Original Shareholder Value Article – Milton Friedman to GM: Build Clunky Cars

By Michael Olenick, a research fellow at INSEAD. Originally published at his website

On September 13, 1970, Milton Friedman published one of the most arguably economically destructive articles in history, “The Social Responsibility Of Business Is to Increase Its Profits,” in the New York Times. The article is available, in PDF form, for subscribers from the New York Times website.

Friedman advanced the idea that managers are agents of shareholders and that the only purpose of for-profit businesses is to increase stock price.

Managers have been debating Friedman’s “Shareholder Value Theory” for ages but nobody seems to have found the most obvious flaw from the seminal article. Milton’s sermon was directed at GM management who listened, decimating their brand, market share, and share price.

Specifically, Friedman raved against the notion that corporations have “social responsibilities” that, in this specific case, meant they should build safer, more fuel efficient and environmentally friendly cars. One can surmise this notion eventually extended, during a time when planned obsolesce was part of a business model, to quality.

In 1970, Friedman insisted businesspeople not concern themselves with issues beyond increasing shareholder value. “Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades,” wrote the Nobel laureate. Implicit is the message to GM: keep doing what you’ve been doing: build clunky, crappy cars because that strategy was profitable in the past. The Times, They Weren’t A Changin’ at GM.

In hindsight Milton Friedman was, by any measure, wrong.

No serious student of business, economics, law, history, or engineering could argue that Friedman’s business analysis was correct. GM, along with other US automakers, listened to Friedman, ignored the “reformers” (Friedman’s word), and went on to build a series of truly terrible cars. Automobiles that broke, blew up, hurt people, handled terribly, and guzzled gas. These cars were uglier than a Blobfish and polluted “like a 19th century coal-fired factory,” as Wired Magazineeloquently summarized the era.

Besides building awful automobiles those “social responsibilities” that Friedman raved against were important to many baby boomers who, in 1970, were trending to be the largest consumer group. That is, to appease faceless shareholders, Milton Friedman advised that GM and other businesses ignore demands from future customers.

The result was predictable. As my mentor Prof. Robert Ayres recalls, he bought a Honda. I’m younger but remember when my father replaced the family jalopy with a new Corolla. Subaru’s became cool. Japanese cars were fuel efficient, environmentally friendly, relatively safe, and incredibly reliable. They were built by companies that took exceptional care of their workers who, in turn, cared exceptionally about their businesses and the products they build. Japanese executives must have been aware of Friedman’s theory and actively rejected the advice; they took, and continue to take, those “social responsibilities” seriously.

Did Toyota and Honda ignore shareholder value? With booming sales and sterling reputations I imagine their shareholders were pleased. How about those GM shareholders that Friedman praised for voting against exploring social responsibilities? People who purchased GM stock in 1965 — the one’s Friedman praised for voting down social policy considerations — did see their stock increase in value … in 1993. I’m not sure how that constitutes shareholder value.

Milton Friedman’s Exhibit A on shareholder value — the notion that GE must reject a call for “social responsibility” and ignore buyer demands — resulted in one of the worst business disasters in history, the gutting of General Motors.

Others have pointed out that the rest of Friedman’s theory is bunk.

First are the business executives: those who run actual businesses, something Milton Friedman never did. As detailed in this article from Forbes, Jack Welch called it “the dumbest idea in the world.” Paul Polman, CEO of Unilever, referred to followers as a “cult.” Alibaba CEO Jack Ma reminds that “customers are number one; employees are number two and shareholders are number three.” Marc Benioff, founder and CEO of Salesforce, added it is “wrong .. the business of business isn’t just about creating profits for shareholders.”

Great business executives care about social issues. Apple CEO Tim Cook famously told an analyst, when questioned about Apple’s use of renewable energy, “I don’t consider the bloody ROI,” adding that Apple does “a lot of things for reasons besides profit motive. We want to leave the world a better place than we found it.” Google’s founding motto was “Don’t be evil.” They eventually dropped that because it set the bar too low. Facebook actively works on connectivity for poor countries. Well managed businesses are menschkeit, taking care of their customers, employees, and communities while earning a lot of money for shareholders. Lesser businesses, or those driven by short-term activist shareholders, are parasitic, milking their customers, employees, and the organization itself dry until there is little left for shareholders or anybody else.

Legal experts explain that Friedman’s theory, that managers are agents with a responsibility to increase stock returns, is outright wrong. Lynn Stout, distinguished professor of corporate and business law at Cornell Law School, argues Friedman bungled the law; managers are legally not agents of shareholders. She wrote a book on the subject, The Shareholder Value Myth. Prof. Stout writes “the idea of a single shareholder value is intellectually incoherent. No wonder the shift to shareholder value thinking doesn’t seem to be turning out well — especially for shareholders.”

Shareholder Value Theory remains alive and well. Michael Jensen and William Meckling published a 1976 article, “Theory of the Firm,” that repeated the myth managers are agents of shareholders. Despite that by 1976 GM’s struggles were apparent, and that one would think the question of agency is for lawyers rather than economists, their paper became and remains one of the most widely cited in academic literature.

Print Friendly, PDF & Email


  1. ToivoS

    I never really thought about why GM sucks but I definitely came to that conclusion after I purchased my first car. The year was 1972 and I wanted to purchase a new car made in America. I bought a 1972 Chevy Vega. That had to be one of the worst cars ever put on the road. It lasted about 50 k miles and the engine simply blew. I found out later that my experience was just about average.

    I have been buying Japanese ever since. Hondas mostly that easily last 200 k miles though I have traded mine in after 100 k. It should be noted the Milton Friedman became the guru for economic reform for the Pinochet regime in Chile after the 1968 coup. They listened to him for about 18 months until his advice froze the Chilean economy and they had to jettison all of his policies.

    1. skippy

      Recently bought a 2006 Toyota 3.0 diesel with 300K on it with full books as ex fleet vehicle, its a mule.

    2. SufferinSuccotash

      I never bought a Vega back in the day, but I did test-drive one. The door handle came off in my hand and the steering column wobbled. Been driving Corollas ever since.

    3. Jim Young

      My first new car was a 1973 Vega GT Wagon, rusted out by 50,000 miles and with an engine that failed before it was paid off on a 3 year contract. The engine had an aluminum block and iron cylinder head, with a problem caused by the cylinder block bores sinking if it ever overheated in the slightest (IMHO). Being a bit of an amateur mechanic, I’d traded in my 68 Camero (that I had reconfigured 6 times with the original 396, a mostly stock 427, a stock 327, a slightly modified 396, a built up 427, and finally a 327 with headers and an Economaster 4 barrel that made the salesman that accepted the trade in ask if it still had the 427 in it.

      As bad as the Vega ended up being, we bought it the week before the gas shortages hit, filling it the first time for under $4, but with the second fill up costing nearly $10 more. Driving it carefully I could get up to 30 mpg (1.9 to 2.3 times better gas mileage than my Camero)

      I did take advantage of a secret warranty GM had on the engine, taking the engine directly to the GM district representative in Hawaii, instead of hassling with a dealer directly. He gave me a voucher that I used to get an iron lined block, and I added headers and a better carburetor, as well as a few suspension and tire choices to make it a fun Gymkhana car instead of a daily driver. We ended up with rapidly improving Honda Civic CVCC Station Wagons for a few years, and even a really fun little Honda 600 2 cylinder I drove around Denver getting 45 mpg.

      The CAFE standards persuaded GM to market cars like the 1987 Chevy Sprint and 1994 Geo Xfi that I bought as great little one or two person commuter cars, letting me average up to 52 mpg (operating at 1/5th the life cycle cost per mile of the cars others chose for “comfort and safety”), letting us put our children through Catholic schools and a good part of colleges. Our son’s PhD became realistic from the money we put to better use than ego cars.

      Now I drive a used 2001 Prius I paid $600 for and am exploring the wide range of other used hybrids that can be upgraded at least as much as my old Vega. I’m interested in used Honda Insights (all Aluminum), that can benefit from much improved and more affordable batteries (even used packs, that are properly balanced and about 60% the cost of new packs). I do love vehicles that can be 1/5th the cost of what the industry would like to sell us.

    4. Joel

      The Chevrolet Vega!

      My parents’ first car was a 1977 Vega. Oh, the times that car left us stranded on the side of the highway. And yet my parents kept buying American, basically getting conned, until the 1990s (ironically, when Detroit quality started to improve) and now my mother only buys Japanese or Korean.

      Congratulations on getting 50k miles out of yours! That is impressive.

  2. PlutoniumKun

    Just to say that the issue of shareholder crappification predates Friedman and applied even in Japan. One of my all time favourite films is Akira Kurosawa’s High and Low from 1963. A central plot point is the attempt by a group of executives in ‘The National Shoe Company’ to introduce cheap shoddy mass produced shoes – the hero attempts to take over the company to reassert the primacy of well made hand crafted shoes. No doubt it was influenced by Kurosawa’s constant battles with philistine film producers.

    1. Carolinian

      Filmwise the fifties American movie Executive Suite also comes to mind. A company ceo dies and the board must decide whether new leadership will be a bean counter out for the short term or an engineer played by William Holden. This might be the story of GM (once run by engineers, lately more of a finance company making all its profits off auto loans).

    2. LifelongLib

      IIRC back in the 1950s Robert McNamara was famous at Ford for thwarting engineers who wanted to spend money on new car designs, saying it was more profitable to just stick fins or something on last year’s models. So all this is nothing new.

      1. skippy

        Wellie I blew every tripwire with my original response couched in beardo prose and a suggestion that the crazybros wax oratorically. Got a blank thingy.

        Anywhom the devolution to one huge company [corporatist] store proceeds unabated.

        Disheveled… ffs what happens at the end of this…

  3. Larry

    The article is fine, but suffers from the major flaw of pretending that tech companies care about more than share price and profits. Tim Cook buys renewable energy for multiple reasons, but most likely for marketing purposes for their high priced goods. I wonder if he okayed the suicide nets at Foxconn?

    1. diptherio

      Yeah, that. He’s making the point, though, that executives in practice aim for a lot of other things that don’t have to do with share price. In context, I’ll let it go…although this one had me rolling my eyes:

      Google’s founding motto was “Don’t be evil.” They eventually dropped that because it set the bar too low.

      I believe that’s “too high,” not “too low.”

      1. WobblyTelomeres

        Perhaps, just end the sentence at bar. As in, “because it set the bar.”

        Those crazy freedom loving guys don’t need no stinking bars being set. /s

      2. lyman alpha blob

        Yes that one made me do a double take too. I also assumed they dropped it because they wanted to start being evil.

  4. Darius

    One may accept that managers have a fiduciary responsibility to shareholders, but those not part of that relationship don’t need to exalt that relationship above all others.

    Corporations also have legal responsibilities to their employees, not to pollute, to pay taxes, and respect others’ rights. A big dose of antitrust enforcement would reassert these duties.

    Shareholder value thinking has fostered value extraction over value creation and a short term business focus. In addition, if you want to go down that road, creditors take precedence over shareholders.

    1. divadab

      Well, creditors do take precedence over shareholders in the law. The law of bankruptcy.

      And that is what Friedman’s simplistic ideology has wrought – the bankruptcy of US capitalism and its stripping and selloff in favor of foreigners.

    2. Yves Smith Post author

      There is no “fiduciary duty to shareholders”. Wash your mouth out. Directors of public companies are not fiduciaries. They have a duty of loyalty and a duty of care to the corporation, which is a lower standard.

      If you read any guide to what directors are supposed to do, you see NOWHERE any discussion of giving shareholders special consideration. That’s because equity is a residual claim. Everything else, payments to suppliers, employees, lenders, Uncle Sam, insurance payments, legal judgments, usage fees, come ahead. The message to directors is basically “Don’t go bankrupt”.

      1. Darius

        Yes. Fiduciary also is a legal term with specific meaning, not to be tossed around lightly. Poor word choice.

  5. JCC

    Regarding this post and yesterday’s post, http://www.nakedcapitalism.com/2017/08/shareholder-value-killing-innovation.html one of the first and best books I read on this subject was Marjorie Kelley’s The Divine Right of Capital.

    I still think it’s a good introduction for those who want a general view of how our stock markets and many American Corporations operate today. It was published 14 years ago and since then, unfortunately, things have not changed for the better at all as far as I can tell.

    The above link is a summary page of this excellent book. i personally feel it should be required reading for every introductory economics class.

  6. John Wright

    I’ve suggested before that the “must maximize shareholder value” story could end, not by pressure on executives or a change in their compensation structure, but by covenants in the debt the corporations need to finance their company’s purchase of stock “to increase shareholder value”.

    The bond holders frequently take a bath as companies are taken private or are levered up to buy shares back, so bond holders experience a wealth transfer from themselves to the managers/share owners..

    If the debt holders want healthy companies with good interest coverage to keep the riskiness of their bonds at an acceptable level, might future corporate debt have covenants that require a certain capital structure that limits future “shareholder value enhancement” financial engineering?

    I don’t see exhortations to “Do the right thing” will work, as the current system is benefiting senior management and indirectly, the political establishment.

    Another limiting of the “maximize shareholder value” tool kit would be for the SEC to determine that share buybacks are indeed stock manipulation as they were prior to the Reagan SEC.

    But all recent Democratic/Republican SEC’s (Bush I, Clinton, Bush Jr, and Obama) have NOT overturned the “buybacks are not stock manipulation” determination.

    I suggest the eventual corrective pressure could come from bondholders/lending institutions..

  7. flora

    ““Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades,” wrote the Nobel laureate.”

    “unwitting puppets”?? “forces …undermining …a free society these past decades”??

    Friedman here sounds like a McCarthyite loosed onto the business community, imo. The implied subtext is remarkable, and nothing to do with successful business practice.

    Thanks for this post.

  8. FortyYearsInThe UniversitySystem

    “Nobel”? Winner of what? Friedman’s Nobel Prize was fake. The Nobel family is angry that the extreme neoliberal Swedish Central Bank is still using their name immorally. Friedman got a fake “Nobel” as a scam by neoliberals to pimp their decadent, psychopathic ideology. Stop disseminating the lie please.

      1. Yves Smith Post author

        He is saying that the so-called Nobel prize for economics was not instituted by Alfred Nobel and the institute that confers those prizes has nada to do with the economics prize. Instead, the Swedish central bank appropriated Nobel’s name without getting permission, much to the annoyance of Nobel’s descendants,. They named it “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.”

  9. Scott

    One of the best examples of shareholder value is what happened to DuPont. Historically, DuPont had a well-deserved reputation for safety; however, due to pressures to maximize shareholder value, the company cut spending in this area. In 2014, this resulted in an explosion that killed four people. Last year, rather than upgrading the plant, DuPont elected to close it.


    Are DuPont shareholders better off now than if the company made investments in safety and maintenance all along? Possibly. Would the company’s reputation be stronger? Probably. But we know that those four men would still be alive.

  10. JTMcPhee

    C’mon, folks — on that list of priorities, customers, workers, shareholders, there’s a major omission: number 1 is Corporate Executive Compensation. All else is nugatory.

  11. MASShole

    I have responded to a number of people who advance the “unions destroyed Detroit” line with the following:
    “While unions may have overreached, did the union leadership or rank and file INSIST that Ford manufacture the Pinto OR Chevrolet make the Chevette?”
    I had a Pinto that never would start in rainy weather (not good thing in humid metropolitan DC summers).
    So my next car was a Mitsubishi (branded by Chrysler)… Good mileage, reliable…

    Of course management never took responsibility for bad decisions. They never do.
    “The bucks stop here — Any success is due to my capabilities; any failures are the fault of underlings…”

  12. hemeantwell

    This could serve as a stake into the heart of one line of criticism of centrally managed economies. The chuckling over Soviet managers meeting a shoe production quota by making scads of nothing but size 10 shoes would turn to guffaws over the folly in this guideline.

  13. Ptolemy Philopater

    Would that the monster Milton Friedman were still alive so that he could be tried for crimes against humanity. Nobel prize, are you kidding. I am sure that Milton Friedman has a special place in hell, to quote Madelaine Albright, preparing to take her place there, in the bowels of hell.

    It is Milton Friedman who rationalized the kleptocracy that has and is now devastating the world. It is his rationalizations that has held back economic development for at least 100 years. Look around you at the US, the devastated infra-structure, millions of lives destroyed. The corporate kleptocrats passing around the oxycontin like candy, die deplorables die. That’ll reform social security all right. This is textbook sociopathy.

    Shareholder value indeed. Ask yourself who are these shareholders that Friedman was so solicitous about. Ask yourselves how many of them are there. This is predatory capitalism at its worst. The question is who are the predators, and how can they be stopped and held accountable. How about RICOH prosecutions of the American Bar Association, the American Medical Association, or has Congress exempted them too from RICOH like they have the banks. How much longer will the looting continue? When will the pitchforks come out, after the next disaster?

    When President Trump releases the missiles and tens of millions of more people are incinerated, will there then be war crimes tribunals, when it is too late? Your average American who thought Trump was the “Great White Hope” will wake up the next day and go Huh? May they all rot in hell.

    1. flora

      “It is Milton Friedman who rationalized the kleptocracy that has and is now devastating the world. ”

      From Automatic Earth:
      “The main problem is the collapse of western political systems. While that is what brought Trump to power in the first place, he didn’t cause the collapse. The collapse is also what ‘gave you’ Brexit, and Trump didn’t cause that either. …

      “Still, that’s not where the core of the demise of our political systems lies. Though it does gave us a flavor of their priorities. The core can be found in economic issues. In both president Bush II and president Obama bailing out banks while letting people’s incomes and wealth tank, and not sueing any banker for anything at all. Obviously, the same scenario played out in Britain as well. And in many other nations….

      “This happens all over the place. Japan PM Shinzo Abe is the latest trophy to be added, and to join Holland, Italy, France, the US etc., in the list of ‘traditional’ parties and politicians being voted, if not out, then certainly down, way down. You can’t run a country in the midst of a crisis like that….”


    2. Winston "Alhazred" Smith

      Well, I think I have a copy of “The Necronomicon” around here somewhere, ah there it is! We could re-animate his corpse and then beat some sense into him and put on repeat…


  14. Arizona Slim

    When I was a young pup during the 1970s and 1980s, I spent some time in the great state of Michigan.

    Were the local cheerleaders for the drek that rolling off the local assembly lines? Nope. Far from it.

    In Michigan, I learned to call the Chevy Vega the Vegamatic. And I heard about a rock band called the Exploding Pintos.

    What were my young Michigan friends driving? Certainly not those big Detroit hulks. They were rolling around in VWs, Datsuns, and Toyotas. None of them new cars, mind you. We were kids, after all. But, dang, those foreign cars were reliable. Much more so than their American counterparts.

    1. Carolinian

      The Vega had an aluminum engine block with iron sleeve inserts–an engineering disaster. The truth is that when the oil crisis came and small cars became popular Detroit didn’t have a clue how to make them. And they probably still don’t have a clue how to make them or at least how to make a profit on them. This is why they push the much more profitable pickups and suvs.

      1. John Wright

        I believe the original Vega had the pistons running directly in the aluminum block bores.

        Initially there was no iron sleeve insert.

        The Vega linerless aluminum block is similar to the Alusil alloy linerless engine blocks used by Audi/BMW/Porsche with considerable success.

        See https://en.wikipedia.org/wiki/Alusil

        Nothing wrong with the technology, but GM’s implementation must have had some problems.

        Maybe it was because of expansion problems as they used a cast iron head on the aluminum Vega block.

        1. Paid Minion

          The original engines were aluminum bores. Sleeving came later, after the rep of the car was crap.

          The Vega was an awesome car. As soon as you dropped a 327/350 in it……..

          If you follow the history. GM Engineering at the time wasn’t the problem. It was the half azzed way some of the stuff was forced to be built, per the direction of the beancounters.

          Which is why I became (and remain) a “Mopar Guy”

          GM was in the habit of putting giant engines into GTOs/Chevelles, with weak disc brakes and overstressed suspensions. Or doing idiotic stuff like building Pontiac engines with cast iron connecting rods.

          Contrast this with Chrysler, who was still interested in protecting their rep for engineering.
          Look at the stuff the “police packages” were built with. Look at the HiPo cars…….heavy duty brakes/trannsmissions/rear diffs, bigger radiators and cooling system components, etc.

          Disassembling a “new” Hemi out in the shop. A pretty impressive bit of engineering. Cam moved high into block, shortening the pushrods (so less valvetrain instability at high rpm). Cross bolted main bearings. The rods/pistons look like “race” stuff. Pistons weigh 420 grams. Cylinder head ports as big as a Big Block Chevy. No wonder it makes the power that it does.

  15. Mike G

    So many of these economic theories/management fads (“Shareholder Value” “Laffer Curve”) that come along every few years are crappy ideas that are heavily promoted because they benefit powerful neolib interests, not because they are any good.

    Most people are followers, not thinkers. Either they are inclined that way, or the thinkers are weeded out of competition for positions of power in favor of compliant followers, so they have little influence. That makes it much easier for crap ideas to become widely adopted regardless of how much damage they do.

  16. Altandmain

    Basically Milton Friedman’s article was a pseudoscience PR type of article that has been used by the very rich to loot society from the rest of us, in a manner not entirely dissimilar to the actions of Ayn Rand, whose book Atlas Shrugged has similar ludicrous warnings.

    For those interested in more on Robert Ayres, here is one of his articles:

    NC’s article by WIlliam Lazonink (read his other works, most notably Profits without Prosperity as well):

    Covers this. Stock buybacks, often designed to maximize executive compensation, while limiting R&D and capital expenditures. This has left the US a weaker society overall. I fear that this infection has spread throughout the Western world.

  17. Chauncey Gardiner

    Milton Friedman’s damaging view can be contrasted with the system employed by Japanese manufacturers, who subscribe to the teachings of a lesser known American: engineer, statistician and manufacturing expert Dr. W. Edwards Deming. The Deming Prize is still awarded annually in Japan by the Japanese Union of Scientists and Engineers to a Japanese manufacturer who is assessed to best meet the quality control standards, processes and values set forth by Deming.

    Wikipedia has an insightful summary of Deming’s work, including a salient segment pertaining to his subsequent work with Ford and his “Seven Deadly Diseases”. Tellingly, one of the diseases Deming cited is “Emphasis on short-term profits”:


    Given the nation’s economic and social malaise, it is clearly far past time to discount Milton Friedman’s views and to reduce Wall Street’s political and economic influence.

  18. Adam Eran

    Worth listening to in this connection: This American Life’s account of NUMMI–the joint venture between GM and Toyota that built the Geo (a re-branded Corolla). The commentary about the social setting on the assembly line characterizes it as a prison labor situation, wherein workers would sabotage cars to get even with management. When Toyota showed the workers a friendly, productive environment, the American workers wept.

  19. mauisurfer

    No story on quality of Japanese cars is complete without discussion of Dr Ed Deming. I had the pleasure to work with him in 1964-5, when he was unknown to the auto industry. He was a statistician, and comprehended the relevance of math to quality control. The Japanese auto industry realized he was on to something, and hired him. The rest is history.
    After he became famous, then USA car makers began to listen, but not until the Japanese auto makers had shown the way.
    Ed said it was really simple basic Christianity, in contrast to the dog eat dog atmosphere of USA corporations. His prime example was a small town with 2 service stations located across an intersection. They shared a tow truck! What a revolutionary concept!
    Ed was a vegetarian, and he did not drink alcohol.

  20. PD

    Focusing solely on “shareholder value” may be myopic, yet writing in a way that dismisses the concept seems equally unbalanced.

    It seems that General Motors failed in the 1970s marketplace more for building gas-aholic vehicles as gas prices ballooned. There were quality issues but those were nothing compared to that of the earlier Toyopet, made by Toyota Motors (which required its second government bailout after WWII), that suffered massive recalls and failed to gain acceptance. It’s well documented that GM’s recent financial failure was owed more to generous pensions guaranteed to employees starting in the 1950s rather than operating or strategic mishaps. (As employees lived longer and healthcare costs skyrocketed, GM has for the last few decades been called a healthcare company with an automotive subsidiary. Japanese and many other foreign competitors didn’t have such handicaps.)

    One of the most admired and respected companies in the US, if not the world, is Berkshire Hathaway, Inc., whose Chairman and CEO has succeeded in running the company for over a half-century and focused almost exclusively on building long-term shareholders’ equity. Before his renown, another conglomerateur ran Textron, Inc., which invented, among many other things, alloys that supported the first manned moon landing. These executives and many other US corporate leaders have been professional role models for many others around the world.

    There are also companies that focused on “social responsibility” that failed in the marketplace. Ben & Jerry’s Homemade, Inc. had great financial success until it tried to change leadership (who continued emphasizing social responsibility) and ultimately faltered and was quickly sold to–a conglomerate. (Will a certain Brooklyn, NY based marketplace targeting “artisans” that emphasizes anything other than profits experience same fate?)

    Centuries before M. Friedman learned his alphabets, a Scottish economist named Adam Smith penned that businesses focus on increasing profits. His was a viewpoint of sincerity, knowing that businesses that say otherwise are doing so for financial gain.

    What do the above conglomerates and, say, retailing and tech conglomerate Amazon.com, Inc. (or, yes, even Wal-Mart Stores, Inc.) have in common apart from being economic successes? They all focus or focused on their customers with zealous ardor with the thought that doing so results in economic value. This final point may make an insightful and interesting story.

    1. Yves Smith Post author

      Citing Warren Buffett, an example of one, is hardly persuasive. And if you read his annual reports, he likes the businesses he bought because they are good businesses (following the Ben Graham principle of investing) and he was able to get them at a good price. Those businesses aren’t operated to “maximize shareholder value”.

      In fact, when companies try to maximize shareholder value, they don’t succeed. As economist John Kay wrote:

      If you want to go in one direction, the best route may involve going in the other. Paradoxical as it sounds, goals are more likely to be achieved when pursued indirectly. So the most profitable companies are not the most profit-oriented, and the happiest people are not those who make happiness their main aim. The name of this idea? Obliquity…

      Obliquity gives rise to the profit-seeking paradox: the most profitable companies are not the most profit-oriented. ICI and Boeing illustrate how a greater focus on shareholder returns was self-defeating in its own narrow terms. Comparisons of the same companies over time are mirrored in contrasts between different companies in the same industries. In their 2002 book, Built to Last: Successful Habits of Visionary Companies, Jim Collins and Jerry Porras compared outstanding companies with adequate but less remarkable companies with similar operations.

      Merck and Pfizer was one such comparison. Collins and Porras compared the philosophy of George Merck (“We try never to forget that medicine is for the people. It is not for the profits. The profits follow, and if we have remembered that, they have never failed to appear. The better we have remembered it, the larger they have been”) with that of John McKeen of Pfizer (“So far as humanly possible, we aim to get profit out of everything we do”).

      Collins and Porras also paired Hewlett Packard with Texas Instruments, Procter & Gamble with Colgate, Marriott with Howard Johnson, and found the same result in each case: the company that put more emphasis on profit in its declaration of objectives was the less profitable in its financial statements.


      1. PD

        Berkshire Hathaway, Inc. and Textron, Inc. were chosen because, as conglomerates, they allocate capital internally to whichever businesses will generate the best financial returns, accounting for scale and risk. There is nothing in the former’s chairman letters that hint of “social responsibility.” Indeed, the company’s Chairman and CEO ended the company’s shareholder-led philanthropy program once it began to interfere with his operations and has made clear that he doesn’t continue investing in businesses that don’t earn good enough returns, however he defines them. When asked by a college student about advice on social responsibility, the company’s Vice-Chairman, who’s known for his brevity, suggested that it’s not a good use of time.

        With all due respect to all, if that article excerpt is accurate, then its author made a number of errors (e.g. the book was published in 1994). Minor errors aside, the referenced book and comparisons prove the opposite point. Since shortly after the book’s publication, Pfizer, Inc.’s common stock price and profitability have handily outperformed those of Merck & Co.’s; even throughout the 1990s. The Economist does a fair review on the main author’s books (http://www.economist.com/node/21540219).

        Apple, Inc.’s CEO may posture in public that he’s doesn’t care about ROI (the company’s last CEO also said he doesn’t conduct market research and court cases showed otherwise); it’s highly unlikely his board and shareholders share similar views.

        The point here is that there’s a need for balance. Shareholders’ gains are important and shouldn’t be dismissed. The more important matter may be how well an enterprise meets or exceeds its customers desires. An enterprise having solid social responsibility or “shareholder value maximization” programs without successfully addressing this matter will likely fail to achieve either in the long-term.

    2. John Wright

      How did Warren Buffett and Berkshire Hathaway improve the world?

      One can cite significant historical builders of industry such as Alfred P. Sloan (GM), Andrew Carnegie and John D. Rockefeller.

      Or even the founder of General Motors, William Durant, who ended up running a bowling alley after he lost his fortune..

      And I submit that William Hewlett and David Packard helped build up the electronics industry as they launched many businesses that inspired many others over a 50+ year period

      But if Warren Buffett had not built up Berkshire Hathaway how would the world have been significantly poorer as a result?

      What is the great contribution of Warren Buffett to the common good?

      As I mentioned on NC before, will his epitaph read, “He was very good at buying low and selling high”?

      1. PD

        Years before Apple, Inc. made headlines for its commitment to renewable energy, Berkshire Hathaway, Inc. had already become one of the largest, if not the largest, non-energy investor in the sector. Notice that no headlines were printed touting the feat. No public posturing. Just focus on profit.

        (“These companies make Berkshire Hathaway Energy the owner of one of the largest renewable energy portfolios in the U.S.” https://www.berkshirehathawayenergyco.com/environment/renewables)

        Moral philosopher Adam Smith had it right that companies focus on increasing profits, as they should; anything else is their being less than sincere.

    3. Michael Olenick

      Ben & Jerry’s isn’t a good example. They were a startup that did great in a difficult field. The business eventually struggled — like many mature businesses do after iconic founders leave — and was sold to Unilever, a company that takes social responsibility just as seriously as Ben & Jerry’s itself did. Unilever just turned down a buyout $143 buyout offer because, in part, they believed their social responsibility mandate would not be maintained. Like my original piece says Unilever CEO Paul Polman calls shareholder value adherents a “cult.”

      GM’s issues in the 1970’s and 1980’s were due to quality, pollution, fuel economy, and safety; the exact issues the “reformers” Friedman ranted and raved about were advocating for. GM was building crappy cars. There have been countless case studies, books, and probably more than a few doctoral theses written about the subject: look at the number of comments about auto quality in this thread alone.

      1. PD

        Then moral philosopher (now labeled today as “economist”) Adam Smith’s point is as valid today as when it was written: Businesses seek to increase profits, as they should, and their claiming anything otherwise is merely misleading. This isn’t anti-business cynicism; it’s reality for even social programs can’t be funded without money.

        Yes, this applies to Unilever, where the CEO seems to have used an argument other than profit to save his >$10mn / year job. This is respectable as any other reasonable person would do same.

        It could reasonably be argued that General Motors Corp. went bankrupt at least in part owing to its adherence to social responsibility ideas decades earlier. Before it filed for bankruptcy, the enterprise had on its balance sheet an estimated $25.1bn liability for employee pensions and another $28.9bn liability, mostly for its retirees’ healthcare costs. Notice that these were estimated future cash costs for employees who most no longer worked at the company, i.e. they were no longer producing for the company. Meanwhile, its shareholders’ equity was a negative -$85.6bn (https://www.sec.gov/Archives/edgar/data/1467858/000119312510078119/d10k.htm).

        General Motors Corp.’s shareholders had already suffered substantial losses. The bankruptcy filing made creditors, retirees and communities lose, too (China is now GM’s most important operation). How could such a company be globally competitive when Japan and Europe have universal healthcare? Maybe it could though such financial and political ecosystem would constrain any enterprise anywhere.

        A case study should be done on Ben & Jerry’s Homemade, Inc. and its fall from grace. It was so swift and sudden that the full story is worth exploring.

        1. Yves Smith Post author

          Misrepresentation is your stock in trade. You need to consult our written site Policies. Agnotology is a violation. You are rapidly accumulating troll points.

          Adam Smith and Classical economists generally NEVER supported your bogus claim that businesses “should” seek to increase profits. Smith regarded his most important work as The Theory of Moral Sentiments, not The Wealth of Nations. He railed against the way businessmen colluded to suppress wages and also opposed the way businesses would co-opt the state to the disadvantage of citizens:

          He saw the interests of big capitalists conflicting with those of the public: capitalists seek high profits, which corrupt and impoverish society. He criticized the way British mercantilism divided the world into parcels, granted the merchants’ business monopolies, and the corruption of the EIC [East India Corporation].

          Moreover, Classical Economists were firmly opposed to what would now be called rentier capitalism and supported land taxes and usury ceilings to prevent speculation and unproductive drags on commerce.

          I will not approve any more comments that are false. This is not a chatboard and we don’t tolerate inaccurate information, particularly to promote ideological positions.

        2. Michael Olenick

          Paul Polman took a voluntary 20% pay cut in 2016. He’s still paid €8.4M, an amount is says he is “embarrassed” about.

          Why the pay cut? 2016 sales growth was up 3.7%, ahead of the market. Turnover declined by 1%. Operating profit was €7.8B and net profit €5.5B. Free cash flow was €4.8B. The decrease was because he wanted compensation shifted to long-term targets. Managers with performance numbers like these don’t need to “save their own jobs.”

          Having worked with the GMAC securitization data it was junk RMBS that torpedoed GM in 2008, not their cars, nor their pension obligations.

          Statistia (sourced from IRI) reports Ben & Jerry’s has the third largest market share in the US (8.7%), with private label coming in first (20%) and Breyers second (9.2%). I’m not sure how that’s a “fall from grace” considering Breyers had a 112 year head-start.

  21. georgieboy2

    “Ed said it was really simple basic Christianity, in contrast to the dog eat dog atmosphere of USA corporations.”

    Mr. Deming was a wise man, and you were indeed a fortunate youngster, to work with him.

  22. rd

    I have not read the full text of Friedman’s article, nor do I know the details of GM’s operations in the 1970s. However, the below quote stood out to me:

    “Implicit is the message to GM: keep doing what you’ve been doing: build clunky, crappy cars because that strategy was profitable in the past. The Times, They Weren’t A Changin’ at GM.”

    This is not how I understood (your explanation of) ‘the social responsibility of business’. It can be argued that, by ignoring safety, quality, etc., GM was acting against its ‘social responsibility’ to maximize profits. Conversely, perhaps Toyota and Honda were actually following Friedman’s advice because they were focusing on what the consumer wanted (safety, quality, etc.) and therefore were living up to their profit maximizing responsibility.

    I’m no expert on Friedman, but, if building environmentally friendly cars maximized profits, I am sure he would be in favor of it.

    1. Michael Olenick

      Friedman clearly saw “social responsibility” and an implicit responsibility that he argues exists to maximize returns for shareholders as polar opposites. He argued that opting for social responsibility is akin to socialism equating it somehow to taxation (yes – he really makes that argument). For purposes of this answer I’ll skip that he’s entirely wrong about the agency issues with shareholders.

      Friedman failed to grasp that social responsibility can and often does align long-term with profit maximization. Another commentator suggested that Apple uses renewable energy for marketing purposes; it’s a cheap way to prop up the brand. My thought is good for Apple — effective and inexpensive marketing (here we are repeating it) — and also good for the environment. Milton Friedman would argue it’s a wrongful tax on the shareholders and buyers of iThings.

      Wish I could publish the original, with the photos — the photos clarify how GM-centric his argument was — but it’s copyright to the NYT. If you have a subscription you can get the PDF from their archives though. It’s worth a read.

  23. Rob Lewis

    Well, OTOH, no less an authority than Robert Reich argues in his book Supercapitalism that the way to make corporations behave more responsibly isn’t to lobby them or try to shame them, but simply to make irresponsible behavior illegal. Problem with that, of course, is who’s going to aggressively enforce the law?

    Since we seem to be telling GM stories:
    I bought a new Honda Civic in 1975. Not long after, I received an invitation to attend a market research presentation. Though they didn’t disclose it, I’m fairly certain the company was GM, and the car they were testing was the Chevette. I was invited to stick around for a focus group after the main session. I was asked why I chose a Honda. My reply was something like “When Congress passed limits on pollution, the American makers hired lawyers and lobbyists to argue that the regulations were impossible to meet. The Japanese makers hired engineers and rolled up their sleeves and made it happen.”

    1. Rob Lewis

      I should perhaps add that I think Detroit has cleaned up its act considerably. My 2000 Saturn soldiers on; it’s been wonderful for the most part. (Too bad GM killed the division.)

  24. ewmayer

    The author seems more than a little credulous with regard to the “social responsibility” bona fides of the leaders of huge multinationals such as GE, Apple and Google. “Great business executives pretend to care about social issues” – fixed it for you, Mr. Olenick.

  25. Wade Riddick

    When done in a bankruptcy, the elevation of common stock shareholder interests – maximizing shareholder value – is a felony called fraudulent conveyance. These are legally subordinate interests to bank lenders, bondholders, customers, employees and suppliers – even preferred shareholders. Milton Friedman is one of the godfathers of Reagan’s corporate fraud uprising.

  26. Chavdar

    Antisocial behavior often pays in the short run. If a man throws his garbage in the street, he saves the effort of carrying it to the trash bin. But after a while, he finds himself living on a landfill. If corporations don’t fear God, they should have fear of Government in their heart. For their own good.

Comments are closed.