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The Purpose of the Corporation
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Paige Morrow
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Paige Morrow
LLM Candidate and Legal Researcher
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'If [corporations] make it their purpose to maximize shareholder value, shareholders are likely to suffer because that cravenness turns off customers, employees, and the world in general. If they make it their purpose to serve customers brilliantly, be a fabulous place to work, and contribute meaningfully to the communities in which they operate, chances are their shareholders will be very happy.'
How to Win the Argument with Milton Friedman blogs.hbr.org
Ask for evidence.
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Christopher Halburd, Filip Gregor like this
6 comments
Yuri Biondi
Yuri
Yuri Biondi
Tenured Research Fellow at CNRS
http://www.degruyter.com/view/j/ael.2012.2.issue-2/issue-files/ael.2012.2.issue-2.xml
Including 'Being done with Milton Friedman' by J-Ph. Robe' :
http://dx.doi.org/10.1515/2152-2820.1047
Unlike Reply privately Flag as inappropriate 3 days ago Peter Burgess likes this
Christopher Halburd
Christopher
Christopher Halburd
Head of Brussels Operations at Frank Bold Society
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Thanks Yuri. I am very fond of JP's piece.
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Edward Beale
Edward
Edward Beale
Chief Executive - City Group PLC
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Paige, the second sentence in the quote omits a link to explain why shareholders will be 'very happy'. I have inserted the necessary words below and unfortunately those words undermine the broad generalisation in the first sentence of the quote.
If companies 'make it their purpose to serve customers brilliantly, be a fabulous place to work, and contribute meaningfully to the communities in which they operate, chances are' THEY WILL BE SUCCESSFUL, THIS WILL BE REFLECTED IN THEIR ABILITY TO PAY DIVIDENDS AND IN THEIR SHARE PRICE, AND 'their shareholders will be very happy'.
It's all about looking to the medium and long term, rather than a focus on the short term.
Milton Friedman was right. Maximising shareholder value is a valid objective over the medium and long term. It is only very rarely that it is the best objective in the short term.
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Filip Gregor
Filip
Filip Gregor
Head of the Responsible Companies Section at Frank Bold
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Edward: That is a valid argument. In fact many people we have been discussing this with thought that the purpose of the corporation should be maximisation of long term shareholder value. I guess with such a paradigm we would be probably much better off than we are now.
To be able to go down that road, however, we would need to find a way how to deal with two predicaments:
1. the short-termism and proliferation of MSV style management in last two or three decades seems to be linked.
2. a great part of the investors don't engage with companies in the long-term. Instead they seek returns in short-term and then thy sell
Don't get me wrong, I am not saying it is impossible to deal with them. I just don't know how.
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Edward Beale
Edward
Edward Beale
Chief Executive - City Group PLC
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Filip, you response identifies that the problem is not the objective of maximising shareholder value, it is that many of the intermediaries in the ownership chain have acted in a short term manner.
Rather than try to change the purpose of the corporation, the solution seems to me to be to improve the performance of intermediaries; through actions such as the UK's stewardship code and through better design of incentives for intermediaries.
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Peter Burgess
Peter Burgess
Founder/CEO at TrueValueMetrics developing Multi Dimension Impact Accounting
I am a strong advocate for accountancy as a key to managing performance. I see the challenge as being to have some clarity about purpose of economic activity and what constitutes progress and performance.
In this regard, I consider Milton Friedman to be about 100% wrong about almost everything. The singular focus on business profit is also problematic for the 21st century ... even thought this is at the center of what has been taught at name brand business schools for many decades.
What is needed is an accountancy methodology that allows for impact on people and planet to be brought into the accounts as rigorously as profit.
There are many people working to figure out how to do this ... so I am not alone. I see the problem not so much as how the reporting should be done, but how the measuring (or accounting) should be done. For this I believe the solution might well be to use something like standard costs, except in this case it would a way to have standards for impacts.
Peter Burgess - TrueValueMetrics
Multi Dimension Impact Accounting
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