The idea that companies need to pursue a purpose beyond profit has gained traction in recent years, growing stronger in 2020 with the pandemic and social-justice protests.
But 50 years after University of Chicago economist Milton Friedman argued in a seminal essay that the only responsibility of business is to make money for shareholders, corporate purpose remains a controversial topic. Indeed, many investors, academics and even executives say that trying to overhaul capitalism by requiring firms to be purpose-led could make things worse, not better, for those such efforts are intended to help.
Why is corporate purpose controversial?
One concern is that it reduces accountability. Shareholder value can be clearly measured, so it’s easy to assess whether a company is delivering it. But “purpose” is nebulous and means different things to different people. An energy company that closes coal-fired plants, causing mass layoffs, could be deemed purposeful as it’s serving the environment. But one that keeps such plants open to preserve employment might be viewed as purposeful through another lens.
If all sorts of actions can be consistent with purpose, there’s no way to hold a chief executive officer to account—anything goes. Evidence suggests that reducing accountability to investors reduces long-term value, with no corresponding benefit to other stakeholders, including employees, customers, suppliers and the community at large.
