Columbia Governance Expert Highlights Corporate Role in Social Development
In today’s world of more efficient markets, stewardship models and ESG (environmental, social and governance) investing, the views of economist Milton Friedman no longer play a central role in the discussion regarding social responsibilities of the firm, according to Bruce Kogut, Professor of Leadership and Ethics at Columbia Business School (CBS). That useful debate is now over. The discussion has migrated in the last decades to developing the frameworks and tools of corporate engagement, measurement, and asset management of the funds of socially-oriented investors.
In early August, Professor Kogut visited Chile and gave a lecture at Universidad Católica entitled “What Milton Friedman Got Right (and Wrong) and Why it Matters” as part of the governance series that the Santiago Center has developed in cooperation with Columbia Law School’s Millstein Center.
The discussion was opened by Marcos Singer (Ph.D. ’96), director of the MBA program at Universidad Católica, and was moderated by Georges De Bourguignon (MBA/MIA '17), Corporate Development Vice President at Qiruiñenco S.A. and member of the Santiago Center Advisory Board.
In 1970, Friedman published a now famous and at times vilified New York Times article entitled “The Social Responsibility Of Business Is to Increase Its Profits”. Looking back at the history of corporate governance, the state created corporations by giving them powers via charter, and as such corporations assumed also social obligations, Kogut proposed. Along with the objective to run their operations efficiently and to provide a return to shareholders by attending to principal–agent problems, good governance rooted also in public (and labor) law permits companies to consider the impact of their decisions on stakeholders, such as employees and customers, and on the larger society.
Social problems and externalities call for a more modern social responsibility, according to Kogut. Corporations can act through markets, state policies, and private actors to help solve big social problems, said Kogut who pointed to the case of the propagation of solar panels in the US. Too expensive for most households, solar panels were out of the reach of most consumers. Companies relied up a market solution to lease them and then securitize them so that ordinary citizens could access that technology, while government offered consumers and builders to lower the price. A number of sectors came together to make this happen: government, financial entities, private firms and NGOs.
ESG is a corporate governance issue with far-reaching consequences, as it promotes societal change that wealthy investors want to fund. Financial markets and investors as shareholders or as custodians are today investing in firms who are committed to resolving social issues as part of their business model, he concluded. Though inspiring during a time of excessive corporate and personal taxes and regulation in 1970, Milton Friedman’s article looks very dated in our current context of investor social activism.
While in Chile, Kogut also presented the case “The Uber Board Deliberates: Is Good Governance Worth the Firing of an Entrepreneurial Founder” at the ESE Business School, hosted by Alfredo Enrione, Director of ESE’s Center for Corporate Governance and Society. The CBS governance expert and participants in the event discussed governance of the soon-to-be public firm Uber and was what was right and wrong with its governance at the pivotal October meeting in 2017, after Uber founder Travis Kalanick announced he was stepping down as the company’s CEO, bowing to pressure from investors but still very powerful. Following an analysis of the case, Kogut led a simulation exercise replicating the October 5, 2017 board session to resolve several governance challenges, such as whether to approve a major investment by SoftBank, what should happen to dual class shares, and whether there should be an IPO in the near future. The morning event was wrapped up by a discussion on how better governance would have prepared Uber more successfully for its 2019 IPO.
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