If you were to ask me the biggest thing that has crippled workplaces today, it would be Milton Friedman’s 1970 assertion that “the purpose of business is to generate profits.” In modern parlance, this idea has been labeled shareholder value theory.
Why, you may ask, is this idea so damaging? What exactly has this thinking done?
“In one fell swoop,” in the words of the late Lynn Stout, Professor of Corporate & Business Law, Cornell Law School, “Milton Friedman persuaded a generation that selfishness was the natural state of humanity, and that selfishness ultimately would lead to the best possible society.”
The result? Here are but a few of the outcomes.
- Exorbitant pay at the top creating a huge gap between “haves” and “have nots.”
- Shady accounting practices and a craze for share buy-backs that skew stock prices and business valuations.
- Financial resources being diverted from needed investments in innovation.
- Manufacturing jobs steadily sent to other countries with cheaper labor costs making public corporations job destroyers instead of job creators—not to mention the devastating impact on lives and families.
- Almost all gains flowing from improvements in productivity being allocated to shareholders instead of those working hard to make it happen.
- Deployment of more top-down command-and-control management because making money for shareholders and top executives is not exactly inspiring to employees.
- Discouraging workplace policies like non-compete agreements that prohibit over 30 million workers in the U.S. from leaving their job to work for a competitor or to start a competing business.
- The use of layoffs as tools for creating beefier bottom lines that benefit shareholders/investors/top execs at the expense of working people and families.
And if those outcomes are not enough to make you think, there’s more.
The theory is unnatural, it flies in the face of how humans were built to operate. To quote Lynn Stout again, “All the empirical data shows exactly the opposite [to selfishness]: that people are capable of pro-sociality and that pro-social societies do better.” This comes right out of Darwin who said that humans survived not because they were fittest –the survival of the fittest fallacy was something developed by Herbert Spencer, not Darwin—but rather because they were unselfish, cooperative, and friendly. Put simply, we are wired to cooperate, collaborate, and help each other, not to compete to win at any cost.
And finally, the whole idea is flatly absurd.
Saying the purpose of business is to generate profits is like saying the purpose of life is to eat. Do you know anyone who would say that? No. Eating is just something necessary for you to stay alive and fulfill your life’s purpose. Likewise, money is just something necessary for businesses to fulfill their purpose. And that purpose is to help people get things they don’t have ready access to or accomplish things they can’t do or don’t want to do. Tom Peters had it right, “Organizations exist to serve. Period.”
So, given all the negative outcomes of shareholder value theory, the fact that it goes against our nature, and the absurdity of it being the sole purpose of business, isn’t it about time we ditched a theory that benefits only a few and does so at the expense of many? Isn’t about time we got down to people helping people succeed? If you agree, let’s get to work and make some changes.
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