The Past Speaks

Fifty years ago, Milton Friedman published his frequently debated essay on the purpose of the corporation in the New York Times Magazine. In it, Friedman attached the idea that it was the job of business executives to use firm resource to address social issues such as racial discrimination and pollution by arguing forcefully that their job was solely to make profits for the shareholders. The anniversary of the essay has been marked with a flurry of online publications (see here, here, and here). Fairly typical of these comments on Friedman’s legacy were the words of Anand Giridharadas, who described Friedman as a “capital supremacist” and declared that “Today in America someone will be laid off right after his or her company announced record earnings. Someone’s hours will be cut without notice. Someone’s water will be poisoned by fracking. And among the pantheon of villains they can thank is Milton Friedman.”

I’m struck by the tendency of most of the writers who have participated in this debate to assume that Friedman’s essay was influential, that it caused changes in corporate behaviour. I certainly do not dispute that ideas have consequences and that business intellectuals such as Friedman can have an influence on the real world of material conditions by changing the thinking of decision-makers. However, I’ve noticed an absence of serious historical research on the question of how influential Friedman’s ideas were. Such research would begin by answering really simple questions such as “how many people paid attention to Friedman’s essay at the time it was published? How many letters to the editor did it prompt?”

As scholars who wish to speak to practitioners whilst remaining rigorous, we need to think about what sorts of research methods would allow us to determine the actual influence of Friedman and other writers on the shareholder value revolution of the 1980s. Perhaps the revolution would have happened in the absence of their writings, as Prof. Brian Cheffins has suggested?

Trying to determine the real-world impact of academic writings about business is an issue that I have been wrestling with for some time (for theoretical considerations on the role of ideational factors in historical change, please see the co-authored paper I published in Economic and Industrial Democracy). I haven’t published on Friedman’s 1970 article and its role, if any, in the shareholder value revolution, but I have looked that reception of the text that helped to shape the predecessor ideology that shaped American corporate governance from the 1920s to the late 1970s, namely The Modern Corporation and Private Property (see here and here).

In a recent paper in which they reflected on Friedman’s theory of corporate purpose, Oliver Hart and Luigi Zingales (2017, p. 19) observed that the SEC may have contributed to the rise of the shareholder value ideology (shareholder primacy principle). The SEC rules limit the extent to which social and ethical issues can be discussed at company AGMs which, according to Hart and Zingales, have helped to produce a business culture in which there is an amoral focus on profit maximization.

Ironically, in the United States proxy access rules are not designed to solve this problem—if anything they go in the opposite direction. Under rule 14a-8, the SEC requirement to include shareholders’ proposals in companies’ proxy material is limited to “proper subjects for action.” The SEC later opined that “proposals which deal with general political, social or
economic matters are not, within the meaning of the Rule, ‘proper subjects for action by security holders’”. Consistent with this approach, in 1951 a federal court upheld the exclusion of a proposal seeking desegregation of buses as an improper subject for shareholders (Peck v. Greyhound, 97 F. Supp. 679, 680, S.D.N.Y. 1951). In 1954, the SEC added the “ordinary
business” exclusion, which further limited the ability of shareholders to introduce social considerations in proxy ballots. In the late 1970’s the SEC introduced the idea that the “ordinary business exclusion” would not apply to matters with significant policy implications, such as tobacco to minors,
nuclear power and the like (Andersen [SIC], 2016). The effective boundaries of this public policy exception are heavily litigated to this day (see the Walmart case mentioned above). Overall, it is fair to say that law and regulation have not helped to prevent the amoral drift.

The passage I have quoted above suggests that the chain of causation that links Friedman’s ideas with the shareholder value revolution may run through the SEC and indicates a new avenue of business-historical research.