This article by Dr. Ernest Cadotte was originally published in full by AACSB.
There has been a lot of discourse lately on the role of Milton Friedman in channeling business thinking to focus solely on creating shareholder wealth. On the positive side, this focus has facilitated a great deal of investment capital, technology development, new business, and employment opportunities. Business has lifted people and nations out of poverty and into viable standards of living. It has contributed to a steady rise in GDP for the U.S. and most other countries.
Yet, the theory of profit maximization frequently has caused harm to the environment, employees, customers, suppliers, and the community. For instance, to improve profits, firms have let pollutants run into the streams, walked away from devastated land after extracting its resources, ignored or hidden product defects, let unprotected employees work in unhealthy environments, taken advantage of consumer vulnerabilities, and demanded unending price cuts from suppliers. All too often a firm will justify one of these actions by saying, “It’s just business.”
A related argument is that businesses should not be expected to do good things for the community. Shareholders may share their wealth if they wish, but the job of the business is to create the wealth and pass it on to the owners. This argument overlooks the real problem. Firms often make money by externalizing their expenses, which means that customers, neighborhoods, communities, employees, supply chains, and the environment must pay the bill. The wealth that shareholders enjoy might very well belong to those who have paid the costs for the company’s success.
One reason the Friedman Doctrine is so widely accepted is that business professors have praised its tenets for generations. Until recently, every business professor in every class repeated the same refrain: “The only purpose of business is to create shareholder wealth.” After hearing this litany often enough, even a young idealist eventually will succumb—and potentially become part of the problem. The two of us are both business professors, and we acknowledge that we have perpetuated the harm by touting the theory of profit maximization for decades.
Was Milton Friedman wrong? Is it time to stop declaring that the sole purpose of business is to create wealth for shareholders? We have identified five macroenvironmental forces that are combining to drive business away from the Friedman Doctrine and closer to the model of business as a force for good.