This new state of affairs was captured dramatically in a statement last year by America’s most powerful business lobby, the Business Roundtable.
"Why is Friedman sacrosanct? Yes, he was a Nobel Prize winning economist. But that doesn’t make him infallible.”
The “statement on the Purpose of a Corporation” was signed by 181 CEOs who “commit to lead their companies for the benefit of all stakeholders - customers, employees, suppliers, communities and shareholders”.
Predictably, this was met with counter-arguments that “fuzzy” concepts such as purpose, or indeed environmental, social and governance (ESG) issues, had no place in business strategy.
Inevitably, the Chicago School economist Milton Friedman gets wheeled out to justify a view business should have a very narrow interest and that interest should be returns to shareholders. That is, don’t talk about climate change, diversity, equality or any “social” issue.
That line of argument is flimsy. For a start, why is Friedman sacrosanct? Yes, he was a Nobel Prize winning economist. But that doesn’t make him infallible - indeed taking his arguments as dogma would have been anathema to Friedman. The always readable but never dogmatic Anatole Kaletsky of Gavekal has presented this argument at length, for example in Goodbye, homo economicus.
Friedman, like Freud, like Darwin, like indeed Adam “the invisible hand” Smith or Milton “trickle down” Keynes, was a man of his times. Our understanding of the world has grown since their times - indeed because we have been able to stand on their shoulders.
But actually, what did Friedman say? Would he have scoffed at purpose?
Cause and effect
Friedman of course wasn’t simplistic. He did say “there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits”. But he added “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”.
Critically, it is the “rules” of the game which are complex and, long term, are built social licence as well as black-letter regulation. Moreover, when Friedman says “increase its profits” he is talking about long term profits. He would be aghast at the idea of a company which milked short term opportunities, pillaged a common resource - such as the environment - failed to respect all its employees and customers and delivered a profit spike only to later fail.
“Open and free competition” means a company must explicitly pay for its inputs - be they natural resources or labour - otherwise it is not engaging in “open and free” competition with companies that do.
With International Women’s Day approaching, take diversity as an example of one debate around what is truly the realm of business. Companies embrace diversity because it is right. But does it also help shareholders?
There is increasingly more evidence it does, on multiple fronts. It pays - in matching customer bases, winning talent, being alert to risk. There is also a growing body of empirical data.
One of the seminal pieces of research was undertaken by McKinsey & Company in 2014. Diversity Matters argued not only was the moral case for workforce diversity clear but so too was the business case.
“Top-quartile companies for racial and ethnic diversity were 35 per cent more likely to have financial returns above their national industry medians,” McKinsey reported while companies in the top quartile for gender diversity were 15 percent.
“Bottom-quartile companies were less likely than average ones to achieve high financial returns,” the consultancy found.
“The unequal performance of companies in the same industry and country suggests that gender, racial, and ethnic diversity are competitive differentiators: more diverse companies lure better talent and improve their decision making, customer orientation, and employee satisfaction.
“Diversity in background, age, sexual orientation, and work experience also probably confer some level of competitive advantage.”
McKinsey, and many other credible research bodies, have since looked at this in more detail.