This essay is featured in Boston Review’s Summer 2019 issue “Economics After Neoliberalism”


In 1962 Milton Friedman—the economist who, more than anyone else, worked to undo Keynesian theory—published his landmark book, Capitalism and Freedom. In it, he argued for many of the policies we now call libertarian or neoliberal: free markets promote freedom, government intervention does not, and therefore government should be extremely limited. But the book was also crucial in advancing what is now known as the theory of shareholder primacy, the idea that corporations have no higher purpose than maximizing profits for their shareholders. “Few trends,” Friedman wrote, “could so thoroughly undermine the very foundation of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.”

By 1970 he was expanding on this theory even more. Since markets are efficient, he argued, corporations should be constituted like markets; and since shareholders are the only stakeholders in the company who assume risk, the corporation’s purpose should be to generate returns for them. The messy and complex power dynamics of group interactions were thus written out of the story, and decision-making within corporations, Friedman and his acolytes argued, should focus on a singular goal, an “optimum”: maximizing shareholder value. “The key point,” he wrote in an essay for the New York Times Magazine, “is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation . . . and his primary responsibility is to them.”

For the past fifty years, virtually all business leaders, many policymakers, and a great deal of voters have accepted Friedman’s argument that shareholder primacy is the “natural” law of the market. Yet shareholder-focused corporations are not laws of nature, nor does that governance model accurately reflect today’s business dealings. This misguided focus is the result of decades of flawed theory in economics and law. It stems from an incorrect analysis of the relationships between shareholders, employees, management, and the corporation itself. And it is based on a flawed theory of the underlying economy: that markets work perfectly, and the heavy hand of government must get out of the way.

This ideology has caused immeasurable harm. The singular focus on stock price means that wealth is extracted by a small number of shareholders while those who work to produce that wealth are squeezed to the bone. Large corporations operating in this way so dominate U.S. political, economic, and social life that it is difficult for most of us to remember that the rules that shape corporate governance are democratically determined—that we, the electorate, can actually change them.

Who owns a corporation, after all? Friedman referred to the shareholders as the owners. According to this way of thinking, a business corporation is nothing but a collection of shares, so whoever owns the shares owns the corporation—and thus should be able to decide how to govern it.

In reality, however—as well as in law—corporations own themselves. Corporations are legal entities that require state government approval. Once incorporated, they have tremendous privileges to operate apart from the people who form them and run them: they have perpetual existence, limited liability, and the ability to take out debt in their own name. Corporations are different from other forms of businesses, such as sole proprietorships or LLCs, where there is no formal legal separation between the founders that profit from and run a business and the business itself. The very purpose of incorporating a business is to create an entity that lives on its own; it exists in perpetuity and is not just an extension of those who provide its capital.

Despite this fundamental separation, the delusion that shareholders are the exclusive owners of business corporations in the United States has persisted, causing most corporations to then govern themselves by the theory of shareholder primacy. But it does not have to be this way. New policies could ensure that all the stakeholders who collectively generate a corporation’s prosperity then benefit from its wealth.

Corporations have multiple stakeholders other than shareholders, including employees, customers, suppliers, and communities. In this essay, I will focus on one set of stakeholders—employees— because changes to corporate law to include employees as equals in corporate ownership and governance would be radically pragmatic. Employees could hold corporate equity shares in an employee ownership trust to more equitably distribute a corporation’s wealth. And employees could serve on corporate boards of directors alongside shareholders and management to ensure the corporation is governed both by those who take risks on its behalf and those who are affected most directly by its decisions.

These reforms, which should also include a new articulation of a corporation’s purpose and a change to corporate “fiduciary duty,” require procedural changes in how incorporation happens in the United States. The goal is not to pre-determine certain business outcomes—say, a set wage for workers or a set percentage of profits reinvested in the corporations—but to fundamentally rebalance power among three of the most important corporate stakeholders: employees, shareholders, and management. These changes would not automatically solve today’s economic problems, but they would stop us from hurtling down the path we are on—a path that sacrifices worker and community wellbeing at the altar of shareholder wealth maximization.

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