In his epochal, controversial and highly polarizing essay, “The Social Responsibility of Business Is To Increase Its Profits,” published in the New York Times Magazine some 70 years ago, Nobel Prize-winning economist Milton Friedman argued against the social responsibility of businesses, and explicitly declared that “the business of business is business.” The shareholder value theory of the company continues to endure. “[T]oday shareholder value rules business,” The Economist proclaimed in 2016. To Friedman and other free market enthusiasts, maximizing profit and shareholder value in and of itself is the only real goal of business in a free-enterprise system.
The Ukraine crisis compounds a patchwork of global crises new and old — from climate change to COVID-19 — in forcing corporate executives to confront and reevaluate the so-called Friedman Doctrine. With global multinationals suspending operations in Russia and/or divesting completely from Russia at the expense of their bottom line, are we seeing the demise and burial of the Friedman Doctrine?
The Friedman Doctrine
In his piece, Friedman declared: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society, both those embodied in law and those embodied in ethical custom.”
To Friedman, discussions of the social responsibilities of business “are notable for their analytical looseness and lack of rigor.” Friedman believed the doctrine of “social responsibility” to be a “fundamentally subversive doctrine” in a free society.
In his book Capitalism and Freedom, Friedman asserted that in a free society, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
Corporations and the War in Ukraine
In response to its invasion of Ukraine, a growing number of Western businesses are pausing operations in Russia. Companies that have suspended operations include Harley-Davidson, Mitsubishi, Toyota, and Apple. In the entertainment industry, companies like Disney, Warner Media and Sony Pictures Entertainment are suspending their releases of new products in Russia. Disney announced plans to pause film releases such as the upcoming Turning Red from Pixar in Russia citing “the unprovoked invasion of Ukraine and the tragic humanitarian crisis.” Also citing the humanitarian crisis in Ukraine, WarnerMedia paused the release of its feature film The Batman in Russia. “Given the ongoing military action in Ukraine and the resulting uncertainty and humanitarian crisis unfolding in that region, we will be pausing our planned theatrical releases in Russia, including the upcoming release of ‘Morbius,’” Sony said in a statement. “Our thoughts and prayers are with all those who have been impacted and hope this crisis will be resolved quickly,” the statement added. Netflix likewise suspended service to Russia.
Some companies are going a step further and are divesting from Russia. The past few weeks have seen a mass exodus of Western oil majors from the country. Some companies in the oil and has sector are leading in this regard. In the last week or so, British Petroleum (BP) announced that the company will exit its shareholding in Rosneft. Rosneft is a state-owned enterprise and BP has held a 19.75% shareholding in the company since 2013. On February 28, 2022, the Board of Shell plc (“Shell”) announced its intention to exit its joint ventures with Gazprom and related entities, including its 27.5 percent stake in the Sakhalin-II liquefied natural gas facility, its 50 percent stake in the Salym Petroleum Development and the Gydan energy venture. Shell also plans to end its involvement in the Nord Stream 2 pipeline project. ExxonMobil announced plans to exit Russia oil and gas operations valued at more than $4 billion and to halt new investment as a result of the invasion of Ukraine. “We are deeply saddened by the loss of innocent lives and support the strong international response” ExxonMobil said in a statement. Italian oil giant Eni will end a decades-long pipeline joint venture with Gazprom PJSC.
Analyzing Business Response to the Ukraine Crisis
What can we make of the response of Western businesses to Russia’s invasion of Ukraine?
First, businesses are publicly and explicitly condemning Russia’s invasion of Ukraine. “TotalEnergies condemns Russia’s military aggression against Ukraine, which has tragic consequences for the population and threatens Europe,” Total stated in a press release.
Second, statements by corporate executives suggest that business can be concerned with promoting desirable “social” ends and could possibly have a “social conscience.” “Like so many, I have been deeply shocked and saddened by the situation unfolding in Ukraine and my heart goes out to everyone affected” British Petroleum’s CEO Bernard Loone declared recently. Regarding BP’s decision to divest from Rosneft, Loone stated: “I am convinced that the decisions we have taken as a board are not only the right thing to do, but are also in the long-term interests of bp. Our immediate priority is caring for our great people in the region and we will do our utmost to support them.” “Our decision to exit is one we take with conviction,” said Shell’s chief executive officer, Ben van Beurden. “We cannot – and we will not – stand by. Our immediate focus is the safety of our people in Ukraine and supporting our people in Russia” van Beurden added
Third, companies are taking bold, and sometimes irreversible, steps with the knowledge that investment recoverability may not be possible and that their bottom line would be affected. “At the end of 2021, Shell had around $3 billion in non-current assets in its ventures in Russia. We expect that the decision to start the process of exiting joint ventures with Gazprom and related entities will impact the book value of Shell’s Russia assets and lead to impairments” Shell announced. As one analyst put it, “[b]illions of dollars of impending write-downs are piling up for the companies that have said they would exit their Russian assets… For now, there are few potential buyers for the stakes and operations they are leaving in Russia.” BP “faces a write-down of up to $25 billion for dropping Russia and losing out on annual dividends from Rosneft which have fluctuated between around $300 million and $780 million,” analysts predict.
Corporate Response to the Ukraine Crisis: A Cynical View
Critics are likely to argue that the corporate response to the Ukraine crisis is not driven by altruistic considerations and values but is actually driven by profit.
First, it could be argued that companies divesting from Russia are doing so to prevent harm to their reputation and ultimately their bottom line. Companies do not want to be accused of profiting from a war economy.
Second, an argument could be made that the recent move by Western is all about avoiding risk of running afoul of the sanctions that the E.U. and U.S. have put in place and nothing more. Sanctions play a major role in the response of companies to the Ukraine crisis but does not fully explain the response of most businesses to the war. “While we continue to review the extensive sanctions and their impact on our business, we have stopped all new business in Russia,” a spokesperson of Siemens Energy told reporters. Volvo suspended shipments to Russia largely as a result of “potential risks associated with trading material with Russia, including the sanctions imposed by the EU and US.” The new EU sanctions regime is also shaping the response from companies like Airbus and Jaguar Land Rover. “We are fully complying with all sanctions…. Given the current situation, ExxonMobil will not invest in new developments in Russia.” ExxonMobil said in a statement. In response to the sanctions, U.S. payment card firms Visa Inc (V.N) and Mastercard Inc blocked multiple Russian financial institutions from their network. “We will continue to work with regulators in the days ahead to abide fully by our compliance obligations as they evolve,” Mastercard reportedly said in a separate statement. As noted, while some corporate response to the Ukraine crisis is informed by the sanctions regime in place, not all actions have been driven by sanctions. The mass exodus of western oil majors from Russia started occurring even before the U.S. announced plans to stop buying Russia’s oil.
Third, to cynics, it is all about limiting their exposure to legal and political risks associated with war and nothing to do with social conscience. Companies expose themselves to considerable legal risk when they do not act fast and responsibly to protect their workers in war torn zones. The statements from companies suggest that worker’s safety is a major consideration for companies. “In this very serious and complex situation, our first priority is our employees and their safety,” Sandvik (Sweden) said in a statement.
Finally, critics are likely to point out, and rightly so, the utterly inconsistent approach of Western businesses to wars and humanitarian crisis in general. Critics are likely to also argue that race and nationality fundamentally shape corporate response to humanitarian crisis. Would the reaction of Western business and CEOs have been the same if instead of Ukraine, the war was unfolding in Africa, Middle East or Latin America? Probably not. Are the current responses influenced by the images of middle class, blue-eyed blonds on our screens rather than images of black and brown skins people living in squalid conditions? Probably. However, putting aside for a moment the very important role that race plays in global governance, it must be admitted that the response of the business world to the Ukraine crisis is unprecedented and arguably sets a new record.
The response of Western business to Russia’s invasion of Ukraine could mean that a new consensus is emerging that pursuing shareholder value is no longer enough. Analysis of the recent behavior of businesses to the crisis is likely to continue long after the crisis ends.
It is doubtful that the corporate response to the Ukraine crisis will be the death of the Friedman doctrine, a doctrine that has been the basis of business practice, leadership, policy, and education for decades. First, most of the response from the business world have come from Western companies. Thus, emerging market multinationals, a major force in today’s economy, have been largely silent on the Ukraine issue. Second, among Western multinationals, not all companies have jumped into the bandwagon. France’s TotalEnergies has resisted pressure to quit. TotalEnergies is not divesting but “will no longer provide capital for new projects in Russia” the company announced. “The company cannot divest assets from one day to the next unless sanctions force it to do so. One must take time to reflect,” TotalEnergies’ is quoted as saying. Third, to Friedman and his ardent supporters, the recent responses to the Ukraine crisis amount to nothing more than “hypocritical window-dressing” and says little about whether we are seeing a change in the corporate purpose and
The shareholder theory has its critics. Jack Welch reportedly called it “the dumbest idea in the world.” In an article in a May-June 2017 issue of Harvard Business Review, Harvard Business School professors–Joseph L. Bower and Lynn S. Paine— argue that maximizing shareholder value is “the error at the heart of corporate leadership.” Maximizing shareholder value, according to Bower and Paine, is “flawed in its assumptions, confused as a matter of law, and damaging in practice.” Many scholars and business insiders believe that it is time to change the Friedman Doctrine. In a 2020 article, Bruno Roche the former Chief Economist at Mars, Incorporated and Colin Mayer the Peter Moores Professor of Management Studies at Saïd Business School, University of Oxford, argued that it was time to change the Friedman doctrine. According to the duo, “the conversation should no longer be about why the system needs transforming – but how we can deliver the necessary transition.” We contend that a new breed of courageous business leaders must arise to embrace the duty and opportunity presented by today’s global challenges. Companies must reposition themselves to thrive by meeting the needs of the world,” they argued.
Debates will likely continue around issues such as whether business has a “social conscience,” whether business should be only concerned with profit and not with promoting desirable social ends, when and why business should deviate from its core goal, the pros and cons of CEO activism, and fiduciary duties of corporate boards. It will take more than the Ukraine crisis to announce the demise of the Friedman Doctrine. Roche and Mayer assert that “a superior alternative to profit-maximization has yet to take root because this is a systems issue.” They suggest that the business community “has to move beyond piecemeal reform and pursue fundamental systemic change.”
Uche Ewelukwa Ofodile (SJD, Harvard) is a Senior Fellow of the Mossavar-Rahmani Center for Business and Government at the Kennedy School of Government, Harvard University and Scholar-in-Residence at the New York University School of Law’s Center for Human Rights and Global Justice. She is the author of many monographs and articles on intellectual property rights, technology and the law, international trade and investment law, China in Africa, and global governance. She holds the E.J. Ball Endowed Chair at the University of Arkansas School of Law.