14 SEP


SRI , Topics

Fiftieth Anniversary of Milton Friedman’s Shareholder-Only Firm: Does Impact Investing Show a New Way ?

Maïa Ferrand
Co-Head of External Multimanagement
Mohadeseh Abdullahi
Investment Analyst, Impact Investments

Since the 1970 editorial by the late Nobel Laureate Milton Friedman, there has been a transformation in thought about the purpose and responsibilities of publicly-traded companies.

A Friedman doctrine – The Social Responsibility Of Business Is to Increase Its Profits

New York Times, 13 September, 1970

Shareholders only? The so-called ‘Friedman Doctrine’ holds that a public company’s main, perhaps only, responsibility is to shareholders and to maximizing shareholder value. Professor Friedman most notably brought his views to a broad readership in his 13 September, 1970 editorial in the ‘New York Times’.

Father of monetary theory and Nobel Laureate, Milton Friedman might also be called the unintentional father of the shareholder society. Subsequent generations of financial scholars, corporate managements, and hedge fund managers declared that firms which spend money for social initiatives are stealing profits from the real owners, the shareholders. Those owners who want to see company profits used for society, they argue, should take their dividends or capital gains and allocate these funds as they choose – reinvest, make a charitable contribution, or spend.
Professor Friedman, it must be remembered, was an advisor to both US President Ronald Reagan and British Prime Minister Margaret Thatcher.

As so often happens, popular culture both simplified the doctrine and bent it to their own purposes, which perhaps the author did not intend. We seem to have taken Friedman’s doctrine beyond the shareholder firm to the ‘greed is good’ shareholder society.

Long-term capitalism, not short-term share price. Professor Friedman’s view of shareholders was considerably more nuanced. Friedman was reacting to the idea, prevalent fifty years ago, that big (rich?) corporations should use their profits for charitable purposes, or for social programs which governments were not prepared to fund. He gave as an example that companies should not hire ‘hard core’ unemployed at the expense of corporate profits when better-qualified workers are available, if the only purpose was to contribute to the social objective of reducing poverty. Similarly, for a firm to build local infrastructure that the government should be providing is essentially stealing from the shareholders. But he notes the important exception: “It may well be in the long-run interest of a corporation that is a major employer in a small community to devote resources... to that community ... to ... make it easier to attract desirable employees, ... reduce the wage bill, or lessen losses.” Sounds rather like modern-day ESG analysis investing, doesn’t this? In which considering all the stakeholders ultimately should benefit the shareholders.

Enter Impact Investing. A new business model is evolving, Impact Investing, in which the firm is founded to create a social or environmental impact. For this new breed of entrepreneurs, the firm’s profits and shareholder value are derived from societal impact –whether social or environmental. Providing clean water. Building affordable housing. Creating employment agencies to match long-term unemployed to jobs where they are the right person for the position. In this new model, shareholders and other stakeholders, relating profit to societal purpose. 

We think ‘Uncle Milty’ would approve.