Firms’ actions on guns debunk a myth
Milton Friedman should be spinning in his grave just about now. In 1970, the conservative economist turned his withering glare on business leaders who asserted that “business has a ‘social conscience’ ” and the responsibility for “providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers.”
These business leaders, Friedman declared, were “preaching pure and unadulterated socialism” and were nothing less than “unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades.”
Yet in recent days, numerous public companies including Walmart and Delta Air Lines have taken stands against gun sales, raised the minimum age for gun purchases, or put daylight between them and the National Rifle Assn. by canceling member discounts and other cooperative marketing deals.
The most outspoken may be Dick’s Sporting Goods, a public company, which said on Feb. 28, in the wake of the Parkland, Fla., massacre, that it would stop selling assault-style rifles or high-capacity magazines and not sell firearms to anyone under 21. The company also called on lawmakers to ban assault weapons and high-capacity magazines, raise the minimum age for firearms purchases to 21, and require universal background checks of buyers.
“The systems in place are not effective to protect our kids and our citizens,” said Dick’s Chief Executive Edward Stack. “We believe
it’s time to do something about it.”
“Gun control” is today’s reform “catchword,” to use Friedman’s term, and some of these steps may well cut into those companies’ sales and profits.
So are we witnessing an outbreak of pure and unadulterated socialism among corporate CEOs? Or are we seeing a long-overdue reevaluation of the myth that a corporation exists for one reason only — to maximize its shareholders’ wealth?
It’s certainly true that gun control is an issue that the public wants to see progress on. Masses of students, teachers and supporters are being called on to participate in a National School Walkout for 17 minutes Wednesday at 10 a.m. — one minute for every death in the Feb. 14 mass shooting at Marjory Stoneman Douglas High School.
The shareholder value myth sprang in large part from the mind of Friedman, who articulated the case in an op-ed the New York Times published in September 1970. Its title was “The Social Responsibility of Business is to Increase its Profits.”
Yet as Cornell law professor Lynn Stout showed in her 2012 book “The Shareholder Value Myth,” Friedman’s notion was unsupported by corporate law, corporate economics or empirical results.
The legal case establishing shareholder value as the be-all and end-all of corporate management was Dodge vs. Ford, a Michigan Supreme Court case in 1919 that was chiefly about the duty that Henry Ford owed to the Dodge brothers, who were minority shareholders. Ford Motor was then privately held so the case didn’t even involve public shareholders.
In the course of ruling for the Dodges, however, the Michigan court happened to assert that “a business corporation is organized and carried on primarily for the profit of the shareholders.” Stout labels this remark “dicta,” referring to a casual observation in a court ruling that is largely irrelevant to the issue at hand. Over the years it has been frequently cited by business commentators, but almost never by other judges as precedent, Stout observes.
The shareholder value idea got wrapped up with the concept of the shareholders as the “owners” of a public company. That’s also a myth. Shareholders don’t have many of the rights we normally associate with ownership of anything. They don’t get discounts on company products. They can’t appoint a CEO (that’s the board’s job).
They have a limited and conditional right to a portion of the company’s profits, but only if the board grants that by declaring a dividend. If a company is liquidated in bankruptcy, the shareholders are entitled to whatever’s left after all other stakeholders, including tax collectors, vendors and bondholders, are paid off.
Nor is there any evidence that a single-minded focus on shareholder value makes a company more successful in the long term. Corporate success is the product of many factors, including factory floor efficiency, innovative products, and positive popular esteem. Focus on those factors, and shareholders may be among the beneficiaries. Focus on shareholders — including CEOs with big option grants — and other stakeholders may become unhappy and unproductive, and the company will stagger.
One reason the shareholder value myth has been so alluring since Friedman’s essay is that it offers a simple proxy for corporate success: the share price. How is IBM doing? Well, the stock’s up today, so what do you think!
But the share price can be a deceptive proxy, since it’s based not merely on performance but expectations of performance. And both can turn on a dime — witness the sudden revaluations of companies such as Enron, or America’s banks after their gluttonous appetite for toxic assets almost destroyed the global financial system in 2008.
Who are the shareholders, anyway? Some (usually most) will be long-term investors holding shares through mutual or pension funds. Others are shortterm traders hoping to capture a decimal or two and then bail out. Their “values” are certain to be very different.
The truth is that a public corporation is a public licensee, granted certain legal and economic advantages for the benefit of the public, not of a narrow and ill-defined shareholder group. Its duty is to apply its public benefits for the good of all its stakeholders: suppliers, customers, communities and employees.
A public company has the power to make life miserable for all these stakeholders, and those with a laser-like focus on shareholder wealth tend to squeeze the others mercilessly. In the long run, everyone suffers except perhaps the CEO who has managed to cash out his shareholder benefits and salted the money away for retirement.
The recent actions of companies placing restrictions on gun sales and backing away from the NRA fit much better with the responsibilities of public corporations than a policy that allows unrestricted gun sales because they bring profit to those companies. These companies understand their duties to the community at large. Professor Friedman, maybe your time is past.