Do we care too much, or too little, about the business then…

In 1970, economist Milton Friedman wrote a famous opinion piece, titled “The responsibility of business is to increase profits”. Friedman’s view was challenged then, but is now almost universally considered a relic.

Very few people think in such crude terms these days. In 2019, the Business Roundtable, the first organization of business leaders in the United States, explicitly endorsed stakeholder capitalism, putting the interests of employees, customers, suppliers and communities on an equal footing with shareholders. The board of directors at the time included the presidents of Walmart, General Motors, Apple and Cisco.

The tide has definitely turned, but it’s important to understand exactly what Friedman was arguing and why. I think the key statement in Friedman’s article is: “What does it mean to say that the business leader has a ‘social responsibility’ as a business person? If this statement is not pure rhetoric, it must mean that he must act in a way that is not in the interest of his employers.

Friedman used the analogy of a tax, saying that if leaders were acting in the promotion of a social good, they were effectively imposing a tax either on shareholders, by producing less profit, or on consumers, by producing a greater product. dear. And how were they to decide on which special social interest to spend this tax? According to Friedman, it was simply more logical and better accountability for the government to make these decisions and for corporate leaders to refrain from making them.


In response to the Business Roundtable’s statement, there have also been many criticisms along the same lines.

“Focusing on shareholder value is the most important social cause because it leads to the greatest wealth creation. As corporations and their shareholders maximize wealth, resources flow into the economy in a way that necessarily increases overall social welfare,” Professor Donald Kochan of George Mason University said last year.

Still, I guess that view is now in the minority; almost all companies, at least theoretically, support the notion of corporate social responsibility, and this idea is now more explicitly stated in the idea of ​​ESG – environmental, social and governance factors.

I think the shift happened for a number of reasons.

First, there has been a new awareness of the magnitude of ‘externalities’, particularly in the context of climate change. Externalities are the consequence of the production of goods that entail costs for unrelated third parties. This is particularly evident with the climate crisis, where climate change is the external consequence of, for example, the narrow pursuit of profit by oil companies.

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The second reason for the change is the increased skepticism about the ability of governments to adequately deal with all the myriad challenges of modern society, which was Friedman’s solution.

Third, the democratization of the investment industry and in particular the increase in the number of retail investors means that the constituency in favor of companies acting in a manner proportionate to the interests of citizens has widened and intensified.

Fourth, the investment industry, which largely represents pension funds, has an interest in extending the time perspective of corporate executives to match their longer-term obligations. It is no coincidence that some of the strongest supporters of ESG are investment companies.

But the generalization of ESG does not solve all the problems and, in fact, it highlights Friedman’s objections a little.

I recently participated in an ESG-themed webinar (see below) with JSE’s Director of Sustainability, Shameela Soobramoney, and Xolisa Dhlamini, Certified ESG Analyst at Sanlam.

I put them the famous recent tweet from entrepreneur Elon Musk. Musk’s company, Tesla, had been removed from the S&P 500 ESG Index. For Musk, it was undeniably crazy: Tesla’s whole point is to offer a meaningful contribution to reducing greenhouse gas emissions through sustainable transportation.

“ESG is a scam. It has been weaponized by fake social justice warriors,” Musk wrote, mocking the inclusion of six oil companies in the index, and claiming that a good “ESG score equates to a company’s compliance with the ‘left agenda’.

Well, Soobramoney, Dhlamini and I all confessed to the social justice warrior charge.

“If we don’t have social justice, everything we try to build won’t be sustainable,” Dhlamini said. It is impossible to live in a country like South Africa and ignore these problems.

It all depends, Soobramoney said, on your theory of change. Different indexes look for slightly different results, so the weighting process for each of the different results makes a difference. Obviously, there is a lot of effort to find convergence. At its core, what the JSE is trying to drive is better information into the public domain, she says.

Is ESG too broad a measure?

What I wonder is if the E, S and G are really compatible measurements in a unitary system. Isn’t it too broad to expect anything even vaguely related to business ethics to fit into one box? Is it really functional to compare in the same index something as huge and global as environmental compliance with something much more specific to a particular national and company context, like a company’s free float ?

My other criticism goes back to Friedman’s original question: ESG should become a means of reducing government liability for market share. You see this often in South Africa, where the responsibilities of government are legislatively stacked on corporations. It is a kind of indirect recognition of the insufficiency of the government. But if this is the case, then the onus is on the government to improve its adequacy, not hand over its responsibilities to another institution.

In any case, I think ESG is here to stay, and the next frontier is to measure it accurately and honestly, because we have a new challenge in “greenwashing”, as Deutsche Bank recently discovered. .

So, in answer to the question, “Do we care too much, or too little, about corporate social warriors? I think the answer is “yes” in both cases.. DM/BM

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