What are the chances that corporations will actually behave any differently because of this? My uninformed guess would be slim to none, but maybe I'm just cynical.
That's one of author and law professor (and son of jurist Richard) Eric Posner's arguments:
"this new philosophy will not likely change the way corporations behave. The only way to force corporations to act in the public interest is to subject them to legal regulation."
How does this prove it was wrong? The end goal is still to maintain long term profits. Once a company becomes unprofitable it dies. Friedman gets credited with it, but it's basic econ.
This. Plus, if the way to be long term profitable is to be more socially and ecologically responsible, because that's what the market is asking for, then corporations will adapt or die.
The problem is that they're currently in the process of dying, but they're bringing (quite literally) the entire planet down with them. That is not an acceptable outcome. The market cannot regulate itself.
> “short-sighted and muddle-headed” in matters of public import.
vs
> Many business executives realized that wage and price controls would serve their business interest (no doubt by holding down the cost of labor and other inputs) and didn’t care whether they harmed the economy at large.
Those are the same thing. They were short sighted because price controls would serve their business interest in the short term.
Yea, I also took issue with this point initially, but I think the author was pointing out that Friedman's complaint of CEOs "short-sightedness" at its core was asking CEOs to exhibit a sort of social responsibility--the very same responsibility that he criticizes.
I'm not an economist, but I disagree. The purpose of a corporation is to make money. Money benefits the shareholders. If its purpose was to benefit the "stakeholders" then it would be a nonprofit. Stakeholder sounds good for public relations, but I don't see it truly occurring in practice.
You can make money without a corporation though. And a corporation adds a bunch of overhead and costs to "making money," so I can't agree that's the purpose of a corporation.
It's true that the corporation making a profit benefits the shareholders, but that doesn't mean the purpose of the corporation is to maximize this shareholder benefit. The corporation obviously wants to attract and retain shareholders, and so it must give them sufficient return on their investment, but that's it. And giving the shareholders value isn't at all the "purpose" of the corporation, it's merely something it must do. You may as well say "the purpose of a startup is to maximize return for VCs"; that's certainly what the VCs want but that's not a healthy mindset to be conducting business with.
Incorporation, and the legal protections extending from it, are extended by the state, to provide value, ultimately to the state as a whole (e.g., not just the government, but the people).
You'll find a form of this expressed in Adam Smith's Wealth of Nations, though he speaks here in terms of the entire field of political economy:
POLITICAL œconomy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.
Of incorporated firms -- joint-stock companies -- Smith is markedly less enthused, and limits them to serving in insurance and banking, major civil engineering, and public works projects.
The only trades which it seems possible for a joint stock company to carry on successfully without an exclusive privilege are those of which all the operations are capable of being reduced to what is called a Routine, or to such a uniformity of method as admits of little or no variation. Of this kind is, first, the banking trade; secondly, the trade of insurance from fire, and from sea risk and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city.
Smith wasn't some prophet. He got some things right, and some things wrong. He was trying to imagine a world he couldln't possibly imagine from a point in time when slavery was rampant across the world, there were nobles and monarchs, and power was as centralized as the technology would allow. Free enterprise is not intuitive because tribes were so small and the world was so sparsely populated, they never had the issue.
Sure: Smith was responding to, and opposing, concentrations of wealth and power and their negative, distortionary and discriminatory impacts on the economy.
His harshest criticisms were against those concentrations and abuses of power. His strongest and most heartfelt arguments were for the common man. He wasn't some wealth gospel preacher, despite often being portrayed as such. And his attacks on the power and dangers of corporations were well taken.
J.K. Galbraith's The Age of Uncertainty explores this in depth. As does much of the writing of Emma Rothschild. Among many others.
I dont agree. Most of them that is probably true. I think the purpose is whatever the founder wants it to be, and after they're gone its whatever the person in charge says it is. Perhaps they've agreed to follow the founders vision too. I think it's up to the one in charge to tell shareholders what the purpose of the company is and if an investor wants to buy in, that would be their informed choice.
Even under that concept, I think most companies would say their purpose is to make money. But what if the purpose of SpaceX really is to colonize Mars? Is that a problem? I think not.
These are arguably identical statements. I think Milton Friedman's "Theory" was descriptive, not prescriptive: ultimately shareholders can sway a corporation, and thus the corporations' "duty" is "to" them. If public opinion moves in a way that makes it so a corporation would become unpopular and unprofitable by harming customers and "stakeholders", then they are effectively "harming" their shareholders, who would be the ones that then say "we should take these concerns into consideration".
This may seem perhaps a pedantic or semantic way of looking at it, but I do think it somewhat gets to the heart of many of Friedman's beliefs regarding incentive structures. By understanding that corporations are ultimately essentially accountable to their shareholders, you can develop a model where the shareholders goals are aligned with the customers'. Some would argue that this is always the case given enough time, others would argue that it isn't and you thus need additional laws to create the alignment of goals (if you go to jail for harming your customers, then your shareholders all of a sudden have the goal of not harming your customers). The main distinction I'm trying to make is that this is a description of where agency lies, vs. pretending corporations have some "decision" as to who they are responsible to. I promise you that if tomorrow they decided they're all actually accountable to me, the CEOs would get fired and that would reverse fairly quickly.
The most interesting place this comes up IMO is in the emergent behavior of collective shareholders. Many people may believe they would tell Phillip Morris to behave a certain way, and yet, without knowing it, they actually indirectly tell them the opposite. If their retirement plan unbeknownst to them is invested in Phillip Morris, and Phillip Morris starts making decisions that are good for customers but lower profits, and thus random people get angry at their retirement fund managers and those managers pull money out of Phillip Morris and into some other venture that is more profitable, without knowing it they have sent a clear signal that "Phillip Morris is ACTUALLY accountable to shareholders, and in particular the money they make". This is the default case without actively doing any extra work. It is absolutely the case that if enough education is employed that people start choosing to tell their retirement funds to not invest in Phillip Morris because they are profitably harming customers, then you can have the more socially desirable effect of forcing them to behave in a way that doesn't harm customers. But again, the goal is to understand that "steady state" of this relationship.
Are you sure you do not have that backwards? One could argue that in practice in many democracies politicians, executives of 'the state', seem to exist at the pleasure of the corporations that fund their election.
The idea that 'the state' and 'corporations' are two fully separate entities is an oversimplification that is so far from reality that it is an unuseful model for reasoning.
I thought you couldn't maximize for more than one variable, and so if society wants other outcomes such as low pollution laws need to tie high fines to it.
That would assume the law wasn't subject to regulatory capture. In theory high fines exist, in practice they really don't. See the debacle with Equifax and not having any real money in the fines to make people whole for their wholesale credit history being breached.
Matt Levine has an worthwhile take on the new "stakeholder" mission statement:
"""
It is productive—not 100% accurate, but a useful heuristic—to assume that all corporate governance debates in the U.S. are about whether shareholders or managers should have more power to control the corporation. There are other stakeholders, sure, but they are mostly tools in the shareholder/manager fight, not power centers in themselves. 6 So when an association of big public-company CEOs gets together and declares that corporations should serve the community, take care of the environment, and be responsible to employees and customers, not just shareholders, that might be because the CEOs have thought it over and decided that employees and the environment are getting a raw deal, but it is also possible that the CEOs have thought it over and decided that shareholders are annoying.
"""
Levine's focus on the principle-agent and manifest vs. covert aspects of short-term vs. long-term returns hits on a theme of risk in economic activity that I've been noodling at.
In one sense, Levine's argument is for better tools for making, and costing / pricing in risks and rewards of future activities. Or perhaps he's observing that a bird in the hand wins over two, or four, or four hundred, in the bush, no matter what.
Given that risk, uncertainty, imperfect, and nonuniformly unveiled and available information are givens in the real world, this is a bit of a stumper for economics.
Alternatively, imposing obligatory constraints through other mechanisms -- say, competing and equally-considered stakeholder demands from employees, business partners, government, and community -- might be an alternate approach. Effectively removing some of the near-exclusive power now claimed by shareholders.
This short piece is a response to the recent statement by the Business Roundtable, a group that represents CEOs of big corporations, about the "purpose of a corporation."
This piece is also the best takedown I've seen so far of Milton Friedman's influential article, "The social responsibility of business is to increase its profits."[a]
Key passages:
> ...if the purpose of a business is to “increase its profits,” as Friedman argued, then it is not only “clear-headed,” but also justifiable for a business to use its political influence to dismantle the free market that Friedman cherished.
> ...the notion that the big public corporations are tribunes for the free market is quixotic. Big corporations are islands of socialism within our market economy: Their bigness protects them from competition for customers and workers.
> ...[Businesses] can (like Facebook) break promises to respect their customers’ privacy. They can (like Twitter and Google) generate ad revenue by facilitating the transmission of hate speech. They can (as Exxon used to do) propagandize against climate science. They can (like Jimmy John’s) use illegal contract terms to deter their low-skill workers from quitting low-paying jobs. They can (like the tobacco companies and now the tech companies) push addictive products onto children, or (like Purdue Pharma) create a generation of drug addicts. And they can engage in corporate lobbying. The biggest problem with Friedman’s theory is that corporations can—and, according to his theory, should—use their influence in Congress to block laws that stop corporations from causing such harms.
> ...Nor was Friedman correct that business executives are the employees of the shareholders. Legally, business executives are employees of the corporation, which—crucially—they, not the shareholders, control. The shareholders have a contractual relationship with the corporation that entitles them to a share of its profits and a vote on certain major corporate decisions. Time and again, CEOs have used their power over the corporation to bat away shareholders when they propose that the corporation should act in a socially responsible way. When an employer says “jump” to an employee, the employee jumps. When shareholders say “jump” to the CEO, the CEO sues them.
> On Monday, the Business Roundtable, a group that represents CEOs of big corporations, declared that it had changed its mind about the “purpose of a corporation.” That purpose is no longer to maximize profits for shareholders, but to benefit other “stakeholders” as well, including employees, customers, and citizens.
CEOs are employees. A group of employees just voted that they aren't responsible to the people that pay their salary, but to their impression of the interests of other people who don't.
You can bet if it was a group of middle managers at any of the firms those CEOs run that made that declaration, they’d very concretely stop being responsible to their employers before the ink was dry.
Which isn't too say that corporations, which are publicly chartered and granted public privileges, shouldn’t be answerable to someone other than the shareholders: they clearly should be accountable to the public by way of the chartering government. But that's not what these CEOs are saying, which is just “We shouldn't be responsible to the only people who are positioned to hold us accountable, to be vague amorphous interests that we interpret for ourselves, and which have no accountability mechanisms.”
This was not about responsibility and accountability, but mission and direction.
A company should be able to state that its mission is (for example) to deliver the best electric cars in the world, and be able to do so without pressure from shareholders to fire the CEO when the CEO focuses on building production capacity instead of maximising quarterly profits.
> A company should be able to state that its mission is (for example) to deliver the best electric cars in the world, and be able to do so without pressure from shareholders to fire the CEO
“A company” is an abstraction. Who is declaring the mission? The shareholders? Or the CEO?
Yes, if the shareholders declare a mission, the CEO shouldn't generally be fired for pursuing it effectively.
If the CEO declares a mission, and the shareholders don't agree that it represents their interests for the firm, they absolutely should create pressure for the CEO to either reverse course or be removed.
Why should the shareholders have any determination of direction? They are there to invest in a company, not run a business. If they don’t like the direction they can invest elsewhere.
Tools tend to work best when they have one job and do it well. A company is a tool for generating profit for shareholders. If we need tools for social good that's fine, we should absolutely make them, but forcing one tool to be used for a purpose it wasn't designed for sounds like a great way to get no social good or profits.
I don't think any part of this should be controversial. The purpose of a business can be whatever you want it to be, whether it is to make money or make the world a better place. But either way, the corporation is a part of society, and reaps the benefits from that, but also has responsibilites to it. That means that all the stakeholders should have some influence. And stakeholders are everything from shareholders to employees to the local community to the environment.
38 comments
[ 2.8 ms ] story [ 95.8 ms ] thread"this new philosophy will not likely change the way corporations behave. The only way to force corporations to act in the public interest is to subject them to legal regulation."
vs
> Many business executives realized that wage and price controls would serve their business interest (no doubt by holding down the cost of labor and other inputs) and didn’t care whether they harmed the economy at large.
Those are the same thing. They were short sighted because price controls would serve their business interest in the short term.
That can be to make money but it doesn't have to be.
[1] https://en.wikipedia.org/wiki/Benefit_corporation
You'll find a form of this expressed in Adam Smith's Wealth of Nations, though he speaks here in terms of the entire field of political economy:
POLITICAL œconomy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.
https://oll.libertyfund.org/titles/smith-an-inquiry-into-the...
Of incorporated firms -- joint-stock companies -- Smith is markedly less enthused, and limits them to serving in insurance and banking, major civil engineering, and public works projects.
The only trades which it seems possible for a joint stock company to carry on successfully without an exclusive privilege are those of which all the operations are capable of being reduced to what is called a Routine, or to such a uniformity of method as admits of little or no variation. Of this kind is, first, the banking trade; secondly, the trade of insurance from fire, and from sea risk and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city.
https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_V/...
This is also the major thrust of Matt Levine's Bloomberg article on the Roundtable announcement commented elsewhere in this thread: https://www.bloomberg.com/opinion/articles/2019-08-19/maximi...
Edit: spelling.
His harshest criticisms were against those concentrations and abuses of power. His strongest and most heartfelt arguments were for the common man. He wasn't some wealth gospel preacher, despite often being portrayed as such. And his attacks on the power and dangers of corporations were well taken.
J.K. Galbraith's The Age of Uncertainty explores this in depth. As does much of the writing of Emma Rothschild. Among many others.
I dont agree. Most of them that is probably true. I think the purpose is whatever the founder wants it to be, and after they're gone its whatever the person in charge says it is. Perhaps they've agreed to follow the founders vision too. I think it's up to the one in charge to tell shareholders what the purpose of the company is and if an investor wants to buy in, that would be their informed choice.
Even under that concept, I think most companies would say their purpose is to make money. But what if the purpose of SpaceX really is to colonize Mars? Is that a problem? I think not.
This may seem perhaps a pedantic or semantic way of looking at it, but I do think it somewhat gets to the heart of many of Friedman's beliefs regarding incentive structures. By understanding that corporations are ultimately essentially accountable to their shareholders, you can develop a model where the shareholders goals are aligned with the customers'. Some would argue that this is always the case given enough time, others would argue that it isn't and you thus need additional laws to create the alignment of goals (if you go to jail for harming your customers, then your shareholders all of a sudden have the goal of not harming your customers). The main distinction I'm trying to make is that this is a description of where agency lies, vs. pretending corporations have some "decision" as to who they are responsible to. I promise you that if tomorrow they decided they're all actually accountable to me, the CEOs would get fired and that would reverse fairly quickly.
The most interesting place this comes up IMO is in the emergent behavior of collective shareholders. Many people may believe they would tell Phillip Morris to behave a certain way, and yet, without knowing it, they actually indirectly tell them the opposite. If their retirement plan unbeknownst to them is invested in Phillip Morris, and Phillip Morris starts making decisions that are good for customers but lower profits, and thus random people get angry at their retirement fund managers and those managers pull money out of Phillip Morris and into some other venture that is more profitable, without knowing it they have sent a clear signal that "Phillip Morris is ACTUALLY accountable to shareholders, and in particular the money they make". This is the default case without actively doing any extra work. It is absolutely the case that if enough education is employed that people start choosing to tell their retirement funds to not invest in Phillip Morris because they are profitably harming customers, then you can have the more socially desirable effect of forcing them to behave in a way that doesn't harm customers. But again, the goal is to understand that "steady state" of this relationship.
No. Corporations are ultimately accountable to and exist at the pleasure of the state, full stop.
The costs approach effectively allows a firm to optimise for profits, but changes the weightings of various activities and products or inputs.
Which Hayek was fine with (as shown in The Road To Serfdom).
https://www.dailykos.com/stories/2013/09/27/1241729/-The-Roa...
I don't know if I buy the whole social program thing, but the quote is correct. Reader's Digest: https://mises-media.s3.amazonaws.com/Road%20to%20serfdom.pdf
""" It is productive—not 100% accurate, but a useful heuristic—to assume that all corporate governance debates in the U.S. are about whether shareholders or managers should have more power to control the corporation. There are other stakeholders, sure, but they are mostly tools in the shareholder/manager fight, not power centers in themselves. 6 So when an association of big public-company CEOs gets together and declares that corporations should serve the community, take care of the environment, and be responsible to employees and customers, not just shareholders, that might be because the CEOs have thought it over and decided that employees and the environment are getting a raw deal, but it is also possible that the CEOs have thought it over and decided that shareholders are annoying. """
[1] https://www.bloomberg.com/opinion/articles/2019-08-19/maximi...
In one sense, Levine's argument is for better tools for making, and costing / pricing in risks and rewards of future activities. Or perhaps he's observing that a bird in the hand wins over two, or four, or four hundred, in the bush, no matter what.
Given that risk, uncertainty, imperfect, and nonuniformly unveiled and available information are givens in the real world, this is a bit of a stumper for economics.
Alternatively, imposing obligatory constraints through other mechanisms -- say, competing and equally-considered stakeholder demands from employees, business partners, government, and community -- might be an alternate approach. Effectively removing some of the near-exclusive power now claimed by shareholders.
This piece is also the best takedown I've seen so far of Milton Friedman's influential article, "The social responsibility of business is to increase its profits."[a]
Key passages:
> ...if the purpose of a business is to “increase its profits,” as Friedman argued, then it is not only “clear-headed,” but also justifiable for a business to use its political influence to dismantle the free market that Friedman cherished.
> ...the notion that the big public corporations are tribunes for the free market is quixotic. Big corporations are islands of socialism within our market economy: Their bigness protects them from competition for customers and workers.
> ...[Businesses] can (like Facebook) break promises to respect their customers’ privacy. They can (like Twitter and Google) generate ad revenue by facilitating the transmission of hate speech. They can (as Exxon used to do) propagandize against climate science. They can (like Jimmy John’s) use illegal contract terms to deter their low-skill workers from quitting low-paying jobs. They can (like the tobacco companies and now the tech companies) push addictive products onto children, or (like Purdue Pharma) create a generation of drug addicts. And they can engage in corporate lobbying. The biggest problem with Friedman’s theory is that corporations can—and, according to his theory, should—use their influence in Congress to block laws that stop corporations from causing such harms.
> ...Nor was Friedman correct that business executives are the employees of the shareholders. Legally, business executives are employees of the corporation, which—crucially—they, not the shareholders, control. The shareholders have a contractual relationship with the corporation that entitles them to a share of its profits and a vote on certain major corporate decisions. Time and again, CEOs have used their power over the corporation to bat away shareholders when they propose that the corporation should act in a socially responsible way. When an employer says “jump” to an employee, the employee jumps. When shareholders say “jump” to the CEO, the CEO sues them.
The author is Eric Posner.[b]
Go read it.
[a] https://timesmachine.nytimes.com/timesmachine/1970/09/13/223...
[b] https://en.wikipedia.org/wiki/Eric_Posner
Update: this appears to be a LaTeX-generated PDF based on the original column: http://umich.edu/~thecore/doc/Friedman.pdf
(From Matt Levine's Bloomberg article.)
CEOs are employees. A group of employees just voted that they aren't responsible to the people that pay their salary, but to their impression of the interests of other people who don't.
You can bet if it was a group of middle managers at any of the firms those CEOs run that made that declaration, they’d very concretely stop being responsible to their employers before the ink was dry.
Which isn't too say that corporations, which are publicly chartered and granted public privileges, shouldn’t be answerable to someone other than the shareholders: they clearly should be accountable to the public by way of the chartering government. But that's not what these CEOs are saying, which is just “We shouldn't be responsible to the only people who are positioned to hold us accountable, to be vague amorphous interests that we interpret for ourselves, and which have no accountability mechanisms.”
A company should be able to state that its mission is (for example) to deliver the best electric cars in the world, and be able to do so without pressure from shareholders to fire the CEO when the CEO focuses on building production capacity instead of maximising quarterly profits.
“A company” is an abstraction. Who is declaring the mission? The shareholders? Or the CEO?
Yes, if the shareholders declare a mission, the CEO shouldn't generally be fired for pursuing it effectively.
If the CEO declares a mission, and the shareholders don't agree that it represents their interests for the firm, they absolutely should create pressure for the CEO to either reverse course or be removed.