Governments will have to work with private corporations to provide them with a framework for making profit a public good through a long-run vision of shared value creation
What justifies the existence of the private corporation? According to Milton Friedman, it is maximising economic profit. For businesses, pursuance of any other social objective apart from profit would be “pure and unadulterated socialism”. The Friedman doctrine can therefore be interpreted as the doctrine of “shareholder primacy”, hailed as the ultimate goal of private corporations. Even acts of corporate charity, when seen through this lens, are touted as strategies to polish the company's image and charm consumers. Such a stance resonated strongly in an era where financial scarcity overshadowed concerns about the depletion of human, natural, and social resources. But was this shareholder-centric view always the norm?
While cases like the 1919 Dodge v Ford Motor Co. underscored the profit-for-stockholders ethos, the mid-20th century started narrating a different story. During the 1940s to 1970s, a period of remarkable prosperity and American corporate dominance, a new narrative emerged. As corporations cemented their economic stronghold and entire communities grew dependent on them, the notion that businesses existed solely for shareholder gain started waning. The era witnessed a shift towards a more inclusive perspective, advocating for corporations to serve a broader constellation of stakeholders, including employees, customers, and the wider public. Icons of management and economic thought, like Peter Drucker and Carl Kaysen, championed this expanded view. They argued that corporations should prioritise a range of interests beyond just those of the shareholders, emphasising a duty to the company as an institution. This period reflected a significant evolution in the understanding of a corporation's purpose, moving away from strict shareholder wealth maximisation towards a vision of corporations as entities with responsibilities to multiple groups in society.
The era witnessed a shift towards a more inclusive perspective, advocating for corporations to serve a broader constellation of stakeholders, including employees, customers, and the wider public.
With the evolution of the global landscape, we today confront a world starkly different from the assumptions of the Friedmanian doctrine. The current generation remains a firsthand witness to the accelerating impacts of climate change, rampant air pollution, and the increasing conflicts arising from the indiscriminate depletion of our natural resources. Rather, businesses' pursuit of a narrow conception of profits is now often thought of as a major cause of social, environmental and climatic problems that plague humankind. Companies are widely perceived as rent-seeking units that meet their bottom-line requirements at the cost of natural resources and the environment—broadly at the cost of the natural ecosystem that provides ecosystem services to the human community. This myopic pursuit of profit makes businesses oblivious to the externality costs they impose on society. Further, this impedes the ability of businesses to address evolving climate risks and transition towards environmental sustainability.
Indeed, at the heart of numerous global environmental crises lies the inability of free markets to adequately consider the social costs of economic activities. This hangover from classical economic thinking, which erroneously assumes the cost of environmental resources to be negligible, overlooks the stark reality of our modern era. Today, we inhabit a world where the scarcity of available natural capital stands as one of the foremost constraints on sustainable growth.
In the modern era, where it is alleged by Porter and Kramer that the “… Capitalist system is under siege” due to the myopic vision of businesses—the definition of profit needs to change. No longer can profit remain a private good but should be associated with creating shared values that focus on identifying and expanding the connections between private returns and societal progress. Therefore, companies need to bring in climate and environmental goals in the framework of their central strategy and profiteering activities. This necessitates a broader delineation of “profit” by inculcating the dimension of public goods into it.
To be sure, the case for making profit a public good is not an altruistic one. Friedman and others have built their arguments against incorporating a social aspect into business on the premise that pursuing objectives beyond economic profits undermines the interests of both shareholders and employees within the company. Essentially, they argue that corporate executives who prioritize social objectives might be taxing their internal stakeholders for broader societal welfare—an area traditionally governed by the state.
Friedman and others have built their arguments against incorporating a social aspect into business on the premise that pursuing objectives beyond economic profits undermines the interests of both shareholders and employees within the company.
However, this argument holds less water today given that profit and societal good are more strongly correlated than one might imagine. A 2022 study reveals that companies with the highest investment in environmental, social, and governance (ESG) reveal higher financial returns in terms of both value and profitability. Therefore, business practices that are embedded in the sustainability principles ensure profitability thereby establishing the basis for creating shared value between its shareholders and society at large.
Myopic businesses, indoctrinated with the vision of “shareholder primacy” through profit maximising practices, fail to recognize two crucial elements: a> their role in today's global environmental crises, and b> their susceptibility to becoming casualties of these crises. Businesses that do not adequately quantify and address the impact of climate change on their future profitability are less likely to be able to sustain themselves in the long run.
Creating shared values between business and society will not happen on its own. There is a need for a new international framework that will develop a new set of business objectives prioritising profits as a means to create public goods. Let us take the case of Nestle in this context. Their Creating Shared Value and Sustainability Report 2023 mentions the various pillars of this initiative that entail: a) supporting tasty and balanced diets; b) delivering food safety and quality; c) progressing to net zero; d) promoting sustainable agriculture through sustainable sourcing and procurement principles; and e) promoting circularity in packaging and marketing. This shows that Nestle’s intervention is impacting the entire value chain beginning from the most fundamental resource where its origin lies, i.e. land or natural capital to the terminal point of the value chain, i.e., consumers. It is by enhancing land productivity through sustainable agricultural practices thereby bringing about the well-being of the farm community, interventions helping sustainable procurements, ensuring circular economy, and increasing the well-being or surplus for the end consumers, that Nestle ensures sustainable bottom lines. In the process, Nestle’s profit emerges as a public good: even if not perfect (to the extent of being non-excludable and non-rival in consumption), but definitely with characteristics of touching upon various nodes of the value-chain and various components of its corporate ecosystem.
The bigger concern here is that it is only the bigger firms that realise that a long-term vision of the corporate bottom lines cannot only ensure the creation of social value but also the co-creation of value by the firm and its broader ecosystem.
The bigger concern here is that it is only the bigger firms that realise that a long-term vision of the corporate bottom lines cannot only ensure the creation of social value but also the co-creation of value by the firm and its broader ecosystem. This is not true for the smaller firms of the Global South. What is more important here is the acknowledgement that a longer planning horizon for a firm brings a different dimension to the justification of its existence: moving from a short-term economic rate of return to a long-term social rate of return. This social rate of return, due to its scalability at a societal level, turns out to be way higher than the economic rate of return viewed through the lens of profit of the firm. This casts a serious question on the Friedmanian “shareholder primacy” doctrine.
While Friedmanian doctrine is driven by market forces, the inherent problem here is that firms’ myopic vision of profit converted markets as myopic institutions. If only markets emerge as visionary institutions exhibiting the clairvoyance of foreseeing the future, the shared value creation will emerge as a market-driven norm. Given that this is not the case, it is important that governmental interventions whether at the levels of the multilateral forums like G20 or BRICS or at national and sub-national levels find their way into this game. Governments will have to work with private corporations to provide them with a framework for making profit a public good through a long-run vision of shared value creation. Economic incentives as well as regulatory nudges will have to play their roles here. Yet, any new international framework must take into account the unique socio-economic challenges that businesses in the Global South continue to struggle with. This will necessitate a dialogue between the businesses of the Global North and South to bring about an understanding of the common goals while acknowledging the divergences in pathways.
Nilanjan Ghosh is a Director at the Observer Research Foundation
Promit Mookherjee is an Associate Fellow at the Observer Research Foundation
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Dr. Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF), India. In that capacity, he heads two centres at the Foundation, namely, the ...
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Promit Mookherjee is an Associate Fellow at the Centre for Economy and Growth in Delhi. His primary research interests include sustainable mobility, techno-economics of low ...
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