Rise of CSR and ESG destroys Friedman doctrine on its 50th anniversary

September 2020 marks 50 years since Nobel Prize winner Milton Friedman told us that “greed is good”. His polarising editorial, ‘The Social Responsibility of Business Is To Increase Its Profits,’ was published in New York Times Magazine on September 13, 1970 and went on to haunt the markets for decades to come. However, the steady rise of corporate social responsibility (CSR) and ESG investments leaves the Friedman doctrine behind, especially in the COVID era.

What is the Friedman doctrine?

Economist Milton Friedman resolutely stated that businesses have “one and only” social responsibility: to increase profits while playing within the basic rules (steering clear of fraud and deception). He said that corporates with a social conscience are “unwitting puppets” of the intellectual faction who want to suppress a free society and free market. Any executives who wanted to work for the greater good could do so in their free time, while contributing to charity out of their own pocket, he implied.

The Friedman doctrine ushered in the “shareholder approach to CSR”. Capitalists of that era called Friedman an intellectual because of his neoclassical theory, and he rose in popularity. Large conglomerates as well as small businessmen have been using the Friedman doctrine to justify their relentless pursuit of profit maximisation at any cost.

Is it time to discard the Friedman doctrine?

The world has been constantly shifting and morphing over the last five decades since the shareholder approach became popular. The world we inhabit today is a lot more complicated than it used to be in 1970. The business landscape is no exception. Multinational companies have to balance a diverse range of priorities. Corporate citizenship is steadily expanding its scope from responsible production to improving the quality of living within the communities they coexist with. The COVID-19 pandemic has brought into sharp focus the scope of CSR in mitigating a global crisis.

The rise of CSR and ESG investments (Environmental and Social Governance) has changed the definition of business leadership. In fact, investors and stakeholders today prefer to engage with companies that have a socially conscious spine. The same goes for employees, a growing segment of whom are millennials and Gen Z.

Rise of ESG investing

ESG investments – equity investments that factor in ESG practices, including carbon emissions and employee diversity – are on the rise. Assets in sustainable funds have hit a record $1 trillion according to the Global Sustainable Fund Flows Report by research firm Morningstar. There is a global push for sustainable funds, with governments all over pushing coronavirus recovery funds into health and biodiversity projects.

A company that ignores ESG factors may lose out on crores of rupees from international investors. The first ESG fund was launched in India in 2018. A couple of years down the line, three more have entered the market and outperforming their peers on the Nifty 100 ESG Index. 

Business leaders like Ratan Tata, Anand Mahindra, Ajay Piramal and Azim Premji are proactively working towards increasing the employment rate, ending illiteracy, reducing climate change and preventing air pollution.

The New York Times itself has reconsidered its stance. The publication issued a special commentary on the 1970 Op-ed this month, where economic and business tycoons argued that the Friedman doctrine no longer holds true. Alex Gorsky, Chairman and CEO, Johnson & Johnson told NYT that the company has given higher priority to patients, doctors, nurses, parents and “others who use our products and services” over the shareholders from the start.

Professor Marianne Bertrand from the University of Chicago, where Friedman himself got his degree, said that his theory worked only when markets performed perfectly, which almost never happens. Practically everyone in the update agreed that corporates have a social obligation to fix the gaps that business has created in the last century. If you haven’t given thought to conduct business mainly as a force for good, this year is a good time to start.