Nevertheless, well into the twentieth century, the idea was that corporations were only permitted to exist and enjoy benefits unavailable to other forms of business because they served some sort of public purpose. Corporations commonly deferred to the interests of the communities in which they operated and to other stakeholders—including customers, employees, and suppliers, in addition to shareholders and communities. Defenders of the rising new corporate order adopted this broader notion of a corporation’s true client base as a key justification of corporations’ greatly expanded privileges.
This all began to change in the 1970s. In an influential article published in The New York Times Magazine on September 13, 1970, University of Chicago economist Milton Friedman fired the first salvo against the traditional view of corporate responsibility as being divided among various stakeholders. He argued instead that the corporation has one and only one responsibility: to the shareholder, who is the owner of the business. In Friedman’s view, “ownership” confers an absolute right to use whatever property is owned in whatever way the owner chooses, subject only to the constraints of law. Since shareholders are the owners, they are entitled to 100 percent of the profit, minus taxes. It therefore followed for Friedman that any benefits the corporation confers upon nonshareholders that do not serve the ultimate purpose of profitability are, in essence, theft of money that belongs to the shareholder. Friedman believed that narrowing the focus of the corporation to the single goal of maximum profitability would increase productivity and efficiency, and thereby raise economic growth and improve social well-being to the greatest extent that corporations could do so.
In an extraordinarily important article in 1976, University of Rochester economists Michael Jensen and William Meckling amplified the Friedman doctrine. They argued that shifting the focus of management solely toward the maximization of shareholder value offered a solution to the long-standing problem of ownership and control of the big corporation.
Since at least the 1930s, economists and legal scholars had been concerned about the new powers wielded by large modern corporations. Under the modern model of corporate governance, shareholders had little control over the assets that they owned. In reality, they were controlled entirely by corporate management. In theory, managers were just employees working for the shareholders, who were represented by the corporation’s board of directors to look out for their interests. But in practice, boards did a poor job of doing so. Being a board member was not a full-time job, and boards might only meet a couple of times a year and were often hand-picked by senior management. Moreover, boards lacked the information and detailed expertise necessary to really understand what the company was doing on a day-to-day basis, and usually just rubber-stamped whatever the CEO was doing, as long as he was doing reasonably well.