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October 28, 2005

Shareholder Value

This is a theme that seems to be going around. Mark A. R. Kleiman: Why shareholder value maximization cannot be a complete business ethic

Friedman's argument is simply that corporate leaders are playing with (mostly) other people's money. Failing to maximize profits out of private moral concerns is like giving that money away. If corporate officers want to be charitable, says Friedman, let them do it out of their own bank accounts, not their shareholders'. After all, a truste who made a charitable contribution out of a trust account would be justly criticized for that. How is a corporate officer -- a trustee of the shareholders' money -- any different? Since profit maximization points companies toward the socially most efficient uses of resources, says Friedman, maximizing profits is precisely the social responsibility of the corporation.

The problem with this argument, it seems to me, is that it proves much, much too much. For one thing, it must apply to omissions as well as acts. So by this standard a corporate officer must have an affirmative duty to seek out ROI-maximizing opportunities, no matter how morally disgusting, as long as they are not not actually illegal. (That would include, of course, establishing, as necessary, subsidiaries in countries where the terrible activity isn't illegal, and using lobbying and campaign contributions to change the laws, if feasible.)

By this standard, engaging in the slave trade, back when it was legal, would have been not merely permissible but required. So would working children to death in mines and mills, or inventing and marketing any dangerous and addictive drug that wasn't (yet) illegal. So would financing munitions plants for the Nazis during the 1930s, or helping the Soviet Union during the Cold War, or Iraq in 2001, or Iran or North Korea today, as long as it managed to skirt actual illegality.

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And yet there is no sharp line between the obviously obscene cases and such ordinary actions as looking for a good pretext to fire an employee just before his retiree health benefits vest. Once we admit that there are some things too awful to do just to maximize shareholder value, then whether some particular thing is really that awful or just a little bit less awful than that is necessarily a matter for judgment, not for bright-line rules.

As I've said before, I think this is a foolishly tunnel-visioned view of Friedman's position. The market's perception of the decency and ethics of a company affect the company's profits.

Consider, in agile development - if you provide free coffe and buy pizza for the team when they stay late, is that "wasting money?" Of course not - anyone would recognize that the value that the team provides is far, far greater than the cost of the pizza or the coffee.

If you have your salaried workers work only 40 hours per week, is that "wasting profit?" Not if you believe that they are more effective and efficient at 40 hours, and the cost of hiring replacements and/or fixing bugs is worse.

It's easy to take an accountant's view of so much in life, and try to boil it down to the specific dollars spent on X, versus the revenue generated from X. But that would be stupid, because we do not live in an accountant's world. We live in a world of all different kinds of people, and all different kinds of "value". I would not use agile development and project management techniques if I did not think they resulted in projects getting done faster and better. And I haven't met a single agile advocate who thinks the opposite (I'm going to do agile because I want to waste money.)

Posted by jb at October 28, 2005 09:27 AM

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