Saijel Kishan’s recent Bloomberg article, provocatively titled, How Wrong was Milton Friedman is intriguing on many levels. It summarizes the work of George Serafeim, an HBS professor who wants to change how we measure company success and failure. Specifically, he wants to reward and punish companies on the income statement based on ESG impacts. That is, he proposes to put a dollar value on diversity or lack thereof, on polluting or not, etc. And then have those companies report profit and loss after consideration of their social impact. It’s an ambitious plan, and some would say just a natural extension of current ESG investing. You can see the current state of that effort at Serafeim’s Impact-Weighted Accounts project here.
It is worth noting a few general issues. Putting a dollar value on “good” and “not so good” is not easy, and ripe for subjective disagreement. To some extent, we are back in Sunday School. As we know, large, diverse population groups in this country don’t agree on the details of the Sunday School curriculum. I don’t see why determining the specific, detailed social impact of a wide range of businesses would be any easier.
Then there is the measurement problem. We see that already in measuring the existing and much narrower Scope 3 emissions in ESG investing. That exercise is rife with definitional and scale problems. Going “Scope 3” on just about everything will be magnitudes more difficult, and subject to such disagreement as to be potentially meaningless.
But taking the battle to the accounting level is fascinating. Accounting, like economics, is a subjective enterprise pretending to be a hard science. It is not. Wars may not have been fought over depreciation schedules, but they are just as contentious, and just as important for spending and business decisions. Some sort of charge for damage to the planet for polluting or extractive industries might be a reasonable concept, but the details matter. Like a universal carbon tax, pretty much everyone is in agreement that it is a good idea. And pretty much no one can agree on the details of the amount and implementation.
Which brings us back to the foil of Milton Friedman, and his assertion that profit maximization is the only legitimate goal of a business enterprise. This September saw a lot of commentary around the 50th anniversary of his famous Sunday New York Times piece, “The Social Responsibility of Business is to Increase its Profits.” History matters, and it is worth re-reading the original column. The link is here. It turns out that many of the same issues that are being hotly debated now within the framework of ESG investing were present a half-century ago, albeit without the current moniker. And the challenges remain the same.
While there may not be a lot of common ground between the current activist community and the heirs of Friedman, there is some. Friedman writes about companies seeking profits “while conforming to [the] basic rules of the society, both those embodied in law and those embodied in ethical custom.” It is clear that in both law and custom, those basic rules have advanced a great deal in the past half century. In an ideal scenario, Gus Levy’s “long-term greedy”–coined roughly at the same time as Friedman’s article–meets the needs of both communities. Maximizing long-term profits means being around in 50 years, and for a business to have that staying power, it has to adapt to changing societal standards. The ESG community likes to cite Friedman as a bogeyman. He might better be referenced for how the core, long-term profit motive can be framed and achieved within society’s evolving standards.