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On September 13th 1970 an essay was published in The New York Times Magazine that was to serve as the ‘permission’ for a generation of executives and politicians like Margaret Thatcher and Ronald Reagan to encourage the free market to operate solely for the benefit of the people that theoretically funded it – shareholders.

Half a century of Friedman

The essay is summarised by the current chief executive of Salesforce, who read it when he was in business school a few years later, in these words – ‘the only business of business in business’.

Training in the late 1970s to be a Chartered Secretary – the company officer charged with keeping a business legal in the UK and many former British colonies – I was taught a different line: that companies were part of the fabric of the economy and therefore of society, so ought to be accountable to other stakeholders, like employees, the government and the consumers.

What I was taught was not, as some still argue, some leftist permission for lazy managers to avoid focusing on profit generation, but an understanding that the profits of a company were generated by the utilisation of other resources apart from capital. That is really just traditional basic economics.

I would argue that to suggest that out of the contributors to profits in a democratic world, only the capitalist should be rewarded is in fact very specifically American and indeed represents right wing liberal philosophy.

The role of companies in society

Much more recently, in his books about humanity (Sapiens etc,), Yuval Noah Harari suggest that some corporations are now so large that they have become a new form of maybe everlasting life, whose influence will forever impact on humanity as a whole.

It is reasonable easy to demonstrate the governments are now at times the servants, not the controllers, of business. The allocation of tax payers’ money to bail out banks, the printing of money (the cost of which will be serviced by the population as a whole, not corporations) and the control of political process (which only the most naïve could deny happens in the US and probably in Europe) by industry paid lobbyists are all examples.

Even in dictatorships and communist countries, the corporation is the favoured entity for corruption. The state assets stolen from the population at the end of te USSR generally went into corporations owned by a few shareholders who used to be party officials.

I would suggest that because ultra large companies offer the opportunity for a few people to acquire almost unlimited power and they will probably use that to their own advantage (not surprisingly), some checks and balances are appropriate in a democracy. This has been recognised by anti-trust law in the US and competition law in Europe, but that only addresses part of the issue and not that effectively when it comes to the ultra large businesses.

If you don’t agree with the last sentence, you must be running your PC on Linux and viewing this page in Firefox – good on you!

I was also not at all surprised to see that Daniel Loeb (an ultra capitalist) defends Friedman by suggesting that the law requires companies to focus on profits only: since the 1960s, US corporations have had the ability to influence the law to their satisfaction, most notably to eliminate foreign competitors. Did I you just think Huawei and Tic Toc?

In fairness, Mr Loeb’s main claim for shareholders is that they should eliminate poor management. Managers (I mean directors and executives) are a sub-class of the employee stakeholder group who might well be accused of acquiring too big a slice of the pie.

As investors, perhaps we should be happy to see profit maximisation as the sole focus of company boards?

That would miss one important point – those who support the Friedman argument often want to create the maximum amount of wealth for themselves, not shareholders in general. In fact, if a takeover or merger that was in their interest would wipe out our investments in a good profitable company, it would not worry them at all!

In their world, the few are supposed to win and the many lose and we, sorry to tell you, are amongst the many.

Sharks or dolphins?

It is obvious that at a basic level, indeed it is a human right, we all need to eat good food. The most efficient and ruthless eaters are maybe sharks, or wolves, or locusts. Should the world seek to adopt their feeding process? I think not.

Most people, because of what humanity is, understand that companies should be run with ethical governance, in a way that sustains the human race and shares wealth with those who are less powerful contributors to its creation, like employees.

The rise of ESG investing and the evidence that well governed companies actually make more profits from normal business operations – quite a different idea from making money for those who are rampant market manipulators and speculators – suggests to me that 50 years down the road Friedman’s proposition is at last being consigned to history. I really hope so.