By Curt Welling
Courtesy Everett Collection
Much of the discussion and celebration regarding corporate purpose following the recent announcement of the Business Roundtable’s “Statement of Purpose of the Corporation” has included a formulaic demonization of the great University of Chicago economist Milton Friedman and a mischaracterization of his views. This reaction is symptomatic of a much more serious problem.
Reading this revisionism, one would think that Friedman was a financial sorcerer and that 181 corporate knights of the Business Roundtable have at last awakened from his evil spell after an earnings and compensation binge of almost 40 years. This criticism and the debate are intellectually superficial at least and dangerous at worst. I can find no evidence that Friedman ever said that the purpose of a company was to maximize short-term profit. He is famous for saying that the most important task of the management — and its social responsibility — is to maximize profit on behalf of its owners. It is difficult to reasonably disagree with this statement.
The adherents to this current round of new-age thinking assert that companies “need to have a purpose beyond profit.” Of course they do. The implication, however, is that one should be trading or de-prioritizing profit in favor of some other objective. Or that the choice is binary — you can have profit or purpose, but not both. This is both false and dangerous. Profit is an objective, not a purpose. Profit is the means to an end — to the achievement of the company’s mission, vision, and impact, i.e. its real purpose. Seen in this light, profitability is indeed the company’s most important and centering objective. It is the sine qua non to carrying all of the other social baggage that recent commentators would load on the corporate beast.
This debate is occurring in the context of a growing and larger conversation about the need to reimagine, revise, or rethink capitalism. In the extreme, we hear claims that capitalism has failed. And while a thoughtful debate about the structure of the market economy, competition, incentives, rewards and third-party effects is well overdue, this rhetoric creates an ill-informed risk of throwing out the baby with the bathwater.
If there is a failure of capitalism, it is a failure of policy, implementation and politics.
No economic system in the history of the world has done more to create wealth, improve living conditions and lift masses out of deep poverty than the system which protects individual liberty, choice and responsibility; creates and defends free markets and capital flows, and facilitates freedom of choice and voluntary transactions. We call this system democratic capitalism. If there is a failure of capitalism, it is a failure of policy, implementation and politics.
The necessary debate should not be about profits. It should be about the structure of the economy, the market mechanism, and the boundaries that reflect the values and needs of society. We should set our focus on the following:
The rules of the game: In a democracy, the terms on which business is conducted (the so called “license to operate”) are the responsibility of the government. It is the government’s job to set the rules of the game. It is the job of business to play — as ingeniously as it can — according to those rules. This ingenuity has succeeded spectacularly in post-war economic democracies. But issues related to globalization, technology, toxic politics and financial excess have now pushed us to a point where a full-throated, informed debate about the “rules of the game” is overdue.
Accountability: We need honest assessment of the role and responsibilities of investors (particularly institutions), boards of directors, and consumers in causing business to behave in the way society demands and requires. Each of these groups has essentially abdicated responsibility for holding company management accountable. There’s lots of barking, but not much bite. The Business Roundtable’s statement is a particularly vivid example of largely toothless rhetoric on these topics.
Rewards and incentives: The compensation milieu in corporate America is a morass of insider self-perpetuation and misplaced incentives. The resulting wealth concentration understandably spawns an environment of public cynicism and resentment. We need public and corporate policies which encourage more equitable sharing of the fruits and longer-term investment perspective. (Does anyone really believe that the CEO of Aetna deserved $500 million for facilitating its merger with CVS?)
Doing good and doing well
It is clear that companies should be encouraged, prodded, jawboned, or shamed to account for the impact of their operations on the environment, to treat workers fairly, to facilitate the worker training required for the evolving economy, and to support the communities in which they operate.
Doing these good things, as Friedman in fact often pointed out, may also assist companies in doing well — in creating long-term competitive advantage, achieving their mission, and accomplishing their purpose by generating the goodwill and brand equity that are critical to implementing strategy.
What the current debate about corporate purpose ignores is that none of this good is possible without a laser-like focus on strategy, growth, efficiency, and profitability. The conversation about sustainability and corporate engagement with the environment is an important one, but there simply is no such thing as sustainability without consistent competitive profitability.
Curt Welling is a clinical professor of business at the Tuck School of Business at Dartmouth College. He is former president and CEO of Americares, and previously had a 25-year career in investment banking, working at Credit Suisse, First Boston, Bear Sterns and SG Cowen.