Would Milton Friedman Roll Over In His Grave Over Impact Investing?

May 13, 2014

Latest Thinking, Liberty, Social Enterprise

As I’ve been reading more about Impact Investing and the energized development of “social  enterprises,” I can’t help wondering whether the well-known economist Milton Friedman would be turning in his grave or embracing the new trends. The reason the question is interesting is because Friedman is well known for criticizing any attempt to combine social concerns or causes with business. But the new impact investing and social enterprise may confound the original Friedman position. Let’s see how.

In one of his well-known statements, Friedman wrote that “the social responsibility of business is to increase its profits” and that “to focus on anything beyond profits for the owners is to levy a tax and not to act in the best interest of the owners.”** Indeed, he went so far as to say a person who promotes concern over social issues is “preaching pure unadulterated socialism.”  “Insofar as his action in accord with his ‘social responsibility’ reduces returns to stockholders, he is spending their money.”

In these statements, Friedman was articulating what is considered to have been the dominant paradigm governing business as implemented by business executives and their boards. [Whether this was really what executives and boards did in reality is a separate question that is worth debating]. In any case, Friedman here articulates the now classic argument that the CEO and board are fiduciaries for the stockholders and therefore any attempt to pay attention to social concerns is to defraud the stockholders, whose only concern is with profit. To bring any concern with social responsibility into the business is to essentially act irresponsibly. Social concerns are the business of government and philanthropy and those processes are the avenues by which individuals should pursue their sense of social mission.

Friedman’s position has already been critiqued by what has come to be called the “stakeholder theory,” among others, which suggests that the obligations of the business are not to stockholders alone but to a wider array of stakeholders that should include employees, local communities, and customers who purchase products. An even broader definition of stakeholder might include those affected by any environmental impacts caused by a business, as an example. The stakeholder theory was essentially a rejection of Friedman’s theory in that it said the business and its executives were agents, not just to stockholders, but of a larger constituency of stakeholders. Friedman never would have agreed.

What’s new and intriguing about this new category of “impact investing” and “social enterprises” is it makes the social mission part of the purpose of both the investment and the business itself. In that sense, the CEO and board are now bound by fiduciary obligations to the social cause itself. The social purpose is not an “add on” or a diversion from the concern of the stockholders, but part of the reason the stockholders invested. By focusing on the social purpose, the executive team is carrying out their responsibilities to the stockholders. This looks different than stakeholder theory which assumed that a wider set of constituents had claims above and beyond or in conjunction with the stockholders, who were focused on profits. Here the dichotomy is eliminated and the stockholders are now the ones creating the social purpose.

For this reason, it would be interesting to imagine whether Friedman would roll over in his grave in realizing that some businesses are now created with a social purpose or whether he would have say that this new business model meets his earlier objections and makes social causes a legitimate purpose of the business. In the end, it may not really matter what Friedman would have thought. (It doesn’t matter to me, except insofar as Friedman’s views still dominate). Yet if even Friedman would have approved of this new mode of business and investing then perhaps we have gotten over that earlier dichotomy between values and profit, money and soul, which have dominated for too long.


[*] Friedman, “The Social Responsibility of Business.”


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