The stock market is up. The unemployment rate is at historical lows. Home prices are stable or rising.
All is well. But you wouldn’t think it given how some policy makers want to change business.
Recent proposals have been put forth to control how businesses operate and use their cash. The hope is that U.S. business will operate more in line with certain “social” goals.
Massachusetts Sen. Elizabeth Warren’s Accountable Capitalism Act would require large businesses be chartered at the federal, rather than state level, and that the directors of these businesses “consider the interests of all stakeholders.” Sens. Chuck Schumer of New York and Bernie Sanders of Vermont propose that U.S. companies be restricted from using their cash to buy back shares unless it “invests in workers and communities first.”
These proposals suggest that despite our growing economy, business has not done well for society. The debate over what business should do for society is not new.
In 1970, Noble Prize winner Milton Friedman wrote a powerful op-ed in The New York Times addressing similar concerns at the time that corporations were not serving society well. In his essay “The Social Responsibility of Business is to Increase its Profits,” Professor Friedman argued those promoting a social responsibility for business are actually “preaching pure and unadulterated socialism” and that such talk undermines “the basis of a free society.”
Friedman first noted that the issue is one for corporations only, because individuals or proprietors are free to use their capital as they see fit. But corporate executives are employees of the owners of the enterprise. Executives, and for that matter all employees, are responsible to operate the business in accordance with the desires of the owners. In the fiercely competitive, global business environment facing all managers today, companies that don’t make profits and create value for shareholders will cease to exist.
In the 1990s, Coca-Cola CEO Roberto C. Goizueta put it this way: “Creating value is a core principle on which our economic system is based; it is the job we owe to those who have entrusted us with their assets. We work for our share owners. That is – literally – what they have put us in business to do.”
Goizueta went on to argue that when managers raise the company’s value for its shareholders, they are also serving society. He wrote, “…the exercise of what is commonly referred to as ‘corporate responsibility’ is a supremely rational, logical corollary of a company’s essential responsibility to the long-term interests of its share owners.” Goizueta effectively argues that the interest of business and society are aligned.
For good economic and stock market news to continue, we don’t need new corporate rules and regulations. We simply need corporate managers behaving justly and ethically. Current law already contains actions and remedies for when they don’t.
Peter Crabb is a professor of finance and economics at Northwest Nazarene University in Nampa.