Last month, in a stunning about-face, the Business Roundtable swept aside decades of advocacy for “shareholder primacy” — the notion that the interests of stockholders must be placed above all other considerations. The organization, whose members are all CEOs of major U.S. companies, now believes that corporations must serve the interests of a broader set of stakeholders, including consumers, employees and the communities in which they operate.
For some, this move signals the end of the shareholder era ushered in by the economist Milton Friedman in 1970. That year, Friedman wrote a now-infamous op-ed in the New York Times arguing that corporations needed to be singularly focused on the interests of their shareholders. Attending to the claims of other stakeholders (such as workers, consumers and communities) could only lead to trouble.
While it wasn’t the sole vision for the corporation circulating in business circles in the early 1970s, over the ensuing decades, this idea dominated business thinking and provided executives with a reason to dismiss criticism and accusations of misconduct. But the Business Roundtable reversal indicates that there is an opportunity for activists to force a reimagining of the corporation, one that can make these powerful institutions more accountable to the public.
Friedman’s op-ed came at a moment of intense social conflict in the United States. And the economist had little patience for those who wanted businesses to address the concerns of consumer movements, environmentalists and minority groups seeking more equal treatment in society. In just one example, mere months after the first Earth Day, Friedman listed “avoiding pollution” as one of the demands that corporations should ignore. Addressing such concerns would interfere with the market’s ability to “determine the allocation of scarce resources.”
Friedman’s voice was loud, but while his view would become central to business practices in the following decades, at the time he did not speak for all in the business community. In fact, a group of executives, politicians and business school professors were thinking in very different terms.
In 1972, the Nixon administration organized and hosted a conference titled “The Industrial World Ahead: Business Looks at 1990.” The world was undergoing such an intense period of social and economic change, some in the administration believed, that American corporations needed to start thinking more broadly about the future. When the conference opened on Feb. 7, speaker after speaker insisted that the 1,500 conference attendees were witnessing a major economic transformation. National economies were merging, and the lines between business and government had blurred.
Friedman himself was absent, but his op-ed loomed over the proceedings.
In fact, several speakers pointedly denounced it. Arjay Miller, dean of Stanford University’s Graduate School of Business, felt as if Friedman was simply putting a modern twist on Adam Smith’s famous “invisible hand” theory. But while that principle had “worked remarkably well” for “nearly 200 years,” it was a poor fit for the rapid social change facing the world in the early 1970s. It was a “new ballgame,” Miller told the audience. “Life would be so much simpler,” he commented, if Friedman had been right. But, instead, society was placing “tremendous new demands” on corporations.
Many speakers at the conference believed that through the pursuit of profit, corporations had satisfied Americans’ material wants. Rather than demanding new goods, the public was now turning its attention to "quality of life” issues, such as a clean environment. To retain both customers and workers, businesses needed to directly address these concerns.
Miller was not alone in singling out Friedman for criticism. The consultant and writer Hazel Henderson characterized Friedman’s argument as a “fallacy.” Because businesses “regularly made ipso facto social decisions of enormous consequence,” focusing only on the price of the stock was both shortsighted and dangerous.
In contrast to Friedman’s vision, a number of speakers laid out a much wider role for the corporation. Willis Harman of the Stanford Research Institute, for example, began his talk by bluntly stating “what is seemingly good business policy frequently turns out to be poor social policy.” Harman was convinced that the world needed a “humanistic capitalism” that looked beyond profits to usher in a peaceful and spiritually fulfilling future instead. Others voiced similar ideas.
Although the published conference proceedings reported that workshop sessions devoted to social responsibility turned into debates over “the question of stockholder versus public interest,” it was clear that considering aims beyond shareholder returns was far from a radical idea.
Nor did these ideas die when the conference wrapped up. The reliably conservative U.S. Chamber of Commerce’s Council on Trends and Perspectives continued to promote this view of the corporation. In “The Corporation in Transition — Redefining Its Social Charter,” one of several short booklets the group published during the 1970s, the Chamber’s chief economist, Carl Madden, directly appealed to corporate managers. “Society expects much from you,” he wrote, and unless corporations started attending to public concerns, businesses would face more regulations and restrictions. (Even shareholders themselves, the Council speculated, might start making such “quality of life” demands). Change seemed to be on the horizon.
But, of course, this is not how things played out.
With American prosperity and corporate dominance waning, the incoming commerce secretary, Pete Peterson, warned that American businesses “had been lulled” by decades of success. Inflation was already a growing problem for consumers. U.S. businesses were losing ground to foreign competition. As economic conditions soured during the 1970s, and government seemed powerless to stem the new phenomenon of “stagflation,” a toxic mix of a stagnant economy and inflation, politicians and economists turned toward “the market” for solutions.
When the doldrums of the 1970s abated, the economy of the 1980s seemed very different. A dynamic and booming stock market had replaced American industrial might. Friedman’s focus on shareholders was well-suited to this new era marked by cutthroat competition and an obsessive focus on the market.
Even if some continued to insist on a transformative vision of the corporation that would respond to social needs, such voices were drowned out as a new economic narrative about deregulation, entrepreneurialism and Wall Street as the keys to a thriving economy took hold.
In the 1980s, corporate raiders such as Michael Milken and T. Boone Pickens insisted they were making businesses stronger by forcing them to focus on the stock price. During the 1990s, CEOs continued to take their cues from the stock market. Keeping share prices high crowded out all other considerations, encouraging a short-term approach to strategy. At its worst, “shareholder primacy” led to fraud, such as when Enron wowed investors and shareholders through inflated profits in the 1990s before finally collapsing.
After the Great Recession and a vastly unequal recovery, however, public frustration with growing inequality and corporate unaccountability has created a new opening to rethink the role of the corporation in American society.
The Business Roundtable’s statement is the product of a year-long process of surveying corporate executives, politicians, academics and others that revealed the corporation’s social legitimacy is on shaky ground. Belatedly, corporate leaders are warming to a more expansive view of a corporation’s obligations in an effort to regain credibility with more politically engaged consumers and employees.
But as the case of the 1970s demonstrates, this new disposition can fade quickly. Inevitably, some will call for the restoration of “shareholder primacy.” Because of its clarity and simplicity, Friedman’s argument has an obvious appeal for executives. The notion that corporations are part of a broader social fabric means that executive decision-making would be a far messier process — and one that would risk addressing issues that don’t always result in boosting a company’s stock price.
Still, this is a moment to be seized. Activists should invoke the Business Roundtable’s statement whenever corporate leaders begin to privilege the market to the detriment of other considerations. It will take a sustained effort to push executives who signed the statement beyond mere rhetoric and toward meaningful action. But such efforts are worth it because corporations are powerful actors that can, when pushed, benefit a public that is wider than those who own the company’s stock.