In 1970, Novel laureate Milton Friedman proposed that an enterprise’s sole responsibility was to shareholders by maximizing profits: “the social mission of business is making profits, period, with other social goals best left to politics.”
Corporate duty to maximize shareholder value, or shareholder primacy, has emerged as the dominant principle for free-market capitalism. This capitalist manifesto led to a greed-is-good attitude, and has been the driving force of corporate governance and executive motivation for the past 50 years.
Critics of shareholder primacy like Joseph Stiglitz, another Nobel laureate, argue that this has led to a generation of immoral capitalism. In his article Stiglitz argues: “We have created a society in which materialism overwhelms moral commitment, in which the rapid growth that we have achieved is not sustainable environmentally or socially, in which we do not act together to address our common needs. Market fundamentalism has eroded any sense of community and has led to rampant exploitation of unwary and unprotected individuals. There has been an erosion of trust – and not just in our financial institutions.”
Who’s right? What’s the primary responsibility of corporate boards? Is shareholder profit maximization king, or is there an obligation for balancing profitability and social responsibility? What exactly should Canadians expect of corporate governance? And what role does government play in managing corporate responsibility?
Most Canadians probably don’t think of such questions unless some specific event such as a company closure, bankruptcy or disaster impacts their lives. But these questions define our society, our values, our relationship with the world around us and our future.
A 2014 report on Canadian corporate governance by the Allard School of Law at the University of British Columbia noted that many Canadian executives and directors have been schooled in the American style of governance since the U.S. market is so dominant. And the two systems have much in common.
Few American or Canadian board members have been held legally responsible for corporate malfeasance. While penalties are designed to encourage compliance with legislation, they’re generally enacted under a strict liability framework. The company pays the fines, leaving the board safe.
In Canada, as in the U.S., neither environmental nor social responsibility are integrated into corporate governance; accountability and liability are pursued outside of the board governance structure. This system contributes to a culture of calculated risk management assessed solely against the principle of maximizing shareholder profits. Liability becomes a calculable risk, where those risks worth hedging can be ignored or allowed and only those that damage the bottom line are worth avoiding.
Stakeholder profit maximization contributes to boards seeking innovative and disingenuous means of adding to the bottom line. Even donations, corporate events that support social issues, environmental responsibility and fair trade become calculable corporate projects only supported to make financial gains or add to the goodwill of a company’s balance sheet.
Companies like Starbucks, sensitive to their reputations, offer their customers “fair-trade” alternatives that promise decent labour conditions, agricultural standards and fair wages. But only about five per cent of the world’s coffee is fair-trade. And it remains unclear if premium prices result in improved net compensation for farmers, who incur added costs to gain certification. And growers attracted by higher prices tend to increase land use for cultivation, and add to oversupply, depressing prices for non-fair-trade farmers. Nonetheless, fair-trade coffee makes an important contribution to Starbucks’ goodwill.
Why Milton Friedman’s ideas still resonate by Matthew Lau
Goodwill is a non-tangible commodity, lumped with patents and other intellectual property on annual financial reports. Goodwill is a measure of what a company is worth beyond its tangibles it owns – largely the reputation value of its brand.
No corporate project, tangible or intangible, is undertaken without a careful and calculated decision about its impact on the company’s bottom line. Corporations aren’t incentivized to allocate funds if not compelled and are more likely to abdicate responsibility if they can go unnoticed.
Take for instance the approximately 95,000 inactive wells and 69,000 abandoned wells across Alberta, Saskatchewan and British Columbia.
According to the Alberta government oil and gas liabilities management program, the province’s approach to governing the cleanup of these wells was put in place decades ago, when the industry was largely focused on growing production and building new infrastructure. As the province’s oil and gas sector has matured, a new approach is required to more actively manage reclamation of sites throughout their life cycle. Too many companies simply walked away without doing the right thing.
In 2017, the Alberta government loaned the Orphan Well Association $235 million for the reclamation of oil and gas well sites that no longer have a responsible owner. That loan was extended by up to $100 million in 2020.
The federal government is now expected to spend $1.7 billion to help clean up orphaned and abandoned wells in Alberta, Saskatchewan and B.C. That’s $1.7 billion in expenses paid by taxpayers and evaded by the corporations that put the wells there in the first place.
It’s unlikely that governments will pursue restitution from existing corporations, and it’s less likely independent land owners have the capacity or funds to launch class-action lawsuits against the companies responsible.
But there are alternative corporate governance principles being applied elsewhere.
South Africa was the second country after the United Kingdom to publish a shareholder stewardship code. The Code for Responsible Investment in South Africa was influenced by the UN Principles of Responsible Investment. It advocates emphasis on responsible investing over and above shareholder engagement, based on the inclusion of environmental, social and governance factors.
Thailand’s framework highlights a “balanced way of living based on the principles of moderation, reasonableness, and self-immunity – along with the conditions of morality and knowledge.”
In 2019, JPMorgan Chase CEO Jamie Dimon, representing chief executives of 192 large companies, admitted “Americans deserve an economy that allows each person to succeed through hard work and creativity and to lead a life of meaning and dignity,” and that business as usual is no longer sustainable.
This group, representing America’s most powerful chief executives, agreed that the perspective that companies must maximize profits for shareholders above all else be abandoned in favour of better balancing of the needs of shareholders with customers, employees, suppliers and local communities.
The 2008 financial collapse resulted in greater oversight and transparency requirements in the U.S., set out in the Sarbanes–Oxley Act of 2002. It also led to a concerted effort by many in the corporate sector to undertake voluntary certification standards in an effort to shore up their reputations.
As the World Economic Forum notes, there’s no universal definition of sustainability. But many point to the United Nations’ 1987 Brundtland Report that calls for sustainable development that meets our needs today without compromising the needs of those in the future.
This represents a major opportunity to reframe the roles and responsibilities of corporate stewardship. An opportunity in which all Canadians should have an informed and vested interest, since Canada possesses amongst the richest, most fragile and beautiful ecosystems on the planet.
Anil Anand is a research associate with the Frontier Centre for Public Policy.
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