Is Milton Friedman rolling over in his grave?
The Nobel prize-winning economist would surely have been dismayed over the recent Business Roundtable heresy that corporate decisions should consider all stakeholders instead of being based solely on maximizing profitability to benefit shareholders. The statement is a major philosophical shift that would put employees, customers, and society as a whole on par with investors.
Broadening the focus
It was Friedman who famously argued that “the social responsibility of business is to increase its profits,” a view that has largely guided corporate behavior for the past half-century. Promoting desirable social ends and arguing that companies have a social conscience is “pure and unadulterated socialism,” he said.
While the new BRT statement has been met with some skepticism about what it really means — corporate boards still have a legal obligation to protect the interests of shareholders, they point out – it reflects a trend by a growing number of companies and boards to give more weight to broader, longer-term considerations rather than focusing only on short-term gains and shareholder profits.
What’s your story?
Pressure on companies to shift to longer time horizons is also coming from investors in the area of executive compensation. CalPERS recently announced that it will assess executive pay plans of the companies it invests in under a five-year quantitative analysis instead of a three-year performance period.
As investors pay closer attention to performance, companies are responding in a number of ways, including engaging regularly and proactively with investors, learning from peers to improve engagement on sensitive issues such as Say on Pay and providing more detailed disclosures about compensation, with visual elements that depict trends.
Whether listening to investors or considering the views of other stakeholders, companies are increasingly expected to be able to tell their story well – and with the long term in view. Even Mr. Friedman wouldn’t be opposed to that, right?