Responsible Capitalism Is Here To Stay.

So many people have asked me “If you have socialist opinions such as supporting the Green New Deal and AOC, how can you be interested in business?” and I think about it a lot. What I usually tell them in response is that the two should not be mutually exclusive. The heart of a business should be to enhance the lives of the communities they serve, not to solely chase after profits. In my opinion, a business that follows the latter goal, which was formulated by Nobel Prize winner Milton Friedman’s concept regarding capitalism, is destined to fail. Let’s take a look at some of his ideas.

Friedman’s theory makes two points.

The first statement is that the companies solely exist with the help of shareholders and so they must do anything possible to appease the shareholders, the term was coined “shareholder primacy”.

However, we see countless examples of companies performing social good with Target raising the minimum hourly wage of all employees to $15 starting on July 1, 2020, Hobby Lobby increasing the minimum hourly wage to $17 for all employees starting October 1 2020, and UnitedHealth group’s commitment to sustainability that has earned them the sustainability leader for 20 years (https://www.uhc.com/employer/news/client/unitedhealth-group-named-sustainability-leader-for-20th-year)

All of these corporations are doing very well, and are increasing their focus on paying their employees better and doing more for society which powers their growth. Shareholder’s interests aren’t misaligned with that of the employees or society — responsible capitalism factors all of these in to deliver an optimal mix that works for all constituencies.

In this case, what’s good for the Goose (the shareholder) is indeed also what’s good for the Gander (the society and employees) :-).

The corporations that ignore the employee or the society's well-being can succeed in the short-term, but will eventually be punished with lawsuits, regulatory sanctions, lower stock prices, and eventually, declining profits. These corporations ultimately bring down the market as a whole as well. Harvard Business Review (March-April 2017) featured a study by the University of Ottawa economics professor Anthony Heyes and his colleagues who compared daily data from the S&P 500 index with daily air-quality data from an EPA sensor close to Wall Street, they found a connection between higher pollution and lower stock performance. They reached the conclusion that poorer environmental factors had a direct correlation with lower stock performance.

The second follow-up argument from Milton Friedman, states that the main interest of shareholders is to see profits, hence companies should prioritize profits above everything else. This means that anything that subtracts from profits such as readjusting a company’s minimum wage, donating a campaign’s proceeds, or taking necessary environmental precautions are against Friedman’s concept of the ‘ideal business’.

We covered this partly with the Univesity of Ottawa research study earlier, but let’s go beyond that and look at the nature of the investor themselves.

The investors have changed in the past 50 years since Milton’s famous proclamation — even people who never recycled a can in their youth, are now using recycle bins every day, and even using green bins in California to compost their food. I don’t need to look beyond my own home — My dad is a die-hard Friedman-esque capitalist and, is a prime example of this dramatic transformation.

Socially responsible investing (SRI) has gone beyond talk on Wall Street — Mutual Fund giants such as Vanguard and Fidelity have launched ESG (Environmental, Social, Governance) funds that specifically look for investing in companies that provide a positive environmental and social change. And it’s working.

This is not to say that Milton Friedman’s ideas are all obsolete and have to be dismissed altogether. Let’s not throw out the baby with the bathwater — Friedman’s ideas need to be adopted/tailored for the current environment, where you can build a corporation that makes money, but also provides well-paying jobs to its employees and does good in the society: these are not mutually exclusive ideas. Similar to how Socialism and Capitalism are not polar opposites.

Responsible capitalism is here to stay and we, as Gen Z will make sure that we build profitable corporations with healthy top line as well as bottom-line that deliver on all three stakeholders’ interests — the investors, the employees, and the society.