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Milton Friedman's "Shareholder" Theory Was Wrong

theatlantic.com

11–20 of 39 posts

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#11
Matt Levine has an worthwhile take on the new "stakeholder" mission statement:

""" It is productive—not 100% accurate, but a useful heuristic—to assume that all corporate governance debates in the U.S. are about whether shareholders or managers should have more power to control the corporation. There are other stakeholders, sure, but they are mostly tools in the shareholder/manager fight, not power centers in themselves. 6 So when an association of big public-company CEOs gets together and declares that corporations should serve the community, take care of the environment, and be responsible to employees and customers, not just shareholders, that might be because the CEOs have thought it over and decided that employees and the environment are getting a raw deal, but it is also possible that the CEOs have thought it over and decided that shareholders are annoying. """

[1] https://www.bloomberg.com/opinion/articles/2019-08-19/maximi...

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#12
This short piece is a response to the recent statement by the Business Roundtable, a group that represents CEOs of big corporations, about the "purpose of a corporation."

This piece is also the best takedown I've seen so far of Milton Friedman's influential article, "The social responsibility of business is to increase its profits."[a]

Key passages:

> ...if the purpose of a business is to “increase its profits,” as Friedman argued, then it is not only “clear-headed,” but also justifiable for a business to use its political influence to dismantle the free market that Friedman cherished.

> ...the notion that the big public corporations are tribunes for the free market is quixotic. Big corporations are islands of socialism within our market economy: Their bigness protects them from competition for customers and workers.

> ...[Businesses] 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.

> ...Nor was Friedman correct that business executives are the employees of the shareholders. Legally, business executives are employees of the corporation, which—crucially—they, not the shareholders, control. The shareholders have a contractual relationship with the corporation that entitles them to a share of its profits and a vote on certain major corporate decisions. Time and again, CEOs have used their power over the corporation to bat away shareholders when they propose that the corporation should act in a socially responsible way. When an employer says “jump” to an employee, the employee jumps. When shareholders say “jump” to the CEO, the CEO sues them.

The author is Eric Posner.[b]

Go read it.

[a] https://timesmachine.nytimes.com/timesmachine/1970/09/13/223...

[b] https://en.wikipedia.org/wiki/Eric_Posner

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#13

I thought you couldn't maximize for more than one variable, and so if society wants other outcomes such as low pollution laws need to tie high fines to it.

That would assume the law wasn't subject to regulatory capture. In theory high fines exist, in practice they really don't. See the debacle with Equifax and not having any real money in the fines to make people whole for their wholesale credit history being breached.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#14

I'm not an economist, but I disagree. The purpose of a corporation is to make money. Money benefits the shareholders. If its purpose was to benefit the "stakeholders" then it would be a nonprofit. Stakeholder sounds good for public relations, but I don't see it truly occurring in practice.

It's true that the corporation making a profit benefits the shareholders, but that doesn't mean the purpose of the corporation is to maximize this shareholder benefit. The corporation obviously wants to attract and retain shareholders, and so it must give them sufficient return on their investment, but that's it. And giving the shareholders value isn't at all the "purpose" of the corporation, it's merely something it must do. You may as well say "the purpose of a startup is to maximize return for VCs"; that's certainly what the VCs want but that's not a healthy mindset to be conducting business with.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#15

I'm not an economist, but I disagree. The purpose of a corporation is to make money. Money benefits the shareholders. If its purpose was to benefit the "stakeholders" then it would be a nonprofit. Stakeholder sounds good for public relations, but I don't see it truly occurring in practice.

Incorporation, and the legal protections extending from it, are extended by the state, to provide value, ultimately to the state as a whole (e.g., not just the government, but the people).

You'll find a form of this expressed in Adam Smith's Wealth of Nations, though he speaks here in terms of the entire field of political economy:

POLITICAL œconomy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign.

https://oll.libertyfund.org/titles/smith-an-inquiry-into-the...

Of incorporated firms -- joint-stock companies -- Smith is markedly less enthused, and limits them to serving in insurance and banking, major civil engineering, and public works projects.

The only trades which it seems possible for a joint stock company to carry on successfully without an exclusive privilege are those of which all the operations are capable of being reduced to what is called a Routine, or to such a uniformity of method as admits of little or no variation. Of this kind is, first, the banking trade; secondly, the trade of insurance from fire, and from sea risk and capture in time of war; thirdly, the trade of making and maintaining a navigable cut or canal; and, fourthly, the similar trade of bringing water for the supply of a great city.

https://en.wikisource.org/wiki/The_Wealth_of_Nations/Book_V/...

This is also the major thrust of Matt Levine's Bloomberg article on the Roundtable announcement commented elsewhere in this thread: https://www.bloomberg.com/opinion/articles/2019-08-19/maximi...

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#16

I thought you couldn't maximize for more than one variable, and so if society wants other outcomes such as low pollution laws need to tie high fines to it.

Fines, prohibitions, or internalising externalised costs through some form of emissions fee fully accounting for damages and negative consequences.

The costs approach effectively allows a firm to optimise for profits, but changes the weightings of various activities and products or inputs.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#17

What are the chances that corporations will actually behave any differently because of this? My uninformed guess would be slim to none, but maybe I'm just cynical.

That's one of author and law professor (and son of jurist Richard) Eric Posner's arguments:

"this new philosophy will not likely change the way corporations behave. The only way to force corporations to act in the public interest is to subject them to legal regulation."

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#18
post #12

This short piece is a response to the recent statement by the Business Roundtable, a group that represents CEOs of big corporations, about the "purpose of a corporation." This piece is also the best takedown I've seen so far of Milton Friedman's influential article, "The social responsibility of business is to increase its profits."[a] Key passages: > ...if the purpose of a business is to “increase its profits,” as F…

Would you happen to have a non-paywalled version of the original Friedman article?

Update: this appears to be a LaTeX-generated PDF based on the original column: http://umich.edu/~thecore/doc/Friedman.pdf

(From Matt Levine's Bloomberg article.)

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#19
post #12

This short piece is a response to the recent statement by the Business Roundtable, a group that represents CEOs of big corporations, about the "purpose of a corporation." This piece is also the best takedown I've seen so far of Milton Friedman's influential article, "The social responsibility of business is to increase its profits."[a] Key passages: > ...if the purpose of a business is to “increase its profits,” as F…

Would you happen to have a non-paywalled version of the original Friedman article? Update: this appears to be a LaTeX-generated PDF based on the original column: http://umich.edu/~thecore/doc/Friedman.pdf (From Matt Levine's Bloomberg article.)

check paywallnews com maybe.

Re: Milton Friedman's "Shareholder" Theory Was Wrong

#20

Earlier quoted context omitted.

Would you happen to have a non-paywalled version of the original Friedman article? Update: this appears to be a LaTeX-generated PDF based on the original column: http://umich.edu/~thecore/doc/Friedman.pdf (From Matt Levine's Bloomberg article.)

check paywallnews com maybe.

See my update above :)
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