Spurred on by political activists, academics, lobbyists, regulators, employees, consumers, professional directorship, governance gurus, proxy advisers and, most notably, large institutional investors, environmental, social and governance issues have commandeered boardroom conversations. This unlikely and unwieldly alliance is trying to upend the decades-old doctrine of shareholder primacy, first put forward in 1932 by Adolf A. Berle,Jr., and Gardiner C. Means, and then promulgated by Milton Friedman in the early 1970s.
Friedman preached the gospel of profits-as-purpose and mocked anyone who suggested otherwise as "undermining the basis of a free society." He posited that in a free and open market, pursuing shareholder value delivers the best goods and services to the public, optimizes employment, and creates the most wealth which can then be put to all sorts of good uses. According to Friedman, meeting its shareholders' need for profit represents a company's highest purpose.
Echoing through corporate boardrooms today is a new model of capitalism based on the overarching themes of purpose, inclusion, and sustainability which encompass the interests and needs of a broad array of stakeholders. Corporate chieftains are increasingly embracing this notion as evidenced by the 181 members of The Business Round table (BRT) who recently signed off on a proclamation entitled "Statement on the Purpose of a Corporation," which claims that companies have a "fundamental commitment to all stakeholders."
In recent years, environmental, social and governance (ESG) criteria have...