Updated: Jul 1, 2021
As per American Economist Milton Friedman, CEO is the employee of the shareholders. The sole responsibility of the CEO should be to look for shareholder’s benefit. Milton Friedman went on to win Nobel prize in Economics for his Monetarism theory in 1976 & became a darling of Corporate world in USA. 21st Century still bears the curse of Friedman’s theory, we still have a lot of organizations & CEOs who are drugged by that failed theory even after 50 years since Friedman’s “Shareholder Theory” was published in 1970. Sometimes even the most intelligent of the humans can err, it was an err, a big one. The error which allowed the avarice in the corporates to come out open & weaponized them with a shield to run business for theirs & their circle’s own gains. Every layoff found justification, every corner-cuts got justification, every short-cuts taken found justification, every immoral moves had justification. Inadvertently Milton Friedman drugged an entire generation of CEOs and even those running the government & caused pain to billions of stakeholders & Citizens.
The Social Responsibility of Business is to in increase it’s profits, what is good for shareholders is good for the society
Nobel prize winning economist Milton Friedman wrote in his essay that got published in New York Times magazine in September 13 1970. This was a turning point for Corporate Social Responsibility ( CSR) in USA and other western economies which influenced business model all over the world. It gave those running the government and organizations, the confidence & incentive to start business theories which never was propagated to this level before. Born were the CEOs like GE’s Jack Welch, Coca Cola’s Roberto Goizueta & Microsoft’s Steve Ballmer to name a few who would start talking profits, more profits, shareholder’s value, utilization of human resources, applying lean theories aggressively to maximize profits and many more. Roberto Goizueta became the first CEO who became billionaire on basis of stockholding of a company, the 2nd CEO who became billionaire in the same way was Steve Ballmer. While CEOs ( Due to their stockholdings, bonus component in salary on achieving revenue targets & share values ) got richer & richer, employees & customers got cornered more & more. Friedman’s theory remained controversial & as more and more economist, professors , CEOs started proving the theory wrong & immoral, NY Times magazine was forced to revisit the essay on September 13 2020 with commentary from economic heavyweights, most of whom argued the piece no longer held water, if it ever did. This not only limits itself to theories & commentaries, there are huge number of organizations that has practically ashamed Friedman’s theory, even the organizations like GE , Coca Cola , Microsoft and others who followed the theory only could do well during good times & fell flat on their face during hard times. Even now there are organizations & leaders who believe in this theory due to the delicious taste of avarice & since running business becomes exciting not due to an actual cause or mission but due to quick profit or loss making mechanisms & getting to realize tangible benefits or detriment quarter on quarter.
In 2012, Professor Lynn Stout from Cornell law school in her work on subject “ Shareholder Value Myth” pointed out that Friedman's theory was extremely appealing to 2 groups, CEOs & Corporate raiders. Also the pay of executives & CEOs got linked with performances of stock prices, so they can prioritize their own bonus over interests of customers & employees. Previously the salary component of CEOs & execs used to be more than bonus component, Friedman’s theory changed all that. Professor Lynn Stout also pointed out the big flaw in Friedman’s theory which was that legally owners of the company are not shareholders, they are just owners of some shares of the corporation. CEO cannot be the employee of the shareholder, he is an employee of the corporation.
In 2019, Professor Eric Posner from the Chicago law school came out with the same views by bashing Friedman’s theory. He even used some sarcasms like
When an employer says “jump” to an employee, the employee jumps. When shareholders say “jump” to the CEO, the CEO sues them
Eric Posner even went on to elaborate how Friedman’s theory motivated usage of immoral methods in business & Government and I quote.
There are other, all-too-familiar ways that Friedmanesque businesses can maximize their profits. They 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
That’s not all, Roger Martin who is the Dean of Rotman school of Management conducted research on shareholder’s value ROI prior & after 1976. People who invested in S&P 500 prior to 1976 got an annual return of 7.5%, after 1976 it dropped to 6.5 % & after 2000 it dropped further. The average annual return for last 20 years at S&P 500 stands at 5.90%. Question obviously will be, did the shareholder Theory actually helped Shareholders or it helped THEM ?
Post this Friedman’s theory & it’s lab experiments by CEOs, we observed 3 major stock market crashes, 1987,2000 & 2008, all were due to Greed & immoral methods applied in business. Coincidence ?
The only silver-lining is that the world has started realizing the 20th century error & sooner or later everyone will let go of Friedman’s adrenaline rush for good & Corporations will atone the great error it made in last 50 years.
The atonement started with the Cheerleader himself, Jack Welch in 2009 told the Financial times & I quote,
On the face of it, shareholder value is the dumbest idea in the world, Shareholder value is a result, not a strategy. Your main constituencies are your employees, your customers and your products.