The Purpose Revolution – The Friedman Doctrine Is Out; the Stakeholder Doctrine Is In

August 19th, 2019 | Dustyn Lanz

A revolution happened today – a revolution in how business leaders define their purpose.

In 1970, the economist Milton Friedman wrote: “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” Friedman went even further by calling social responsibility a “fundamentally subversive doctrine.”

In short, the Friedman Doctrine stipulated that companies should focus solely on maximizing profits while obeying the law. For decades, this thinking has provided the theoretical foundations of how business gets done.

Until now.

Today, the US-based Business Roundtable of 181 CEOs announced that it has abandoned the Friedman Doctrine and replaced it with a new vision that focuses on a broader set of stakeholders including customers, workers, suppliers and communities in addition to shareholders.

The powerful group – which includes the CEOs of Apple, Amazon , Goldman Sachs, Bank of America, and ExxonMobil among others – now says companies should “protect the environment” and “foster diversity and inclusion, dignity and respect” for employees while also delivering long-term profits for shareholders.

The demise of the Friedman Doctrine marks a fundamental shift in how business leaders understand the purpose of a corporation. No longer is social responsibility a “subversive doctrine” – rather, it is part of the very purpose of a corporation, according to those who run 181 of the largest corporations in America.

Responsible Investors have been incorporating environmental, social and governance (ESG) issues into their investment decisions for years because they recognize that well-governed companies with strong performance and social and environmental metrics are likely to be better long-term investments. The Business Roundtable has redefined the purpose of a corporation in line with this thinking. This announcement provides leverage for responsible investors who engage with companies on ESG issues.

The Friedman Doctrine is out, and the Stakeholder Doctrine is in. We would love to see a similar statement from the Business Council of Canada (BCC). We will be reaching out to the BCC to start a dialogue.

Author

Dustyn Lanz

Chief Executive Officer
Responsible Investment Association

Dustyn Lanz is Chief Executive Officer of the Responsible Investment Association (RIA) – a Canadian organization that promotes the incorporation of environmental, social and governance (ESG) factors into investment decisions. He is a columnist for Investment Executive, where he writes about topics related to sustainability and responsible investment. Dustyn is also a member of the 30% Club, a network of executives which aims to achieve a gender balance in corporate leadership.