Milton Friedman’s Influential Essay on Business, 50 Years Later

If Friedman had balked, asserting that Starbucks could have performed even better without these “socially responsible” activities, I would have told him what I told an institutional investor who wanted me to slash health care costs during the Great Recession, or what I said to a shareholder in 2013 who falsely claimed that Starbucks’s support of gay rights hurt profits: If you feel you can get a better return elsewhere, you are free to sell your shares.

In 2013, I stood in front of Starbucks shareholders and posed this question: “What is the role and responsibility of a for-profit public company?” Friedman’s flawed answer is not his legacy. His legacy is the question itself — which today’s leaders must answer with a renewed commitment to balancing moral purpose and high performance.

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Today’s DealBook Briefing was edited by Andrew Ross Sorkin in Connecticut and Jason Karaian in London.

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Friedman: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

• Marianne Bertrand, professor of economics at the University of Chicago Booth School of Business

The shareholder-primacy view of the corporation — which gives little voice to the workers, customers and communities that are impacted by corporate decisions — has been the modus operandi of United States capitalism. Why did this view become so dominant? One rationale was a practical one. Rather than being asked to balance multiple, often conflicting, interests among stakeholders, the manager is given a simple objective function. More important, though, was the naïve belief, dominant in the Chicago school at the time, that what is good for shareholders is good for society — a belief that rested on the assumption of perfectly functioning markets. Unfortunately, such perfect markets exist only in economics textbooks.

• Daniel Loeb, chief executive of Third Point

Friedman’s timeless essay resonates today as corporate America embraces “stakeholder capitalism,” a popular concept that is inconsistent with the law. Stakeholder capitalism distorts the incentive that prompts investors to risk their capital: the promise of a profit on their investment. So, I share Friedman’s concern that a movement toward prioritizing ill-defined “stakeholders” might allow some executives to pursue personal agendas — or simply camouflage their own incompetence (until it is starkly revealed by poor shareholder returns).

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Friedman: “This process raises political questions on two levels: principle and consequences.”

• Erika Karp, chief executive of Cornerstone Capital Group