Some 50 years after Milton Friedman declared that "the social responsibility of business is to increase its profits," his doctrine of shareholder primacy is having its day of reckoning. Many entrepreneurs have been skeptical for some time of a system that incentivizes squeezing profits out of the business and handing them off to shareholders not involved in operations. Indeed, companies like Airbnb and Patagonia have stated they want to create value for all stakeholders, not just shareholders, and there's a strong argument that the stakeholder approach is better for the bottom line over the long term.
Friedman's narrative, published in September 1970, set the stage for decades of corporate behavior prioritizing the interests of shareholders above all else. But half a century later, market forces have exacerbated inequality, while deregulation has let companies off the hook for things like air and water pollution and climate change.
Opposition to the Friedman doctrine has been building for some time (last year, the Business Roundtable announced that the purpose of a corporation is to create value for all stakeholders, not just shareholders), and is accelerating with the pandemic. With inequality and natural disasters in the spotlight, leaders in business and finance are rallying for a new narrative.
Enter Imperative 21, a network of business associations created in the early weeks of Covid-19 and representing more than 70,000 businesses, with the ambitious goal of ushering in a more inclusive, stakeholder-focused economic system. The founders include the leaders of B-Lab, an organization that runs a rigorous certification process for companies interested in identifying as having a societal mission. Investors are also represented in Imperative 21 through the Global Impact Investing Network (GIIN), and large corporate CEOs through Chief Executives for Corporate Purpose (CECP), an association originally founded by Paul Newman.
Starting in April, the leaders of these and other organizations partnered with the Ford and Skoll Foundations and began a broad conversation over Zoom with whomever was interested. The conversation led to a couple of drafts of "Imperatives for Economic System Change," and the creation of international coalitions to work on cultural change and shifting the financial system towards better management of systemic risks like inequality and climate change.
The allies chose the 50th anniversary of Milton Friedman's doctrine to announce themselves to the world, launching a campaign they call "Reset." The campaign opens with a display on the Nasdaq Tower in New York's Times Square and on a building in São Paulo, Brazil, along with a full-page, paid announcement in the New York Times. The Nasdaq will also begin projecting key indicators of economic success on its tower, including biodiversity, living wages, anti-racism, and shared prosperity.
Imperative 21 is campaigning for an economic reset based on three pillars:
- design for interdependence,
- invest for justice, and
- account for stakeholders.
The group says it wants an economic system that:
- "recognizes the interdependence of healthy people, planet, and economies; reimagines the relationships between the private sector, government, and civil society; and ensures that everyone has access to free and fair markets;
- "removes structural inequality; ensures leadership and ownership are more representative and investment more accessible; uses technology to advance democratic ideals and human rights; and promotes greater voice, power, and opportunity for those currently marginalized; and
- "measures success based on credible common metrics of value creation for all stakeholders; creates incentives that reward business and investments creating social and environmental value; and enhances standards of fiduciary duty."
While entrepreneurs have long favored such changes, the effort behind Imperative 21 offers a framework for envisioning a different system. The group plans to find ways to highlight actions that help bring about change, and catalyze growing enthusiasm about conscientious business activity. They are designing their strategy around three audiences: the general public, business leaders, and policymakers.
Still, the leaders acknowledge that proper delivery of their message will take a decade or so. Despite such widespread desire for change, the shareholder system ushered in by Friedman is strongly entrenched and tough to deviate from. Just this summer, the Department of Labor issued a proposed rule that would limit the use of investments that consider environmental, social, and corporate governance factors in 401(k) plans. Regulation of the financial sector is designed around shareholder primacy, and shareholders are in a powerful position to continue propagating the notion that greed is good, or perhaps inevitable.
This is why the Imperative 21 allies are focusing on getting the word out: They understand that policies governing the financial system won't change until public opinion builds enough momentum to change them. So as important as it is to advance concrete proposals for a new system, perhaps even more important, according to the network, is sparking conversations. A reset can only begin with awareness.