‘The principal objective of a business enterprise is to generate economic returns to its owners’. University of Chicago economist Milton Friedman’s famous statement in the New York Times in September 1970 about the objectives of the corporation was for many decades taken as gospel.
From the mid-1980s to the early 2000s, Friedman’s (purported) position was dominant in both academia and in the business world. Simple and catchy, it served the interests of certain parts of society. At extremis, think Gordon Gekko of Wall Street. Undiluted capitalism. Only shareholders matter.
Keeping stakeholders in the tent
Of course, the alternative model is for businesses to consider all of their stakeholders: so-called stakeholder capitalism. And since the early 2000s, Friedman’s doctrine has fallen from favour (or so most companies would have you believe), its rejection almost a requirement for acceptance into polite society.
However, Friedman didn’t ever advocate that companies should ignore their stakeholders. What he went on to say was that the only way a company can be successful ‘in the long-term’ is if it treats all stakeholders seriously. Note also that Friedman was writing 50 years ago, partly in response to the US government of the time exhorting corporations to stop raising prices in an attempt to combat inflation. Clearly, the world has changed a lot since the 1970s. The balance of power between government and corporations has shifted and we face more serious environmental concerns.
Responsible capitalism is more than positive PR
If he was writing now, would Friedman frame his ideas in a slightly different way? We suspect he might. Not least because of the passing of time and economic externalities including the climate crisis. But also because there is plenty of evidence to support the idea that business can be a driver of positive impact.
Conscious capitalism can be successful, but it clearly has to mean more than social responsibility for PR purposes. Friedman made it clear that corporations have a social responsibility to play within ‘the rules of the game and, engage in open and free competition without deception or fraud’.
Disrupting the status quo through positive change
Unfortunately, we suspect a lot of corporate responsibility still serves only to protect self-interests and maintain the status quo. Real positive impact comes when companies align their strategy with positive environmental and societal outcomes; impact through innovation which reshapes the very nature of competition and makes the company, its investors and society better off.
Which is why, as impact investors, our focus is on identifying the most innovative and disruptive companies. Companies which are at the intersection of disruptive innovation and the unsustainable status quo. Companies whose strategies, if delivered successfully, will make everyone better off. In fact, given the scale and intensity of the environmental and societal challenges that we face, we strongly believe that corporate success and above-market-returns will come because of – and not in spite of – positive impact.