RUTH SUNDERLAND: The trouble with shareholder primacy is that investors tend to tolerate bad behaviour so long as it seems lucrative
- American economist Milton Friedman was a huge influence on the thinking of Margaret Thatcher and Ronald Reagan
- Even Gordon Gekko’s ‘Greed is Good’ mantra is a simplistic interpretation of his theory
Like shoulder pads and Duran Duran, Milton Friedman was big in the Eighties. The American economist was a huge influence on the thinking of Margaret Thatcher and Ronald Reagan.
Even Gordon Gekko’s ‘Greed is Good’ mantra is a simplistic interpretation of his theory. Friedman’s line was that the primary – and pretty much only – duty of a businessman is to his shareholders (he didn’t conceive of female chief executives back in 1970).
His famous essay ‘The Social Responsibility of Business is to Increase its Profits’ is 50 years old this autumn. In his view, any boss who swerved from the single-minded pursuit of profit to spend time on, say, protecting the environment was wrong-headed and an unwitting puppet of socialism.
‘Greed is good’: Gordon Gekko’s mantra is a simplistic interpretation of Milton Friedman’s theory
He believed that when bosses use company money on worthy activities – what we now call Environmental and Social Governance – it amounts to a despotic form of taxation imposed on shareholders.
There was an important proviso in the essay, which was that businesses should pursue profit through open competition, without deception or fraud. He didn’t consider that if profit is worshipped and other considerations are sidelined, it is easier to cross the line into unacceptable behaviour.
To 21st century eyes, his language sounds extreme. But his ideas have still left a mark on corporate thinking. There are plenty of bosses who believe social responsibility and good governance is box-ticking or at best a fluffy feel-good exercise.
Look at the contempt for governance at The Hut, which is floating on the London market, or the blind eyes turned to sweatshops at former market darling Boohoo.
The trouble with shareholder primacy is that investors tend to tolerate bad behaviour so long as it seems lucrative.
Friedman’s philosophy was shaken to its core by the financial crisis and the pandemic may be the death knell.
Post 2008, the banks, having taken billions of rescue cash, could no longer shrug off their obligations to society.
The financial meltdown also exposed another flaw in the idea of shareholder supremacy. Banks and other big businesses were revealed as ‘ownerless corporations’ with no-one capable of keeping greedy incompetents like Fred Goodwin in check. In the pandemic, businesses have been helped by the taxpayer to hundreds of billions of pounds. What then, do they owe us in return? Clearly, a Friedman-ite response is unacceptable. But answers are not easy.
Take the question of dividends. Should Tesco have paid a dividend to its investors when it has taken taxpayer money through business rates relief? Many critics last week thought otherwise. And how far do responsibilities stretch? Is it reasonable, for instance, for a business whose staff are largely working from home to pull out of a city centre and save on property costs if other firms suffer as a consequence?
Even before the pandemic the rise of Big Tech had begun to raise thorny new problems about corporate responsibilities. Facebook’s attempts to wriggle out of having to deal with fake and harmful material peddled on its platform spring to mind.
Many businesses have responded brilliantly to the pandemic, proving they are not soulless profit machines but part of the communities they serve. Fifty years on, it’s time to leave Friedman behind.