Mark Kleiman has posted an excellent response to the notion – championed most (in)famously by Milton Friedman – that a company’s sole moral obligation is to make profit for its shareholders. His approach is reductio ad absurdum, but I think there’s an even more important flaw in Friedman’s reasoning. This flaw is the all too common assumption that “money is everything” and therefore any value not represented in monetary form is irrelevant. In this case, this leads to believing that people invest only based on (direct, short-term) monetary return, but that’s simply not true. When people buy stock, they do so based on a certain assumptions. They assume that certain legal and moral restrictions are applicable to what the company does, and they invest based on that assumption. This is particularly true of “green” or socially-conscious investors, who might be making decisions based as much on a company’s image or reputation for ethical behavior as on their purely financial performance. In a sense one might say that such investors have monetized their morals by making such investments, but that doesn’t mean they’ve given up those morals forever in return for profit. Presenting such an image and then acting in a wholly different manner is a form of fraud, and unconscionable. The same principle applies to every company and investor, though usually to a lesser degree. If the moral justification for what companies do is fulfillment of shareholder expectations, then expectations other than profit must be considered.

There’s an even more fundamental problem that shareholders do not adequately represent the interests of all who are affected by a company’s actions, and that those others deserve consideration too, but that’s probably best left for a future article.

Update: Mark’s trackbacks seem to be broken, but Michael O’Hare (writing on Mark’s site) seems to echo my point rather well.