In 1962, Milton Friedman said, “There is only one social responsibility for business – to use its resources and to engage in activities designed to increase its profits as long as it remains within the rules of the game, that is, it engages in open and free competition without deception or fraud.”
There has been a heated debate about this quote since the Business Roundtable centered around “stakeholder capitalism” in its revised “Statement of Corporate Purpose” in August 2019.
Nobel Prize-winning economist Milton Friedman has shaped the course of history with his strong focus on free markets and economic growth through business leadership focused on creating shareholder value. His model has proven so powerful that few oppose it today, and he has undoubtedly created financial wealth. But the expansion of corporate power that he has pushed has also led to major changes in the “playbook” of competition over the past 60 years in areas from accounting to taxation, banking, telecoms, digital technology, pharmaceuticals, energy and antitrust. Taken together, these rule changes tend to separate financial performance from the core value to society that Friedman’s philosophy aims to create.
The rules are now heavily influenced by powerful corporate interests, and the very interests they are intended to regulate. This was not something Friedman expected. It was very clear that the rules should not be dictated by private interests.
He said, “When the government—in pursuit of good intentions (…) tries to aid special interests, the costs come in incompetence, lack of motivation, and loss of liberty.”
Corporations and trade associations influence politics through contributions to political candidates and political action committees (PACs) where employees can contribute and lobby. After the decision of the Supreme Court in Citizens United, there is no limit to indirect contributions, for example, to pay for advertising.
If the goal of lobbying is to maximize shareholder value in the short term, companies are pressured to lobby for their own narrow self-interest, with less regard for the effects on society. The strong pressure that guides this criterion must then be a factor in increasing corporate profits by driving policy that enables profitability.
CEOs had been OK with this system for a while, but at a certain point the business case for shareholder capitalism at the expense of all other stakeholders started to crack. As the workforce shifted from muscular work to intellectual contribution, and as younger employees demanded environmental and social accountability, CEOs saw value in a more balanced approach, understood that creating value for all stakeholders avoided the worst outcomes of unrestrained capitalism, and led to the term shareholder value creation too. . This was when the Business Roundtable decided to change its definition of corporate purpose.
Over the past several years, more companies have incorporated this approach to enhancing value for all stakeholders—particularly employees, communities, customers, and the entire value chain—based on a long-term view of shareholder value and moving away from focusing on quick quarterly wins.
However, corporate public affairs departments, the powerful trade associations behind most of the “rules of the game” we now live by, have been slower to consider the challenge of incorporating societal stakeholders and interests into lobbying or political influence strategies.
As the lobbying community catches up with this shift to a more inclusive stakeholder approach, principles are needed to navigate when and how to lobby. The University of Michigan’s Earp Institute has developed a set of initial principles for corporate political responsibility that reflect this more responsible approach. Last year, I became a member of their staff as a supporter. After 12 months of dialogue with entrepreneurs, stakeholder groups, and experts with diverse ideologies and positions on specific issues, they identified four principles:
- legitimacy: Respect statutory and fiduciary duties, refrain from coercing any stakeholder, and pause to ensure there is a real basis for involvement in any issue (based on the company’s contribution to the issue, liabilities related to it, or its consequences for society as a whole).
- responsible: Actively seek consistency and alignment with stated commitments, through effective oversight and governance, including the Company’s engagements with third parties, and taking proactive steps to address misalignment.
- responsible: Demonstrate active support for the systems on which the economy, society and life depend. This includes supporting healthy market “rules of the game” that promote competition on the basis of quality, price and long-term value, reduce costs out to other stakeholders, and align private interests with the broader public good, based on the premises of free market capitalism. It also includes support for and protection of American constitutional democracy, healthy civil discourse, and general harm avoidance.
- Transparency: Communicate openly and honestly about political activities to promote stakeholder informed decision-making and public trust, including disclosure and reporting, open communication, and sharing of experiences.
Such a set of principles could provide a focal point for a new standard that reflects the original assumptions of shareholder primacy, stakeholder capitalism visions, as well as a starting point for more constructive thinking on specific issues. Indeed, from a shareholder, employee, customer or citizen perspective, it can go a long way to restoring confidence in both responsible management and trustworthy civic institutions, without losing the capitalist system’s focus on creating shareholder value.
Applying principles means applying pressure for the self-interest of a company or industry only when societal interests are also being advanced. It means having a legitimate and real basis for engaging with policy makers, being accountable to stakeholders, and refraining from undue influence. This means aligning pressure with company values and insisting on aligning trade unions. It means publishing information on political spending, lobbying, and trade association activity.
Companies can refocus lobbying and influencing strategies on a transparent and accountable approach to their role in writing the “rules of the game”. If the rules are formulated through a fair, democratic process without undue influence from special interests that want to tip the market in their favour, our political and economic systems will reap enormous benefits.
Maureen Klein is the Vice President of Public Affairs and Sustainability for Pirelli Tire North America.
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