Challenging Milton Friedman

Wednesday 17th April 2019

It’s been almost 50 years since American economist Milton Friedman wrote his groundbreaking essay in the New York Times arguing that the social responsibility of business is to increase its profits.

Directors should focus solely on maximising shareholder value, Friedman argued.

But this ‘shareholder primacy’ model may now be under serious challenge, according to a 2019 corporate governance trends report from law firm Chapman Tripp.

The report points to two recent developments as evidence of a shift. First, 2018 amendments to the UK Companies’ Act require directors to consider not just the interests of shareholders, but also of employees, suppliers, customers, the community and the environment, when making business decisions.

Secondly, Financial Markets Authority chief executive Rob Everett recently said Friedman’s shareholder primacy model was not just “broken”, but “was never a valid or sustainable model in the first place”.

Chapman Tripp partner Roger Wallis says change is in the wind.

“Several of the currents we think will shape governance this year reflect a widening of the expectations both on and of directors in New Zealand.”

The Chapman Tripp report also highlights the implications on New Zealand directors of the various critical reports coming from Australia regulators. It particularly noted the importance of organisational culture, as highlighted by the royal commission into misconduct in the banking and financial services sector overseen by Justice Kenneth Hayne

“A strong theme across all of the various inquiries was that Attitude at the top drives Behaviour through the organisation and sets, for better or for worse, the organisation’s Culture. As Hayne put it, culture is ‘what people do when no one is watching’.

“Similarly, the FMA and RBNZ findings highlight the importance of having a culture genuinely focused on improving outcomes, rather than completing box-ticking exercises.”

(BusinessDesk)

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