Corporations were never supposed to write the rules of the game. Now they need to help make them better for capitalism to survive

April 24, 2023 ndowd

In 1962, Milton Friedman said “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”

There has been heated debate over this quote since the Business Roundtable pivoted to “stakeholder capitalism” in its August 2019 revised “Statement on the Purpose of a Corporation.”

Nobel Prize-winning economist Milton Friedman shaped the course of history with his strong focus on free markets and economic growth through business leadership focused on creating shareholder value. His model has proved so powerful that few dispute it today, and it has unquestionably created financial wealth. But the expansion of corporate power that it propelled has also led to major changes in the “rules of the game” for competition over the last 60 years in arenas from accounting to tax, banking, telecommunications, digital technology, pharmaceuticals, energy, and antitrust. In aggregate, these changes in the rules have tended to decouple financial performance from the underlying value to society that Friedman’s philosophy was intended to create.

The rules are now heavily influenced by powerful corporate interests, the very interests they are intended to regulate. This was not something Friedman had expected. He was very clear that the rules should not be dictated by special interests.

“When government–in pursuit of good intentions tries to (…) help special interests, the costs come in inefficiency, lack of motivation, and loss of freedom,” he said.

Companies and trade associations influence politics through contributions to political candidates, political action committees (PACs) where employees can contribute, and lobbying. Following the Citizens United Supreme Court decision, there is no limit on indirect contributions, for example, to pay for advertising.

If the goal of lobbying is to maximize shareholder value in the short term, companies are pressed to lobby for their narrow self-interest, with less regard for the impacts on society. Strong lobbying guided by this norm must, then, be a factor in boosting corporate profits by pushing through policy that enables profitability.

CEOs were OK with this system for a while, but at a certain point, the business case for shareholder capitalism at the expense of all other stakeholders began to fracture. As the workforce shifted from muscle labor to intellectual contribution, and as younger employees demanded environmental and social accountability, CEOs saw value in a more balanced approach, understanding that value creation for all stakeholders avoids the worst outcomes of unfettered capitalism, and leads to long-term value creation for shareholders, too. This was when the Business Roundtable decided to change its definition of the purpose of a company.

Over the past several years, more companies have been integrating this approach of enhancing value for all stakeholders–notably employees, communities, customers, and the whole value chain–based on a longer-term view of shareholder value and moving away from an emphasis on quick quarterly wins.

However, corporate public affairs departments, and the powerful trade associations behind most of the “rules of the game” we now live by, have been slower to consider the challenge of weaving stakeholder and societal interests into lobbying or political influence strategies.

As the lobbying community catches up with this shift to a more holistic stakeholder approach, principles are needed to navigate when and how to lobby. The Erb Institute at the University of Michigan has distilled a starting set of Principles for corporate political responsibility that capture this more responsible approach. Last year, I became a member of their task force as a supporter. After 12 months of dialogue with business executives, stakeholder groups, and experts with diverse ideologies and positions on specific issues, they have identified four principles:

Legitimacy: Honoring legal and fiduciary duties, refraining from the coercion of any stakeholders, and pausing to ensure there is an authentic basis for engaging on any issue (based on the company’s contribution to the issue, commitments related to it, or its consequences for society as a whole).
Accountability: Actively striving for consistency and alignment with stated commitments, through active oversight and governance, including the company’s engagements with third parties, and taking proactive steps to address misalignment.
Responsibility: Demonstrating active support for the systems on which the economy, society, and life depend. This includes championing healthy market “rules of the game” that foster competition on the basis of quality, price, and long-term value, minimizing costs externalized to other stakeholders, and aligning private interests with the broader public good, based on the premises of free market capitalism. It also includes supporting and protecting America’s constitutional democracy and healthy civic discourse and generally avoiding harm.
Transparency: Communicating openly and honestly about political activities to promote informed stakeholder decision-making and public trust, including disclosure and reporting, open communication, and sharing of expertise.

Such a set of principles can provide both a focal point for a new norm that reflects the original assumptions of shareholder primacy, and the insights of stakeholder capitalism, as well as a starting point for more constructive reasoning about specific issues. Indeed, from the perspective of a shareholder, employee, customer, or citizen, these can go a long way to restoring trust and confidence in both accountable management and trustworthy civic institutions, without losing the capitalist system’s focus on creating value for shareholders.

Applying the principles means lobbying for the self-interest of a company or industry only where societal interests are also advanced. It means having a legitimate, authentic basis for engaging with policymakers, being accountable to stakeholders, and refraining from undue influence. It means aligning lobbying with corporate values and insisting on trade association alignment. It means publishing information on political spending, lobbying, and trade association activity.

Companies can refocus their lobbying and influence strategies on a transparent, accountable approach to their role in writing the “rules of the game.” If the rules are written through a fair democratic process without undue influence from special interests wanting to tilt the market in their favor, our political and economic systems stand to reap enormous benefits.

Maureen Kline is the VP for public affairs and sustainability at Pirelli Tire North America.

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