The Purpose of Business and Pricing
Milton Friedman must be turning over in his grave. 49 years after penning an op-ed in the New York Times on the primacy of shareholder value in driving business decisions, the Business Roundtable has declared the idea moribund.
Signed by 181 CEOs of large corporations, the Business Roundtable recently declared that companies should consider a wider set of stakeholders including customers, employees, suppliers, and the communities and environments in which they operate as well as focusing on generating long-term shareholder value.
Long in Development
This significant declaration was long in development and demonstrates growth over previous ways of thinking.
In the 1950’s, corporations would routinely define their purpose through a stakeholder analysis that included customers, employees, communities, and shareholders. The recent addition of suppliers likely reflects the growing importance of managing supply chains and ensuring workplace and environmental standards are met across the supply chain. Likewise, the specific mention of the environment itself reflects the growing importance of reducing pollution and environmental degradation to enable sustainability.
For decades, academics and consultants have been railing against the primacy of shareholders.
Adam Smith, two centuries prior, declared “All the members of human society stand in need of each other’s assistance, and are likewise exposed to mutual injuries” in The Theory of Moral Sentiments.
Dominic Barton of McKinsey & Company called on executives to focus on long-term value rather than short-term shareholder value in a March 2011 Harvard Business Review article.
Joseph L Bower, Herman B. Leonard, and Lynn S. Paine of Harvard Business School identified several challenges to shareholder supremacy in a September 2011 Harvard Business Review article. Perhaps presciently, their litany of challenges created by shareholder capitalism include:
- A fragile financial system
- A breakdown in global trade
- Rising wealth and income inequality and the likely rise of populism
- Environmental degradation
- Failure of the rule of law
- The decline of public health and education
- The rise of state capitalism
- Radical movements, terrorism, and war
- Inadequate institutions
The stakeholder value declaration of the Business Roundtable is significant, but the claim is far from being an outlier. Rather, it is a revival and growth of a prior idea whose value increasingly looks superior.
But is it Right?
The failure of Friedman’s claim is due to his incomplete examination of the moral context in which businesses work. His argument largely rested on the question of who owns the company and what is the role of the CEO with respect to owners. Taken to its extreme, Milton’s claim leads some to assert that corporations are psychopaths, harming customers, employees, communities, and the environment without culpability.
The success of Friedman’s claims is also clear with respect to the question of ownership of the firm’s profits and what companies should do with them. A common argument goes: If social and environmental causes are important to shareholders and the company is profitable, the company should pass profits to the shareholder for them to give to their cherished causes themselves. Similar arguments are made on other dimensions.
Like all great thinkers, Milton Friedman contributed to human thought and his ideas should be constantly examined against evidence. Given the evidence that has developed over the past decades, it should not surprise thinkers that his pronouncement is being overturned. Human society learned that Friedman’s ideas, like Marx’s before him on the opposite side of the spectrum, should not be accepted as the final ruling on history. Discovery and progress require constant re-evaluation.
High in Value-Based Pricing Impact
The commitments made in the Business Roundtable declaration positively impact pricing decisions.
From a customer perspective, the declaration committed to delivering value to customers. From a shareholder perspective, the declaration called to create long-term shareholder value. To balance these two goals, companies must adopt value-based pricing.
In value-based pricing, the value a customer gains from their relationship to a business is the benefit delivered to that customer less the price extracted. Responsible value-based pricing directly examines the value of the differential benefits delivered and seeks to set prices that provide a fair sharing of the value delivered through an offering between the customer and the company. In this way, both customers and shareholders gain.
The full statement and signatories can be found here: 2019 Statement on the Purpose of a Corporation from the Business Roundtable.