With the death last week of the Nobel laureate Milton Friedman, business lost one of its brightest and most influential gurus. His saying ‘There’s no such thing as a free lunch’ has become part of popular English usage, but in business circles his name is associated with another dictum: ‘The social responsibility of business is to maximise profits.’

This idea, which has been dubbed ‘shareholder value’, has helped to provoke a vigorous reaction in the form of the ‘corporate social responsibility’ movement, which insists that business has responsibilities not only to shareholders but to stakeholders: customers, employees, suppliers, society at large and the environment.

Despite the obvious appeal of this argument, there are several reasons why Friedman’s point should not be too easily dismissed. After all, any good that business can do is dependent on it making a profit, and shareholder value obliges managers to put the interests of shareholders first rather than their own. Moreover, shareholder value is not so much the invention of business gurus as the product of our demands for the best return on our investments.

Nonetheless, there is a serious problem with shareholder value, though it’s not one we might expect: it conflicts with the way most businesspeople think. According to recent research, the great majority of CEOs believe that corporations should balance their obligations to shareholders with those to wider society. Only one in six, in fact, agrees with Friedman on this score. None of the most admired companies regards shareholder value as its main purpose; and, paradoxically, companies that do focus on shareholder value perform less well than those whose first priority is to serve their customers.

What motivates most businesspeople, evidently, is the sense that they’re providing something that people want or need. And will want or need again. And again. Business, it seems, is less about serving a remote share index than about creating and sustaining long-term relationships with people. Perhaps this reflects the nature of our universe: ultimately, true purpose and meaning are found not in the quantity of material returns but in the quality of relationships.

Business shoots itself in both feet, therefore, if it makes maximising profit its chief objective. Not only does it damage its reputation by convincing the public that it’s up to no good, it also reduces its shareholder value – two outcomes that Friedman would have been keen to avoid.

Peter Heslam

Dr Peter Heslam is associate faculty at LICC and director of Transforming Business at Cambridge University.

additional resources

Milton Friedman’s discussion of the social responsibility of business can be found on page 133 of his book Capitalism and Freedom (University of Chicago Press, 1962).

Helpful discussions of the shareholder/stakeholder debate from a Christian perspective can be found in David Nussbaum’s ‘Does Shareholder Value Drive the World?’ in Christianity and the Culture of Economics (University of Wales, 2001), edited by Donald Hay and Alan Kreider; Rethinking the Purpose of Business: Interdisciplinary Essays from the Catholic Social Tradition (University of Notre Dame Press, 2002), edited by S A Cortright and Michael J Naughton; Chapter 3 of Richard Higginson’s Questions of Business Life (Paternoster, 2002); and Chapter 10 of Clive Wright’s The Business of Virtue (SPCK, 2004).

For a critique of limited liability, see Michael Schluter in ‘Risk, Reward and Responsibility: A Biblical Critique of Global Capital Markets’, in Globalization and the Good (SPCK, 2004), edited by Peter Heslam.

The recent research referred to above is published in these three sources:

• ‘The McKinsey Global Survey of Business Executives: Business and Society’, in The McKinsey Quarterly, the online journal of McKinsey & Company (if the site asks you to register, click on the link a second time once you have done so);

• George Binney’s Corporate Purpose and Values: Time for a Re-Think? (Tomorrow’s Company, 2006);

• Richard Ellsworth’s Leading with Purpose: The New Corporate Realities (Stanford Business Books, 2002).

Much of this research confirms the findings of James Collins and Jerry Porras in their highly influential book Built to Last: Successful Habits of Visionary Companies (HarperBusiness, 1997), which argued forcefully that companies that last for generations are characterised by a strong sense of purpose and values.

Peter Drucker, a famous business guru who died last year, was a fierce critic of the theory of shareholder value. The saying most frequently attributed to him is ‘The purpose of business is to create and keep a customer.’ See page 37 of his bestseller The Practice of Management (Harper & Row, 1986).