like responsible citizens and steer their firms accordingly—maybe more now than ever before. Even 92 percent of executives in a 2022 survey agreed that corporate leaders should take a stand on social issues.2

One imagines that Milton Friedman would be disappointed by all of this. Fifty-three years ago, the libertarian economist and eventual Nobel Prize winner wrote an article for the New York Times Magazine in which he took aim at the concept of corporate social responsibility.3 His alternative to the social leadership of business executives became known as the Friedman Doctrine. Its core principle could not have been more emphatic: The sole responsibility of business is to maximize profits. Anything less, he argued, is a slippery slope toward the end of free enterprise and, after that, the collapse of democracy. Overstated and simplistic as it was, the doctrine had an undeniable elegance—attractive to its many adherents, crass and even insidious to its many critics.

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The significance of Milton Friedman and his article is not so simple, and a true reckoning with this history is needed to clear up confusion not only about Friedman but about corporate capitalism. On the one hand, Friedman’s view of corporate responsibility was not nearly so radical or original as it is often made out to be. The notion that corporations are the property of shareholders and that management must act in their financial interest has been the default logic of US public policy going back at least to the New Deal era reforms of the stock market and the creation of the Securities and Exchange Commission. On the other hand, despite the almost ritualistic denunciation of the Friedman Doctrine, no comprehensive model for how to think about the large corporation has replaced the practical imperatives and tantalizing simplicity of the doctrine of shareholder value. Simultaneously entrenched and denied, the Friedman Doctrine has achieved the status of conventional wisdom. All of this suggests a question worth considering now, decades after the article’s publication: Can big business live without Friedman’s pronunciamento? The first step to answering that question requires a step back into the history of the article, the author, and the politics of corporate control.

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Mixing business and politics was a dangerous mistake, Friedman contended, that would have unpredictable consequences. Like other neoliberals, he thought of the market as a kind of game that unfolded according to rules set by the state. The conclusion neoliberals arrived at—that politics should be kept in the governmental sphere and sealed off from the market—may seem difficult now for many of us to accept. But it is worth remembering the context in which Friedman and the network of libertarian thinkers gathered in and around the Mont Pèlerin Society (a group formed in 1947 to recover and renew classical liberalism, of which Friedman was president from 1970 to 1972) developed these ideas.11 They wanted to find ways to avoid and undermine the authoritarianism of fascism and communism that had so recently threatened (and continued to endanger) the flourishing of democracy. The problem, as Friedman saw it, was that the market could do the work of coordinating economic activity in a free society only if everyone played his or her part as a self-interested actor, which meant acting on the basis of prices rather than political motives or social responsibilities. Without the rule of profit seeking, the doors were open to the concentration of economic and political power by means of socialism, corruption, discrimination, and, ultimately, tyranny.

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The idea of the corporate stakeholder was mostly unheard of before the 1980s. And it was primarily popularized by self-styled opponents of the Friedman Doctrine. So when the Business Roundtable statement came out four years ago, it was unsurprising that journalists perceived it by and large as a repudiation of Friedman’s idea of shareholder primacy—even if it was not explicitly explained in that way. Joshua Bolten, the president and CEO of the Business Roundtable, said it wasn’t intended as a rejection of Friedman. “It was not a demotion of the long-term shareholders, because, in our view, the interests of all the stakeholders align in the long-run success of the enterprise,” he told the New York Times.16 As many defenders of stakeholder value maintain, the Friedman Doctrine can and should be reconciled with the ideals of ethics and responsibility.

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The centerpiece of the Accountable Capitalism Act was a requirement that workers be given a vote on 40 percent of a corporation’s directors, a proposal modeled on a system of codetermination that’s become institutionalized in Germany since the end of World War II. But it is unclear what effect other elements of the legislation, including one that enumerates new duties of directors toward stakeholders, would have on the day-to-day operations of a firm. “The Act creates a fiduciary duty of directors toward five or six additional stakeholders,” points out public policy analyst Matt Bruenig of the People’s Policy Project. Even if stakeholders initiated litigation in response to what they thought was a dereliction of those duties, he told me, “there would be no serious way to review this legally.” Under a court-honed doctrine known as the business judgment rule, most judges will give wide latitude to corporate executives and directors who are presumed in almost every case to act in good faith and according to their expertise.

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Even supposing a reversal in the decades-long misfortunes of labor unions, a more intractable problem lies with the legal standing of shareholders. Setting aside momentarily the stakeholder theorists’ confidence in the existence of a harmony of interests between investors and everyone else, any would-be corporate reform movement will inevitably break against the flood walls of shareholders and their financial interests. The more challenging task, then, might be to break down the wall between stakeholders and shareholders by redefining what shareholder interests are. Some have proposed marshaling the holdings of public pension funds to pressure big corporations into changing their behavior. Bruenig has proposed a similar plan on a much larger scale. Modeled on Norway’s Government Pension Fund (the largest sovereign wealth fund in the world) and the Alaska Permanent Fund, Bruenig’s idea is that the US government would create a fund that would gradually purchase the stocks of publicly traded firms, among other equities. In addition to redistributing wealth gained from investments and thereby easing economic inequality, the fund would give public representatives a substantial voice through shareholder votes at annual corporate meetings. Over time, state holdings in publicly traded corporations would weaken the iron grip of private investors and disrupt the financial machinations of Wall Street.

These proposals for transforming the way big business does business help explain the stubborn persistence of the Friedman Doctrine and what it means to America. The very possibility of quenching the supremacy of shareholders’ financial interests and making profit maximization subordinate to other social purposes depends on reimagining who gets to exercise power in the corporation—and how they do it. Indeed, a form of corporate governance that shares power among workers, managers, investors, and the broader community would so transform corporate capitalism that we might scarcely be able to call it capitalist anymore. Which suggests something that many critics of the Friedman Doctrine have been unable to countenance: that Milton Friedman expressed in a simple and straightforward, if polemical, way an idea that Americans had been content to accept for about thirty years at that point (and eighty or so years now): that publicly traded corporations ought to be responsible primarily to shareholders.

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That Wall Street has plainly not fulfilled these democratic expectations only heightens the significance of the problem Friedman addressed fifty-three years ago. Those who would seek to do away with the Friedman Doctrine are raising significant questions about corporate governance—who gets to make decisions within the firm and how. But these questions will only lead to confusion if we are not clear about an important historical fact: Friedman’s viewpoint went far deeper and has been more lasting than the politics of 1970 or even the shareholder value movement of the last few decades. If we are going to find a way to live without it, we will have to return to even older questions not seriously considered in this country for generations: What is a corporation, and what is it good for?

I incline to disfavoring the Friedman Doctrine. Mind you, the only economics book I have read was John Stuart Mill's Political Economy. I think concentrated power in a country is a danger to the country, and a corporation has duties as a citizen. However, the practical problems of implementing social investing should not be underestimated. Neither should they be seen as an excuse for not going forward. Perhaps, we can find a capitalism with a human face.

sch 11/9