Enriques on Friedman

Fifty years have passed since Milton Friedman’s article in the New York Times Magazine on “The Social Responsibility of Business.” This anniversary has been widely remembered- though perhaps more vilified than celebrated ( David Henderson was among those celebrating it, here).


As Friedman is considered such a champion of “shareholder value”, I found very interesting that Luca Enriques, on Promarket, comments that ‘Friedman’s essay assigned a totally passive role to what he calls the corporation’s “owners” or “the employers”—that is, the shareholders. They are merely the beneficiaries of directors’ duty to increase profits, but they have no role to play in pursuing that very goal other than (as he notes in passing) when they elect the board.’Friedman’s article (actually, he was restating ideas he had put forward before in Capitalism and Freedom) is supposed to be at the heart of a theory of “shareholder value” which many, on the left and also the corporatist right, nowadays oppose. Friedman’s point was mainly that businesses should focus on making profit for their shareholders. The main reason for that is what I’d call transparency: assessing the performance of a business’ managers in reaching this goal is a much more straightforward affair. Other standards tend to be more opaque, and more difficult to assess, giving managers more latitude vis-à-vis the owners of the company. Of course Friedman is often misinterpreted as if he maintained that corporations should be focused on making profits regardless of the law, of basic human rights, et cetera. He did not. Friedman claimed that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” He never thought companies could do anything beyond the rules of the game.

Instead, as Enriques writes:

When Friedman wrote his piece, the shareholders of US companies were mostly individuals and rarely voted at annual meetings other than to rubber-stamp managers’ proposals. Today, a large majority of listed firms’ shares are held by institutional investors—that is, managers of other people’s funds. Institutions have become key players at US (as well as non-US) listed corporations (e.g., this OECD study with data from across the world), because they regularly vote portfolio shares at shareholder meetings. And their pro-management vote is nowadays anything but certain.

Read the whole thing. Though the corporate world has changed in the last fifty years, significantly, Enriques maintains that Friedman’s paper ‘still provides a useful framework for understanding the implications of managing companies for one purpose or another. And perhaps also for answering the reframed question of whether corporate managers should cater to the preferences of their portfolio-value-maximizing indexing investors when making decisions on behalf of their corporations.”