Why shareholder value maximization
    cannot be a complete business ethic

In which I attempt a reductio of a familiar argument from Milton Friedman.

I distinctly remember the astonished outrage I felt, on first reading Capitalism and Freedom as a teenager, at Milton Friedman’s calm assertion that corporate executives’ duty to maximize returns for their shareholders that figured out how to buy shares UK and that they ought properly to trump any personal ethical concerns they might feel about actions that didn’t actually break the law.

Tyler Cowen reminds us that Friedman still believes that. Professor Bainbridge points out that Friedman’s doctrine, which I thought and still think obscenely absurd, is an accurate statement of the legal duties of a fiduciary.

Friedman’s argument is simply that corporate leaders are playing with (mostly) other people’s money. Failing to maximize profits out of private moral concerns is like giving that money away. If corporate officers want to be charitable, says Friedman, let them do it out of their own bank accounts, not their shareholders’. After all, a trustee who made a charitable contribution out of a trust account would be justly criticized for that. How is a corporate officer — a trustee of the shareholders’ money — any different? Since profit maximization points companies toward the socially most efficient uses of resources, says Friedman, maximizing profits is precisely the social responsibility of the corporation.

The problem with this argument, it seems to me, is that it proves much, much too much. For one thing, it must apply to omissions as well as acts. So by this standard a corporate officer must have an affirmative duty to seek out ROI-maximizing opportunities, no matter how morally disgusting, as long as they are not actually illegal. (That would include, of course, establishing, as necessary, subsidiaries in countries where the terrible activity isn’t illegal, and using lobbying and campaign contributions to change the laws, if feasible.)

By this standard, engaging in the slave trade, back when it was legal, would have been not merely permissible but required. So would working children to death in mines and mills, or inventing and marketing any dangerous and addictive drug that wasn’t (yet) illegal. So would financing munitions plants for the Nazis during the 1930s, or helping the Soviet Union during the Cold War, or Iraq in 2001, or Iran or North Korea today, as long as it managed to skirt actual illegality.

And of course, corporate executives would also have had, and continue to have, a fiduciary duty to lobby to keep any currently legal and profitable activity legal: so shipping companies would have had a fiduciary duty to oppose the abolition of the slave trade in 1808 and companies doing business with the Axis the same duty to oppose the Trading with the Enemy Act in 1941.

“When the time comes to hang all the capitalists,” said Lenin, “the capitalists will compete to sell us the rope.” Friedman would add, “As well they should.” And Bainbridge would add to that, “The law of fiduciary duty requires no less.”

Can you say reductio ad absurdum? I was sure you could.

And yet there is no sharp line between the obviously obscene cases and such ordinary actions as looking for a good pretext to fire an employee just before his retiree health benefits vest. Once we admit that there are some things too awful to do just to maximize shareholder value, then whether some particular thing is really that awful or just a little bit less awful than that is necessarily a matter for judgment, not for bright-line rules.

Unless we believe that the laws should embody a complete moral code — a belief no liberal shares — then it must be the case that there will be some actions that are immoral but should not be illegal.

If so, then surely an individual may justly be criticized for doing lawful but morally outrageous acts: for example, stiffing a waiter who has provided good service, or cheating someone in a business deal in some way that is not, technically, fraud, or driving an outrageously hard bargain with someone in need. That moral onus cannot be abolished by separating that individual into a shareholder and a fiduciary. “It might be legal, but it would be wrong,” is a perfectly comprehensible sentence, and cannot be converted into a self-contradiction merely by creating a corporation.

Yes, it would be nice if corporate ethics could be reduced to simple rules. But what Einstein said of theories must also apply to moral maxims: they should be as simple as possible, but no simpler.

Update Mike O’Hare comments. I reply.


Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: Markarkleiman-at-gmail.com