In The Prophets of Profit, a five-part documentary on Radio 4, the BBC’s Business Editor Simon Jack ‘tracks how a simple idea became so powerful and why it shapes all of our lives today’. This idea is a common approach to running companies, and its ‘prophets’ are economist Milton Friedman and his successors. Being a radio programme, there aren’t any visual distractions to the words spoken by Jack’s interviewees or his explanations of the technicalities of commerce, which are more detailed than most documentaries bother with. However, this makes it harder to discern that buried underneath the talk of ‘maximising shareholder value’, ‘creative destruction’ and ‘equity-based compensation’ are the practicalities of goods being made and used by people.
The series takes 1970 as its starting point, when Milton Friedman’s article ‘The Social Responsibility of Business is to Increase its Profits’ was published in the New York Times. Clear from the title, Friedman’s ‘simple idea’ is that the main aim of corporate executives is to encourage profits, and any responsibilities a company has to wider society are covered by the wealth it generates. The documentary describes his influence through economists such as Michael C Jensen and Bill Meckling, who went from ‘disciples of Friedman to preachers for a new muscular brand of shareholder supremacy’, according to Jack. They, and those they inspired such as ‘corporate finance specialist’ Don Chew, believe that businesses have been held back by legislation and placing too much emphasis on cultural and environmental concerns or perks for staff such as pension schemes.
Chew quotes the view that ‘we’ve reached the point where every corporate interest is represented except for shareholders in the corporate boardroom’. To ‘correct’ this, executives should focus on directly maximising the value of shares, and this would lead to a better return on capital for shareholders than investment in wider issues. A sympathetic government would support this approach by minimising tax rates, regulation and legislation. Techniques to enhance share value which became popular through the 1970s and 80s included firms borrowing more to finance targeted growth, and ‘using cash generated by the business to buy back shares from existing shareholders so they can go and invest the proceeds in new industries’. Chew brags that Americans in particular have become adept at squeezing money out of failing organisations and in to growing industries, so the loss of one company means a boost to others. This is one application of ‘creative destruction’, a concept popularised by political economist Joseph Schumpeter, but which was earlier critiqued by Karl Marx. Those with an optimistic view of capitalism would say that overall this can lead to economic equilibrium, ignoring the hardships workers face when on the wrong end of ‘creative destruction’.
Maximising shareholder value also supposedly creates an equilibrium by being the most effective discipline to mould a well-run company for all, generating taxes for governments to spend while making innovative, decent products and happy workers. With this view, we’re expected to believe that wealth will trickle down to where it deserves to be. The series covers some of the actual consequences of the drive to raise shareholder value. Michael Jensen advocated ‘equity-based compensation’: executives being paid in shares to give them additional motivation to improve the company’s coffers. He didn’t foresee that many would be paid with salaries and bonuses as well, leading to a massive gulf between their income and that of most workers, nor that firms involved in scandals during the 2008 financial crash tended to have executives motivated by ‘equity-based compensation’. And as explained by economist Sir John Kay, a short-term focus on generating wealth can have disastrous effects, such as when crashes of Boeing’s 737 MAX aircraft were blamed on prioritising profits over investing sufficiently in safeguards.
The series uses the late-80s privatisation of the water industry as an example of Friedman’s ideas being put into practice in the UK. Michael Howard, the Tory Minister who oversaw this says that when owned by the state, the water industry had to compete for funding with other institutions such as the NHS. He claims that since privatisation, investment in the sector has always been higher than it was beforehand. However, in the ten years that Macquarie Group Limited owned Thames Water, it didn’t invest any of its own money in the business, which was sold off when in debt, with prices to customers subsequently raised. Sharon Graham, the General Secretary of Unite, is in favour of renationalisation, saying that water privatisation has led to poorly run services while shareholders have taken £72billion. As illustrated by Howard, though, being state-owned doesn’t mean that industries will be adequately resourced, or effectively managed either.
The impetus to maximise shareholder value has also led to ‘wasteful’ exercises such as American vehicle manufacturers buying steel from China rather than from more expensive local producers. This led to a decline in the American steel industry, which President Trump has said he’ll address by imposing tariffs on metal imports (presumably leading to ‘creative destruction’ elsewhere). Another example of Trump contributing to a change in what methods are seen as enhancing shareholder value is his dislike of ‘wokeness’ enabling companies such as Meta, Amazon, Walmart and McDonald’s to ditch their ‘diversity, equity and inclusion’ programmes.
The Prophets of Profit is timely in being broadcast during a shift back to the directions preferred by Friedman and his followers, especially in the USA. Much of episode four is an interview with Paul Polman, who took the opposing stance when he was Chief Executive of Unilever during the 2010s. Investing in staff and green programmes didn’t prevent Unilever’s returns to shareholders quadrupling in value during the decade Polman was in post. Maximising shareholder value was still the priority, though. This doesn’t really change, even if the most profitable approaches to achieve it alter over the years. The resurgence of Friedman-esque policies is a reminder that supposedly responsible business practices such as safeguards, regulation and workers’ rights can be lost as soon as they stop being compatible with the interests of the capitalist class.
Mike Foster
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