Shareholder capitalism works best for society

The author, a former FT editor, is head of industrial policy at Policy Exchange

Was Milton Friedman right when he said in 1970 that the social responsibility of business was to make as much money as possible for shareholders? An influential group of critics, in the business community as well as in academia, believes he was fundamentally wrong.

Friedman’s malign influence, according to these critics, is partly responsible for causing or aggravating some of the world’s most serious problems, including environmental degradation and rising inequality. This will only be corrected, they argue, if the doctrine of shareholder primacy is abandoned.

This issue has come to the fore as the debate about whose interests companies should serve has hotted up. Unilever, for example, has been attacked for focusing on environmental and social issues at the expense of shareholder value. Larry Fink, head of BlackRock, the US institutional investor, has been accused of “wokeness” for insisting that companies should pay more attention to the interests of stakeholders, such as employees, local communities and society at large.

Undeniably, public expectations about how business should behave have been changing. Large, publicly listed companies are under pressure from investors, customers and employees to do more to protect the environment and to help tackle other social ills.  

There was a famous case in 2018 when Google withdrew from an artificial intelligence contract with the Department of Defense after protests from employees that the technology might be used in a way that infringed human rights. If companies want to retain a loyal and committed workforce, they need to demonstrate that their values are aligned with those of their employees.   

In responding to these pressures, many companies are moving in a more stakeholder-friendly direction, displeasing those who think they are going too far, as in the Unilever case, without satisfying those who want them to go much further. Some members of the anti-Friedman camp favour a revision of company law, obliging businesses to adopt a social purpose that goes beyond making profits.

One model is the public benefit corporation, a new US legal form, which enables companies to focus on broader social objectives, as set out in their founding charter, rather than maximising profits. Some advocates say PBC status, which has been taken up mainly by private companies, should be extended to all large, publicly traded corporations. The aim is to shift business away from shareholder primacy, which has long been a central element in company law. Would such a shift be good for society? The answer is: almost certainly not.

Shareholder-based capitalism, with competition between profitmaking firms as its driving force, is the means by which society’s resources are used most productively for everyone. At the heart of the system is the accountability of companies to shareholders; the measure of success is their ability to maximise shareholder value over the long term. This does not mean that companies are run solely for the benefit of shareholders. It does mean that directors have a clear criterion to guide their decisions, and that criterion is not so binding as to cause them to behave in an “antisocial” way. It is good for companies to have a purpose, one that is linked to their business and more likely to enthuse employees than “maximising shareholder value”, but that can be done within the present legal framework.

Shareholders are often blamed for encouraging short-termism, but excessive long-termism — sticking too long to a poorly performing business — is at least as serious a problem. This is where shareholders, including activist hedge funds, can play a useful role. Liberating companies from shareholder pressure would weaken a source of dynamism in the market economy.

​Letters in response to this article:

Shareholder capitalism is opposite of competitive / From José Milheiro, Porto, Portugal

Redefining role of business in society has wide support / From Chris Turner, Campaign Director, Better Business Act, London E1, UK

Social responsibility is how business becomes a force for good​ / ​From Klaus Schwab, Founder and Executive Chairman, World Economic Forum, Geneva, Switzerland