Comment by OliverJones | Hacker News Reader

Comment by OliverJones | Hacker News Reader

The idea that businesses' sole loyalty must be to shareholders is not ancient, and it is not a long-standing central tenet of capitalism.

On September 13 1970, the University of Chicago economist Milton Friedman published an article in the New York Times Magazine under the headline "The Social Responsibility of Business is to Increase its Profits". You can find it here. https://www.colorado.edu/studentgroups/libertarians/issues/f... Much of the shareholder-only ethic of US business is based on that article.

Mr. Fink and his investment firm seem (to me) to be part of a movement to relax that single-minded approach to corporate ethics. Obviously a company that extracts every bit of value from its customers, workers, and host communities leaves them less resilient and certainly less loyal to the company. Uber's the egregious example, but there are plenty of others. Mr. Fink is betting that companies who don't extract everything will have a longer future.

It's worth a try. The Friedman approach has now been tried, and it's not working as well as some might have hoped.

The Friedman approach is merely to recognize that the executive’s responsibility is to execute the desires of the shareholders. The “profit at all costs” mantra comes from the (sometimes false) idea that shareholders care only about profits, and not about using the corporation as a vehicle for social impact.

In this case, BlackRock (the shareholder) is making its desires clear — profits are not the only standard by which its companies will be evaluated. This is fully in accordance with Friedman’s principles. In fact, this kind of shareholder activism is only possible if executives are held to Friedman’s standards. Otherwise, they could just tell the shareholders to piss off.

> The Friedman approach is merely to recognize that the executive’s responsibility is to execute the desires of the shareholders. The “profit at all costs” mantra comes from the (sometimes false) idea that shareholders care only about profits, and not about using the corporation as a vehicle for social impact.

How do you reach this interpretation? Friedman himself explicitly used the word "profits".

This is Friedman's own words, in the 1970 article he wrote in the NYT [1]:

> That is why, in my book Capitalism and Freedom, I have called it a "fundamentally subversive doctrine" in a free society, and have said that in such a society, "there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

Either we charitably interpret his writings as broadly as possible, and we get into a religious debate over which denomination under Friedmanomics is the "One Truth", or we can just recognize that maybe it's time to reconsider some things in supply side capitalism, and try another implementation of capitalism.

I'm also very tempted to point out that the last point in his doctrine in practice likely is an unavoidable effect of supply side economics, thus incompatible with the idea behind the principle.

[1] https://www.colorado.edu/studentgroups/libertarians/issues/f...

Especially in the current market though, profits are increased through numerous different levers. For awhile, it was price price price, and the lowest won. This built the Chinese outsourcing manufacturing engines and the Walmart stores, and now Amazon is eating them in the same way.

Now however it's becoming more fashionable to not simply have the cheapest price, but to have things like socially responsible sourcing of products (coffee especially does this), low friction purchasing processes and easy returns (Amazon), companies that make note of being produced in the same country, companies that make efforts to take care of their own staff making it more palatable to pay more to ensure the people making what you consume are paid living wages, or subscription convenience allow products that are technically higher priced to compete in the market much more effectively than previous years.

I.e. the drumbeat of the last few decades, where employees are paid the bare minimum possible, where corners are cut at every aspect, where service and quality take a backseat to just the lowest possible price, are going out of fashion. The rules of the game are changing, and so the players must also change.

> so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."

This is also an enormous caveat. The type of fiduciary responsibility espoused by Friedman seems to be completely at odds with the type currently practiced.

Indeed, that was what my last line was hinting at, although I could've phrased it less cryptically.

Friedman also supported tax cuts and deregulation.

Combining those two is like saying that the human body works fine as long as no organ malfunctions. While technically true, it's completely irrelevant to whether or not it's a scenario worth debating, and whether or not we in reality need doctors and medicine.

We wouldn't need law enforcement if everyone followed the rules either. It's still not the case.

> The “profit at all costs” mantra comes from the (sometimes false) idea that shareholders care only about profits

Shareholders are detached from negative externalities of their investments unless they pay a financial price. We certainly can't count on shareholders to rein in a company like Equifax, no matter how much harm their investments might cause. There will always be plenty of investors who care only about profit.

Isn't that just the same Friedman approach with a longer time horizon?

Imagine a farmer who farms to exhaust the soil. He earns money but in 30 years, the farmland is rendered useless. He becomes poor in the end.

Another farmer farms slower, leaving fallow years, sustainably. He earns less money but 30 years later the farm is productive. He remains wealthy in the end.

Going from farmer 1 to farmer 2's strategy is not a change in ethics. The second farmer didn't care about the land as an end in itself. He just thought longer into the future, and knew how to measure assets that weren't obvious (in his case, land quality; in real life, loyalty, image, healthy communities to embed in).

There's also a financial reasoning behind that. Low interest rates and high liquidity seems to be the new normal. Even "Main Street" corps are trading with PE ratios above 20. This means 20y of current profits to get back the money.

A capital investor now needs a lot of profitable years to recoup their investment. One single scandal like VW emissions may jeopardize a lot of years profits.

And that's why farmers take care of their land, because farmers generally retire on the worth of it.

If consumers demanded corporate social responsibility, the shareholders would want that too because it would be profitable. Capitalism's outcome does not match with making the world a better place because consumers main priorities are not making the world a better place.

> it's not working as well as some might have hoped.

Curious what was hoped that didn't work?

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