top of page
  • Robert Hinkley


Updated: Aug 31, 2023

15 August 2023

In September 1970 the New York Times printed a soon to be famous op-ed by future Nobel Prize winning economist, Milton Friedman. The title of the article was “A Friedman Doctrine—The Social Responsibility of Business is to Increase Its Profits.” He argued that the purpose of corporations was to make money. Achieving that, he said, was good for the economy and therefore good for everyone. Businessmen who promoted corporate social responsibility were “preaching pure and unadulterated socialism… and undermining the basis of a free society.”

Transition to Stakeholder Capitalism

Since then, times have changed dramatically. By September 2000, there was reason to believe that not very many people felt the same way as Dr. Friedman did three decades before. Business Week magazine published a poll. It asked Americans generally which statement they agreed with more strongly:

· Corporations should have only one purpose—to make the most profit for their shareholders—and pursuit of that goal will be best for America in the long run (i.e., the Friedman Doctrine).


· Corporations should have more than one purpose. They also owe something to their workers and communities in which they operate, and they should sometimes sacrifice profit for the sake of making things better for their workers and communities.

Ninety-four percent of those polled said they agreed more strongly with the second statement than the first. This was a surprise. Most people knew there was something amiss about the way business was then being conducted. But few realized almost everyone else felt the same way.

In the two decades since the Business Week poll, a previously tiny movement to make companies more socially responsible took flight and investments under so-called “socially responsible management” grew from nearly nothing to tens of trillions of dollars. Business schools began to teach a new way of doing business that made environmental, societal and governance considerations (ESG) as much of the curriculum as courses in accounting, marketing, management, and finance. Graduates of these programs now fill spots in the Sustainability Departments of the world’s largest corporations. Major companies now report on their ESG efforts as well as their financial results.

On August 19, 2019, the movement towards a more socially responsible way of doing business was adopted by the American Business Roundtable (ABR), an association of chief executive officers from nearly 200 of America’s largest companies. It issued a statement declaring the purpose of the corporation was more than just serving shareholders (which had been the ABR’s position since 1997). One hundred and eighty-one out of 188 CEOs proclaimed that their companies would take into consideration other stakeholders (in addition to shareholders), including its customers, employees, suppliers, communities, and the environment.

The foregoing shows a significant shift over the last fifty years. Customers want business to operate in a manner that is more respectful of the environment and the public interest generally. Businesses want to be perceived as meeting that desire.

Shareholder focussed capitalism is slowly evolving into a more enlightened way of conducting business. This so-called “stakeholder capitalism,” is based on the idea that corporations should be respectful of, and protect, the environment and other elements of the public interest.

The law lags behind

Having been a corporate lawyer for more than 40 years, I’d like to point out that the corporate laws of the world are still stuck in the old paradigm. These laws do not support the move to stakeholder capitalism. Actually, they discourage it.

Consider the following examples. First, a company that owns a number of coal-fired, electric power, generating stations, all operating in accordance with current regulations that allow the emission of large quantities of greenhouse gases into the atmosphere. Its directors worry about climate change and consider shutting the stations. However, decommissioning them early will require their value to be written off and result in the company recording billions of losses.

The directors of tobacco companies face a similar problem. Their business model depends on manufacturing and selling a product the gives their customers cancer. The directors of one of these companies consider getting out of the business. However, if they do, their company will have to write off billions and figure out what it might do instead.

Both of these businesses are making money and operating legally. The corporate law in every jurisdiction says their directors must “act in the best interests of the corporation.” How could incurring the huge expense of changing their business model to stop the harm be consistent with satisfying this obligation?

These are just two examples of the existing duty of directors interfering with the shift to ESG and stakeholder capitalism. There are others for which existing law poses a similar problem.

Changing the law

Corporations only exist because laws have been enacted which allow them to be formed and operate. For nearly a century and a half the law has directed the people who run them, directors, to pursue the best interests of the corporation without any balancing obligation to respect the environment or other elements of the public interest.

When a company is discovered destroying the public interest, the law doesn’t require its directors to make the destruction stop. Instead, it directs them to pursue the company’s interests and encourages them to defend its anti-social behaviour.

This sets up a situation where occasionally severely harmful corporate behaviour cannot be stopped by passing new legislation and the damage continues (e.g., greenhouse gas emissions and big tobacco). ESG is not going to make this behaviour stop. Existing law gets in the way.

Directors must do more than just consider the public interest as the ABR now suggests. The law should require them, from the day their company is organized, to make sure it doesn’t cause severe damage to the environment or other stakeholders. This can be achieved by adding 31 words to the existing duty of directors. As amended, the new law would read:

Duty of directors: The duty of directors shall be to act in the best interests of the corporation, but not at the expense of severe damage to the environment, human rights, public health and safety, dignity of employees or the wellbeing of the communities in which the corporation operates. (New law in italics).

I call these words the Code for Corporate Citizenship (Code). The Code will balance the duty to act in the best interests of the company with a prior duty to protect five elements of the public interest from severe damage. Rather than affect individual companies one at a time(as ESG does), it will require all companies to lift their game.

The Code will not ask directors to voluntarily consider other stakeholders’ interests (which is ESG’s method). It will require them to respect those interests by providing that they shall not allow their business to continue causing severe damage.

The Code will refute the idea which arises under existing law, that companies have no overarching obligation to protect the environment or other elements of the public interest. When companies are found to be causing severe harm, the Code will tell directors they have an obligation to make it stop—either by closing down or finding another way to eliminate the harm.

The potential costs of this result will become a real risk that directors will want to avoid (as part of their obligation to act in their company’s best interests). The Code will encourage all corporate personnel to spot harmful anti-social behaviour and speak up before it becomes severe.

Some laws set ideals or aspirational goals and then rely on self-regulation or other laws for enforcement. The existing duty of directors is a good example. Directors know their job is to preserve and enhance shareholder value. Including an obligation in the law to act in the company’s best interest reduces the obvious to writing.

The Code will similarly reduce to writing the aspirations of ESG and stakeholder capitalism. It will put company directors on notice that the law has higher expectations regarding corporate behaviour than it had before the Code. All business will be expected to safeguard the environment and other stakeholders from severe harm.

The evolution of business over the last twenty years indicates this is what most people want. It’s time to move on and consign to history all business practices which severely damage the environment or other elements of the public interest. No business should have this right. Revoking it is not too much to ask.

24 views0 comments

Recent Posts

See All


bottom of page