Comment: Milton Friedman was right; CEOs should focus on profit

By Allison Schrager / Bloomberg Opinion

In 2019, the Business Roundtable, an association of America’s highest profile CEOs published a manifesto proclaiming profits, which benefit shareholders, were no longer their primary concern. Going forward, member companies would also consider the needs of other stakeholders: workers, the community, the environment and anyone else deemed worthy. They called it “a modern standard of corporate accountability.”

Sometimes, the old ways are better.

Four years after adopting their new statement of purpose, two of the participating companies are embroiled in political firestorms. Target and Budweiser (though the CEO of parent Anheuser-Busch InBev did not sign the letter at that time, he has expressed approval of the approach) are facing boycotts over trivial marketing activities that illustrated their support of transgender rights. And in Florida, Disney is in an endless fight with Florida Gov. Ron DeSantis after it spoke out against his “Parental Rights in Education” law. None of this appears to be good for profits or society.

It’s the inevitable outcome for deviating from shareholder primacy. The stakeholder model is inherently political, and in this highly polarized environment everyone loses.

We used to live in simpler times. In 1970, economist Milton Friedman wrote an essay for the New York Times Magazine that made the case for shareholder primacy. He argued that corporations should pursue a simple objective: maximizing profits. This would not only be better for the economy, but for society, too.

In any economic decision there are many stakeholders who might be impacted, but weighing their competing interests is never straightforward. If you a move a factory from Detroit to Nashville, it’s bad for workers in Detroit, but good for workers in Nashville; so whose interests matter more? Once profits are no longer the main consideration, values and politics take over, and Friedman argues the CEO should not forgo profits to serve his values. It’s not his money to forgo. And why should shareholders give up their share of profits for values they don’t share?

Multiple stakeholders also make it harder to make decisions and measure success or failure. When CEOs declared the end of shareholder primacy and embraced a broader stakeholder model, what that meant was never clear. Sometimes it meant caring for the environment, sometimes it was diversity on boards, or diversity of their workforce, but even these interests can be at odds with each other.

Friedman argued it’s better for CEOs to keep politics out of it and pursue such activities on their own time with their own money. Shareholder primacy is not as heartless as it sounds. Doing good in your community, investing in your workers, can benefit profit, too. Stock prices are a function of expected profit years into the future, and so short-term business decisions that enrich a company today but destroy its reputation or make it a bad place to work, is also not good for the stock price. Remember Enron? True, the trade-offs between the long and short term are not always cut and dried. Polluting the environment can boost profits while it’s terrible for society. But these trade-offs are better managed through government regulation, subject to the political process where voters can express their values, too.

After 2019, companies still mostly pursued profits. But the rhetorical shift was important. Many corporations in 2020 began taking more political stances on issues. That may have come from a sincere belief that this would improve communities and help marginalized groups. Or it could have been in response to demands from younger employees who expected their employers to make good on their promise to serve society and not just shareholders. Or perhaps companies thought signaling their political opinions would bring in more affluent customers. Or maybe they just thought there was no downside to empty political statements about making the world a better place that would earn them some social approval and ESG-friendly capital.

The intent of Target and Budweiser may have been well-intentioned, advocating more visibility and promoting acceptance of a marginalized community. But after four years of a stakeholder model with companies flagging their values, every purchase begins to feel like a political statement. Even a seemingly innocuous marketing strategy, like sponsoring the Instagram post of a transgender woman or displaying symbols for the trans community, came across as an explicit endorsement of a much bigger and divisive agenda.

There was always something vaguely patronizing about corporations signaling their approval of different communities and lifestyles. Real dignity is exposing marginalized groups to the same transparent marketing ploys as everyone else. If the goal was sales, these marketing efforts could have been more direct and less divisive. If Target was pursuing a shareholder model, it could argue, “The trans community and their friends are a growing demographic, and we want to sell them lawn chairs.”

What good conservative can argue with that?

Instead, when scandal hits in the stakeholder model, corporate leadership comes out with strange statements that affirm their commitment to society and America but end up alienating everyone. It’s hard to argue that the trans community is better off from the backlash engendered by Target and Bud Light when everyone is angry and more divided.

If corporations really want to make the world a better place, then their CEOs should do the brave thing and call an end to this nonsense. They should write a new manifesto and declare a return to shareholder primacy, and promise to leave their politics at home.

Allison Schrager is a Bloomberg Opinion columnist covering economics. A senior fellow at the Manhattan Institute, she is author of “An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk.”