Maximizing shareholder value while maximizing societal value

Claire Markham

Milton Friedman, a Nobel Prize recipient in the field of Economic Sciences, argued in his 1962 book Capitalism and Freedom that the responsibility a business has towards society is to maximize its profits. He explained that when businesses pursue social responsibility initiatives, such as investing in their local communities, they are doing so at the expense of shareholders, employees or customers. Instead, businesses should focus on maximizing profits, and through the additional money that was not imposed on stakeholders by pursuing social responsibility projects, those stakeholders can fund social initiatives themselves if they choose to.

Particularly in the resource-constrained environment businesses find themselves in today, there are flaws in components of Friedman’s argument.

1.    It implies that social responsibility is inherently value-destructive. There are numerous examples of organizations that are positioning themselves to achieve bottom line value through social and environmental responsibility programs. Levi’s Water<Less program enables the company to make jeans using 96% less water, which reduces its reliance on a volatile resource. Gap’s increase in its minimum hourly wage improves retention and productivity. Social responsibility and profit need not be at odds with one another. Amid increasing resource constraints, responsible businesses will not only ensure sustainability of the planet but also sustainability of their own profits.

2.    It relies upon government to consistently act in society’s best interest. Friedman suggests that as long as businesses are complying with the rules of business, they should simply maximize shareholder returns. However, these rules are created and monitored by politicians who have personal interests at stake given their limited terms and who may not always be incentivized to govern business in a way that maximizes long-term societal value.

3.    It ignores the role that culture plays. If a business is comprised of employees and shareholders with similar social values, it is more effective to use the business as a platform to achieve those objectives than for each individual to work towards them on their own. For example, if the majority of a business’ stakeholders care about factory worker rights, it is far more effective to implement positive changes in the business’ own factory conditions than for stakeholders to use their own funds to lobby for factory worker rights outside of work.

As an alternative viewpoint, the purpose of business is to generate value to society in both the short- and long-term, in exchange for profits. The reason businesses exist in the first place is to address an unmet need in society. The challenge with many businesses is that they prioritize the immediate societal need that they are focused upon without consideration for the destruction they are causing on other societal needs, leading to a net disservice to society. There is such a focus on short-term shareholder value that investing in the long-term is often neglected. In an interconnected world of global business, it is increasingly likely that the negative externalities created by a business will come back to impact its profits in future.

Consider the case of a clothing manufacturer with questionable environmental practices. It is addressing customer desires to wear fashionable clothing and thus it is meeting a societal need. However, in doing so, its toxic dyeing processes are contaminating local rivers, which is at odds with society’s need for clean water. Implementing supply chain modifications will not only positively impact the communities that rely on that water, but will ensure the sustainability of profits for the business itself which relies upon those water sources. 

In the absence of business rules that consistently represent societal interests and hold businesses accountable for their negative externalities, it is the responsibility of businesses to go above the bare minimum and uncover the abundance of solutions that simultaneously maximize long-term shareholder value while maximizing societal value.

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