On the 13th of September 1970, the New York Times Magazine published an article by Milton Friedman which concluded that “the social responsibility of business is to increase its profits”.

Friedman’s branding of corporate social responsibility and the consideration of stakeholder concerns in corporate executives’ decision-making as “pure and unadulterated socialism” found fertile ground in the midst of the Cold War.

The article made Friedman the most cited New York Times author, with the article becoming one of the most academically cited newspaper articles of all time. The article has influenced academics, business and financial leaders and political discourse ever since.

With the acceleration of responsible investing and corporate responsibility initiatives, the article’s 50th anniversary is a chance to reflect on the shareholder vs. stakeholder debate in academia and in practice.

Friedman received the 1976 Nobel Memorial Prize in Economic Sciences for his valuable, empirical research on a wide range of major economic issues. But his 1970 article was an op-ed in the political arena. One critic concluded that Friedman’s article is “the world’s dumbest idea....It’s curious that a paper which accuses others of ‘analytical looseness and lack of rigor’ assumes its conclusion before it begins.” (Denning 2013).

After fifty years of academic research, investment and business experience, we categorically conclude that Friedman was incorrect. Friedman’s opinion should be consigned to the history books.

Over the past nine years, DWS has published three major reports on the academic literature focused on the strong relationship between corporate financial performance (CFP) and environmental, social and corporate governance (ESG). We summarise these reports and estimate that there are now 4,000 to 5,500 academic reports on ESG and financial performance.

According to Altmetric analysis, the DWS-University of Hamburg 2015 white paper examining the link between ESG and CFP is in the top 1% of all academic research receiving media and social media attention. Citations of this white paper have appeared (along with others) in numerous reports and speeches from the United Nations, the European Commission, the Bank of International Settlements, the European Central Bank, the European Securities and Markets Authority (ESMA), the Bank of England, the US Government Accountability Office, the Principles for Responsible Investing (PRI), and the World Economic Forum. More than one hundred other banks and asset managers have also quoted our 2015 report.

We also show that maximising shareholder value is not legally required. As well, how the history of management research support the conclusion that companies should balance shareholder and stakeholder interests, not one over the other.

We find that investors, banks and companies are changing their ESG practices and policies, through growing participation in responsible/sustainable initiatives and organisations. However, significant gaps between rhetoric and action exist, for instance in asset managers’ voting at companies’ Annual General Meetings.

Moreover, many top ranked business schools have insufficient focus on sustainability. 

A growing number of financial institutions and companies are participating in sustainability initiatives, aiming to balance stakeholder and shareholder views. They are embracing stakeholder-centric capitalism and rejecting Milton Friedman’s shareholder primacy opinion.

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DWS Investment GmbH as of September 2020
CRC: 078524 (11 September 2020)

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