You’ve probably seen the memes.

On Instagram or TikTok, a Patagonia-clad finance bro ironically extolls his prowess at creating shareholder value. These self-deprecating jokes are pitched as a sort of catharsis, allowing the protagonists to rationalize the long hours spent away from family and friends. My life may be terrible, the posts say, but at least I’m helping my company’s shareholders get rich – and probably pocketing a decent salary for myself at the same time.

Or, as the famous New Yorker cartoon from 2012 puts it, “Yes, the planet got destroyed. But for a beautiful moment in time, we created a lot of value for shareholders.”

Yet the original shareholder-value meme burst into the public consciousness all the way back in 1970, when the economist Milton Friedman wrote an opinion piece for the New York Times with the provocative title “A Friedman Doctrine – The Social Responsibility of Business Is to Increase Its Profits”.

Friedman, a five-foot-tall firebrand of the libertarian right who taught economics at the University of Chicago, used the 3,000-word article to expound his vision of businesses’ role in society. Building on points from his 1962 book Capitalism and Freedom, he outlined the case that companies should refrain from tackling perceived social ills, such as reducing pollution or cutting inflation.

Milton Friedman’s doctrine

Friedman argued that any corporation spending money in the name of “social responsibility” will be taking that money from shareholders, employees, customers, or some combination of these groups. And the company is less qualified to know how to benefit society with this money than the shareholder, customer, or employee would be if they received the money instead.

In addition, corporate managers have little experience in how to allocate capital to social projects and corporations have none of the oversight given to governments, through elections or constitutional checks, to ensure they’re backing projects that the populace as a whole desires.

A company that spends its money on reducing pollution beyond the legally mandated minimum or paying employees more than the market rate will at any rate lose out to one that doesn’t, Friedman argued.

All this led the economist to conclude that, “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”

The case against Friedman

Friedman’s pitch that businesses should obsess over profits to the exclusion of all other goals has some flaws.

For a start, there’s the instinctive ick factor. This is one of those times when an academic’s posture is at odds with the gut reaction of the vast majority. If a person behaved with this monomania about any topic, let alone the accumulation of money, we would instinctively shun them. So why should we give businesses a free pass?

It’s a short jump from “the social responsibility of business is to increase its profits” to Gordon Gekko’s jaw-dropping “greed is good” schtick in the movie Wall Street. Friedman’s doctrine presents the enemies of capitalism with an open goal.

My second charge is one of inefficiency. Friedman assumes that businesses and consumers have equivalent spending power and that a dollar in a shareholder’s or customer’s pocket is always worth as much as a dollar in the company’s coffers. Yet it will generally cost a company much less to prevent an oil spill than it would cost others to clear up that oil spill after the tanker’s hull has been breached. There are plenty of situations when a corporation can limit hugely expensive societal problems with relatively little outlay.

Freidman’s final troubling assumption is that shareholders care only about money, to the exclusion of all else. Yet shareholders are people too. They need a planet with clean air and water on which to live, they want to feel safe as they travel home from work, and they want people in their neighborhood to find gainful employment.

By assigning only one desire to shareholders, Friedman oversimplifies human nature.

The enduring appeal of a focus on profits

Yet for all the flaws with Friedman, his manifesto has a compelling simplicity.

For one, encouraging company managers to focus on the share price and then linking their pay to that share price – through awards of stock – brings clarity for CEOs. When Friedman published his NYT piece in 1970, only a tiny fraction of CEO pay in the US was through grants of shares. By the end of the century, equity-related pay had ballooned to make up the vast majority of compensation – and has remained near those levels.

For society as a whole – a mass of competing power bases including the government, legislatures, the judiciary, labor unions, the media, and many more – understanding that corporations will act to boost profits to the exclusion of other goals can also bring refreshing clarity. Do we really want companies to become black boxes whose motivations are mushy?

Friedman pushes the responsibility for forcing companies to think about more than profit to governments and regulators, insisting that corporations must obey the “basic rules of the society”.

And it’s true that changes in company behavior mainly come from government regulation. At the time when Friedman published his column, General Motors had been facing pressure to make their cars safer. Consumer advocate Ralph Nader led a “Campaign GM” movement that aimed to air these safety concerns at the car maker’s annual meeting of shareholders, in a pioneering example of so-called shareholder activism.

Yet he found greater success in changing auto giants’ behavior through legislative action, with his 1966 book Unsafe at Any Speed prompting the U.S. government to set up bodies overseeing vehicle safety for the first time.

A focus on profit as the true north star goal of a business also brings focus to managers’ decision-making. Every boss juggles dozens of competing metrics when deciding where to allocate resources. Understanding that profit is prime can help managers navigate the winds.

Moving beyond shareholder value

Plenty of commentators have backed away from Friedman’s profit-at-all-costs manifesto in recent years, but few have suggested satisfying alternatives. Even the Business Roundtable, a lobby group representing some of the biggest U.S. firms, unveiled a revised mission statement in 2019 that “more accurately reflects our commitment to a free market economy that serves all Americans”.

It dumped longstanding language that “corporations exist principally to serve their shareholders” in favor of vague aspirations like “we will further the tradition of American companies leading the way in meeting or exceeding customer expectations” and “we respect the people in our communities and protect the environment by embracing sustainable practices across our businesses”.

With all that in mind, here are four suggestions for making improvements without losing too much of Friedman’s bracing clarity.

Option one: Better feedback loops from shareholders to company managers.

Currently, CEOs are forced to assume that shareholders desire profit, to the exclusion of everything else. Let’s find ways of measuring shareholders’ broader desires.

The current system of annual meetings for public companies, where motions are put to a shareholder vote, is broken. In the internet era, companies should be able to poll shareholders’ desires much more deeply and frequently – without sucking up too much time. Putting specific proposals like “How much should we spend on carbon scrubbers at our new factory?” to an online poll could be one approach, although it risks turning corporate governance into a version of Switzerland, with its constant policy plebiscites.

More effective could be a “vibes” survey sent to shareholders, similar to a Meyers-Briggs personality test. By weighting these results across the proportion of shares held, bosses could create a map of their investors’ interests and desires. Institutional investors could “vote” on behalf of their clients, or find a way of polling their clients’ priorities.

Instagram’s algorithm knows I have a soft spot for skiing videos. Why doesn’t Meta, Instagram’s parent company, have similar insights into its shareholders’ desires?

Private firms should in theory be more attuned to the desires of their investors, seeing as they will have fewer shareholders to reckon with. These polls and surveys could work equally well here, if companies have the will to implement them and investors agree to engage.

Option two: Better feedback loops from companies to shareholders.

Public companies have a legal responsibility to publish lots of information about their finances but little else. They could be forced to divulge much more about their performance against various social metrics, like pollution or employment practices, allowing shareholders to make more informed choices about the companies they back. Private firms could also be encouraged to open up.

This does however rely on investors taking the time to consider these extra metrics.

Option three: Focus on customer satisfaction, not shareholder satisfaction.

How much time did you spend considering your last TV purchase? How much time do you spend considering the environmental policies of the companies in your pension portfolio?

Arguably, customers have even more sway over companies than shareholders. We could force companies to be more transparent with customers on their social policies, arming them with the information to make purchases that fit their broader priorities for society.

This approach could work for both public and private companies, assuming regulators are willing to apply these rules to both.

Option four: Break the link between executive compensation and company valuation.

Pay incentives focus the mind. Instead of linking the majority of CEO compensation to the price of a public company’s stock or a private firm’s overall valuation, could we find a measure that reflects a company’s broader social impact?

Perhaps we could poll a representative sample of citizens on their perceptions of a company’s performance against a slate of key metrics. Perhaps regulators could appoint a panel of industry experts to perform a similar task.

This could force bosses to be more responsive to the desires of society as a whole if they want to get their bonus. We’d just have to guard against a new generation of WeWorks, with charismatic founders who say they’re fixing the world without following up words with action.

Creating incentives that match corporate behavior to the social goals that the majority desire is hard. But it’s not impossible.

The views expressed in this publication are the personal views of Andrew Rummer and do not necessarily reflect the views of the EQT AB group ("EQT") itself or any investment professional at EQT.