A Free Market Manifesto That Changed the World, Reconsidered

ALEX GORSKY, chief executive of Johnson & Johnson

Friedman is owed respect for his analysis, but this highlights the ways in which investors and society have evolved over 50 years. Employees care about how companies function. Many of them are also a company’s shareholders, and they are calling on leadership to take action on societal issues.

In 1943, as Johnson & Johnson prepared for its initial public offering, Robert Wood Johnson made clear our responsibilities as a corporation: first to the patients, doctors and nurses, mothers and fathers and others who use our products and services, then to our customers and business partners, our employees and our communities. And, finally, to our shareholders. We are fortunate in having long had shareholders who have valued this balancing of interests. Now markets increasingly comprise such shareholders. Our performance over generations, when the life of an S&P 500 company now averages less than 20 years, is a testament that companies need not choose between service to a broad group of stakeholders and generating long-term financial value for shareholders. Revisiting this essay is a welcome exercise, and a reminder of the importance of self-scrutiny.

MARIANNE BERTRAND, professor of economics at the University of Chicago Booth School of Business

The shareholder-primacy view of the corporation — which gives little voice to the workers, customers and communities that are impacted by corporate decisions — has been the modus operandi of United States capitalism. Why did this view become so dominant? One rationale was a practical one. Rather than being asked to balance multiple, often conflicting, interests among stakeholders, the manager is given a simple objective function. More important, though, was the naïve belief, dominant in the Chicago school at the time, that what is good for shareholders is good for society — a belief that rested on the assumption of perfectly functioning markets. Unfortunately, such perfect markets exist only in economics textbooks.

To be fair, Friedman was most likely well aware of this shaky premise. This is probably why he writes “make as much money as possible while conforming to the basic rules of the society,” rather than “make as much money as possible, period.” The idea is that laws will be written to fix the many market imperfections, laws that would help realign profit maximization with social welfare.

Yet we clearly don’t have these “correcting” laws. Weak antitrust enforcement has led to monopsonistic power in the labor market, squeezing workers’ wages; polluting activities remain broadly untaxed, ravaging our planet. The government should be passing laws to discipline profit-maximization behavior, but too many lawmakers have themselves become the employees of the shareholders — their electoral success tied to campaign contributions and other forms of deep-pocketed support.

DANIEL S. LOEB, chief executive of Third Point

Friedman’s timeless essay resonates today as corporate America embraces “stakeholder capitalism,” a popular concept that is inconsistent with the law. Stakeholder capitalism distorts the incentive that prompts investors to risk their capital: the promise of a profit on their investment. So, I share Friedman’s concern that a movement toward prioritizing ill-defined “stakeholders” might allow some executives to pursue personal agendas — or simply camouflage their own incompetence (until it is starkly revealed by poor shareholder returns).

This is not to say that the principles of E.S.G. (environment, social and governance) have no place in corporate culture or strategy. In my experience, high standards in these areas are almost always found in great companies. Most of the top chief executives we invest in and interact with are driven by a mission to deliver great products or services for their customers — making money is a byproduct of that desire. Fortunately, in the United States we operate in a codified system of law and governance that enshrines our rights as owners to challenge or replace boards whose members stray from their fiduciary duty to prevent the sort of mission creep that Friedman describes.

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