Why Milton Friedman Would Have Been OK With Benefit Corporations

FriedmanWikipediaIn the mid-20th century, corporate CEOs and board members often described themselves as the custodians of a public trust. Like statesmen, their job was to balance competing interests in ways that were wise and fair. Milton Friedman (1912-2006) the son of immigrant shopkeepers, saw that they were lying, and he hated their elitism. He attacked it like a bare-knuckle fighter.

Friedman led a group of economists at the University of Chicago who argued that corporations should be managed only for the benefit of shareholders, and that stakeholders—employees, suppliers, customers, and neighbors—should be rewarded only if it also puts more money into shareholders’ pockets. Friedman and his pals said that a corporation is not a government or a charity, and its social responsibility is simply to increase shareholder profits.

The “shareholders first” argument was radical when it was introduced in the 1960s, and Friedman did not pull any punches. In 1970, he wrote in The New York Times that executives who believe they should serve the broader community are playing around with their investors’ money. They are guilty of “hypocritical window-dressing,” he said, and have a “schizophrenic character.”

Friedman won the Nobel Prize in 1976, advised President Reagan on economic policy in the 1980s, and wrote several blockbusters, including Free To Choose (1980). Thirty-five years later, greedy people still use his writing to justify their immoral acts. But if you’ll go back and read that 1970 article, it’s also clear that he would not have objected to the idea of a corporation whose charter directs it to pursue both profits and social benefits. Friedman wrote:

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom. Of course, in some cases his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose–for example, a hospital or a school. The manager of such a corporation will not have money profit as his objective but the rendering of certain services.

“In either case, the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them.”

Friedman understood that corporations are just social and legal organizations, and that they can have any goals they are chartered to pursue. He insisted that shareholder profits should be a corporation’s only goal merely because an alternative had not yet been devised. He was the uber-capitalist, so he probably would not have invested in a benefit corporation—but he wouldn’t have objected to it, either. It was honest. People should be free to choose.


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