The Friedman Paradox

Recently the Business Roundtable - consisting of Jamie Dimon from JPMorgan Chase, Tim Cook from Apple, David Taylor from P&G and over 180 other CEOs - made headlines for publishing a statement of purpose for corporations that indicated they were committed to serving all stakeholders. Many of us applauded. It is a significant and positive step for capitalism to have our nation's largest companies and most influential leaders vocally assert a broader sense of responsibility.

But not everyone applauded. The Wall Street Journal editorial board seemed to have a panic attack, rushing to the defense of the singular shareholder focus and relinking Milton Friedman's original article on the virtue of maximizing profits and the dangers of social responsibility.

The WSJ and Friedman are clearly drawn to the simplicity of profit maximization. That's understandable. It is simple. And frankly, profit is noble. Profit is a measure of the value an organization creates in its business model that it is able to retain and return to ownership. And the process of value creation is absolutely a noble endeavor. No system does it better than capitalism.

But the singular focus on profit has issues. For starters, Friedman presumes that shareholders' singular interest is, in fact, the maximization of profits. He recognizes that shareholders desires and goals are important. In fact, he actually even says "in some cases his (a corporate executive's) employers may have a different objective. A group of persons might establish…a hospital or a school. The manager of such a corporation will not have money profit as his objectives but the rendering of certain services….the key point is that…the manager is the agent of the individuals who own the corporation". There alone, Friedman has conceded that purpose matters. But Friedman seems to feel it's OK for a hospital or school to have a broader purpose than profit maximization but not for other businesses. Why? And why does he get to assert that all other shareholders' sole objective is profit maximization?

The reality is there is an increasing desire across all of society to affiliate, work for, purchase from, and invest in businesses that are not only profitable (e.g. capable of creating and capturing value) but also impactful. One need look no further than the precipitous decline of Uber's dominance and subsequent rise of Lyft when looking at the impact of organizations that don't demonstrate broad, conscious leadership. There is a revolution - initiated by Millennials and now led by Boomers and Gen Xers - to make a difference through business. Simply capturing value via profit isn't sufficient. Rather, people want their work to matter. People want their vendors to be conscious. They want to affiliate with brands that are making the world better, not worse. And they want to invest in companies they believe are a force for good. All of this is tangible and market-driven.

 Does that all create a set of vague and sometimes competing demands for leaders as both the WSJ and Friedman assert? Sure. That's why leadership is challenging. The overly simplistic acceptance of a singular focus is a problem. It leads to short-term thinking and a worse world for us all. As leaders, we have to be comfortable holding multiple objectives up. Within our company we refer to it as "embracing the tension of the AND": it's not good enough to simply be a high-performance company, we also have to authentically care for people and their lives too. Both matter in equal measure.

In a society of transparency, where information about the inner workings of companies flows at lightning speed through a vast network of social media sites and where everyone is a prospective publisher, the character of an organization matters. The purpose it serves matters. The impact it makes matters.

And herein lies Friedman's paradox: even if one believes maximizing shareholder value is the central purpose of business, it cannot be done without authentic concern for all other stakeholders. Put more simply, one can't maximize shareholder value without authentically maximizing stakeholder value. The operative word though is authentically.

In the 90's and into the turn of the century, "Corporate Social Responsibility" continued to grow. Many businesses did a lot of great things for their communities and for their own organizations. At the same time, it often seemed like much of this was purely marketing. The CSR office was often a sideline function that helped prop up the brand but wasn't necessarily central to who the business was, how it was led, or significant strategic decisions about the long-term future and impact. Even recently, I met with an executive who, with all the right intentions, shared "we're working on our social purpose". My reaction: why not just "your purpose". Businesses that are embracing purpose as an existential question are going to be far better positioned to make an impact in the world and ultimately drive better returns to shareholders. These two notions are not in conflict. In today's age they are inherently intertwined.

The good news is organizations are getting it. Small businesses have gotten it for years. But in recent years, executives at massive companies are embracing the need to develop an authentic purpose and impact. This is not easy stuff, but it's hugely important.

How do you measure authenticity? I can't say for certain. But I know people recognize it when they see it and feel it. And I know it matters. And I know it starts with authentic leadership.

It's worth re-reading Friedman's article. He is eloquent in his theoretical condemnation of social responsibility. Yet it reminds me of the quote sometimes attributed to Einstein: "in theory, theory and practice are the same. In practice they are not".

In his article, Friedman asks countless questions that he believes are complex and vague and arbitrary and impossible for managers to answer if their sole driver is not the maximization of profit. What Friedman seems to fail to recognize is that this is precisely what leaders need to do to be effective.. That is, manage complexity, balance seemingly competing interests, and process tensions across the system. When all persons are held in high esteem and high regard (not just shareholders) and there is a compelling business model that creates value across the system, then managers can be deemed successful. Yes, the matter of how much value should be returned to shareholders vs. invested in other stakeholders is a complex challenge. And it's one that executives have an obligation to lead through and boards have an obligation to direct. Because if they fail to embrace the challenge, there will cease to be any value left for shareholders. And I think even Friedman would agree that is bad for both business and society.