Was Milton Friedman the first “woke” capitalist?

A bitter battle between so-called “stakeholders” and “shareholders” capitalists is heating up again, with BlackRock CEO Larry Fink and Vivek Ramaswamy pitted against each other. If Milton Friedman had anything to say about it, however, Fink and Ramaswamy would see each other’s arms rather than trade blows.

Like most conflicts, the perennial controversy between stakeholders and shareholders arose largely from a misunderstanding. Milton Friedman’s famous 1970 essay never said that companies should maximize profits at all costs. Instead, he wrote that they should “earn as much money as possible while conforming to the basic rules of society, both those enshrined in law and ethical customs.” Friedman also said shareholders are the final arbiters of relevant rules and customs. “In a free company, private ownership system, a company executive is an employee of the owners of the company.”

Since 1970, shareholders have largely operated as Friedman hoped. They have repeatedly intervened to improve their own long-term well-being.

For example, in the 1970s, the bankruptcy of Penn Central and repeated corporate bribery scandals led shareholders and the SEC to demand independent audit committees. It worked. No larger corporate failure than Penn Central occurred for more than three decades, until Enron in 2001. In the 1980s and 1990s, institutional investors led by pension plans Public bodies like CalPERS have imposed performance-based executive compensation guidelines and poison pill takeover protections, in an effort to curb excessive CEO compensation and hostile takeovers. Victor Pozner – who has already been reported to “have the the arrogance of a banana republic dictator”–had become infamous for buying up companies like Sharon Steel and paying himself multiples of what his assaulted targets earned. No more.

From 1991 to 1993, the underperforming CEOs of Westinghouse, American Express, IBM, Kodak and General Motors were removed by the actions of their shareholders, not their boards.

Later, the global financial crisis of 2007-2009 revealed serious misalignments between compensation incentives and shareholder interests, as well as widespread shortcomings in risk management. Stronger balance sheets and professional risk management have become top priorities for shareholders. The same was true for deferred compensation and clawback provisions.

During the last years, shareholder resolutions focused more on environmental and social concerns. In 2021, 81% of Dupont shareholders backed a proposal requiring the company to disclose how much of its plastic pellets end up in landfills and oceans each year (apparently around $10 trillion). In the same year, 95% of Wendy’s shareholders asked management to join the “fair food program” to support safer working conditions in the age of COVID, which most other fast food companies had already done.

Each of these shareholder interventions shares the same cause and effect: in all cases, shareholders have imposed short-term costs in exchange for more likely long-term gains. We can also understand why. Most shareholders are future retirees, plan sponsors, insurance companies or sovereign wealth funds, i.e. individuals or institutions with long-term commitments. These financial needs span generations of business leaders, not just the next few quarters. Most shareholders want their long-term well-being to be maximized.

The stakeholder paradigm has always rested on shaky foundations. Companies should not take the risk of replacing essential growth priorities with potentially superfluous, tenuous, ephemeral and/or socially divisive ones. Stakeholder capitalists do not have proven optimization models or track records on which to base general skill claims.

The same cannot be said for shareholders. They have the legal right to order business leaders to rely on a proven track record of success. This is why Friedman wanted the responsibility to stop with the shareholders, not the stakeholders. Shareholders bear the direct consequences of their orders. Incentives are aligned.

It is a sign of the times that the debate between shareholders and shareholders has been revived. Artificial “red versus blue” conflicts are a pernicious and modern affliction. Besides, students hungry for business goals know that this debate was effectively resolved seventeen years ago – by none other than Milton Friedman and Whole Foods CEO John Mackey.

At a friendly symposium on the subject in 2005 with then-96-year-old Milton Friedman, John Mackey said that “Free enterprise capitalism is the most powerful system of social cooperation and human progress ever devised..” Friedman accepted without hesitation. “The differences between John Mackey and me regarding corporate social responsibility are… rhetorical. Strip away all the camouflage and it turns out we’re basically in agreement.

Today, shareholders legally insist that companies make as much money as possible. They further expect leaders to do so in a way that is socially and environmentally sustainable. Why? Because the concepts of social and environmental awareness have increasingly become our ethical standards, as Milton Friedman anticipated.

Free enterprise capitalism will continue to generate the greatest benefits for the greatest number – and conscious shareholders will continue to guide free enterprise capitalism to do so for as long as possible. long as possible.

In simpler terms, there are no substantial differences between stakeholder welfare and long-term shareholder welfare. Larry Fink and Vivek Ramaswamy can live in peace, after all.

Terrence R. Keeley is the CEO of 1PointSix and the author of SUSTAINABLE by Columbia University Press.

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