Milton Friedman introduced his “Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits” theory in a 1970 essay for The New York Times. In it, he argued that a company has no social responsibility to the public or society; its only responsibility is to its shareholders. He justified this view by considering to whom a company and its executives are beholden:
“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 … his primary responsibility is to them.”[1]. Friedman went on to suggest that only individuals, not corporations, should finance social causes. The only mission of corporations is the maximize profits.
This doctrine made perfect sense to me as a young college student studying business in the mid-70s. Every investment should return equity. A stockholder expects to earn a higher-than-average return on his/her investment in a firm. I believed profit is king. The more profit a company made, the higher the return, the greater the economy, the greater the earnings of the employees! Yes, trickle down economics is good! Right? Wrong! I simply do not believe this anymore!
From 1978 – 2013 CEO pay climbed 937% while worker pay rose only 10%[2]. Why? Because stockholders are willing to pay whatever it takes to maximize their return. “Wealth inequality in America has grown tremendously from 1989 to 2016, to the point where the top 10% of families ranked by household wealth (with at least $1.2 million in net worth) own 77% of the wealth “pie.” The bottom half of families ranked by household wealth (with $97,000 or less in net worth) own only 1% of the pie”[3].
Let’s be clear: Capitalism is the best economic system ever created! In my view, it is the ONLY viable economic system. Communism and socialism have always failed because earning potential is relegated to society or government run entities and wealth is distributed to the masses. This steals the work ethic away from the worker and can lead to complacency and frustration. What our country needs is reformed capitalism; a new definition or mindset on what it means to be a good capitalist. A redefinition or “liberal” viewpoint of corporate success. I call it: “progressive capitalism”.
Progressive capitalists expand on Dr. Friedman’s thinking that wealth and profitability are the primary measures of success. A progressive capitalist and their stockholders focus on multiple variables of success. In this context, success is redefined to mean the degree to which an organization and/or a leader has a positive, healthy impact on all aspects of their community. A progressive capitalist brings a wholistic servant leadership approach to measuring corporate success. Their duty is to serve their customers, employees, and the community as a whole. Corporate success can be defined as a “hexagon of critical success factors”:
Let us examine each of these factors:
> Employee Satisfaction: the degree to which employees are engaged in meaningful, enriching work and paid a living wage for doing that work. Nobody in this country should make < $35,000/year for a full-time job, especially when the CEO is earning $35 million!
> Environmental Health: the degree to which the organizations develop or manufactures its products and performs its services while minimizing the negative impact on the environment. Our planet is slowly dying, and drastic measures need to be taken including significantly reducing fossil fuels.
> Customer Satisfaction: the degree to which the organizations products and services meet the needs of its customers in a constructive and healthy way. This can be identified using the American Customer Satisfaction Index (ASCI) an economic indicator that measures the satisfaction of consumers across the U.S. economy [4].
> Profitability: the overall profitability of the organization measured with standard financial metrics such as stock price, earnings per share, return on investment, etc.
> Regulatory Conformance: the degree to which an organization conforms to legal and regulatory compliance. Many organizations pay fines as standard operating procedures! They hire lobbing firms to influence candidates to fight for the reduction of these regulatory standards. In my view, it is acceptable to hire firms to represent your interests to politicians BUT donations to politicians and political action committees is nothing more than a bride and it totally unacceptable. The Supreme Court had a differing opinion in 2010 with their ruling on Citizens United making these donations legal and stating that corporations were essentially individuals[5] and should be able to contribute to candidates and political action committees. Ironically, this viewpoint totally contradicts the Friedman doctrine.
> Tax Contribution: the degree to which an organization pays its fair and legal share in taxes. We often forget that paying taxes supports the infrastructure, including the military, that protect our freedoms to own our companies. “In 2019, Amazon paid $162 million in federal taxes, just a fraction of the $13.9 billion in pre-tax income Amazon reported for 2019 — roughly 1.2%! The federal corporate tax rate is 21%, but as in the past, Amazon likely employed various tax credits and deductions to reduce its federal tax bill. Amazon also reported $280.5 billion in total revenue in 2019”.[6]
Don’t all companies strive to maximize their performance against these criteria? Every company is different, but few are evaluated and measured against these collective criteria.
JP Morgan Chase has paid well over $20 billion in fines just in the last decade, yet their stock performance is solid with a $7.66 EPS and a stock price of $125/share! At the time of this writing, stock market professionals are recommending a “moderate buy,” meaning it is a good stock in which to invest.
Purdue Pharma L.P. a privately held pharmaceutical company paid out one of the largest fines ever levied against a pharmaceutical firm. “On October 21, 2020 it was reported that Purdue had reached a settlement potentially worth $8.3 billion, admitting that it “knowingly and intentionally conspired and agreed with others to aid and abet” doctors dispensing medication (OxyContin®) “without a legitimate medical purpose“[7]. Thousands of people of all ages have become addicted and overdosed as a result of Purdue’s business practices. Is this what Dr. Friedman meant by delegating personal responsibility to individuals and not companies?
I recently bought stock in PROGENITY, a bio-technology company and paid $4.39/share. I was excited because the company was issuing new common stock and I learned their stock was projected to eventually reach $15/share. Two weeks later I did some further research only to read: “July 23, 2020: Acting Manhattan U.S. Attorney Announces $49 Million Settlement With Biotech Testing Company For Fraudulent Billing And Kickback Practices” [8]. Frustrated, I sold the stock at $5.49/share! I could not be an owner in a company that allegedly “overbilled Medicaid and the Veteran’s Affairs (VA) by fraudulently using a billing code that misrepresented the tests provided”.
I want to invest in and buy products from great companies that support and value their employees, follow the rules, are sensitive to the environment and generate a fair profit. I would like to see independent auditing firms evaluate companies and score them against these critical success factors. This would give investors and consumers more informative criteria in which to make investment and purchasing decisions, respectably. The public needs 1 metric. Every restaurant in New York is rated and I won’t eat in a deli or a restaurant buffet with a “B” rating!
When the investor community refuses to purchase stock in a company that cannot maintain a high score, all companies will reconsider how they do business and focus on broadening their definition of success. I want DOJ to start sending white collar criminals to jail who break the law and violate public trust. If Dr. Friedman were still alive, I wonder if he would agree.
———————————————–
[1] Friedman, Milton (September 13, 1970). “A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits”. The New York Times Magazine.
[2] Robert Reich “Saving Capitalism”, Vintage Books, 2015
[3] https://www.stlouisfed.org/open-vault/2019/august/wealth-inequality-in-america-facts-figures#:~:text=Wealth%20inequality%20in%20America%20has%20grown%20tremendously%20from,net%20worth%29%20own%20only%201%25%20of%20the%20pie.
[4] https://en.wikipedia.org/wiki/American_Customer_Satisfaction_Index
[5] Dr. Friedman stated that corporations should not act as individuals and disregard the social need.
[6] https://www.cnbc.com/2020/02/04/amazon-had-to-pay-federal-income-taxes-for-the-first-time-since-2016.html
[7] https://en.wikipedia.org/wiki/Purdue_Pharma
[8] https://www.justice.gov/usao-sdny/pr/acting-manhattan-us-attorney-announces-49-million-settlement-biotech-testing-company