Putting profits above society may seem logical for corporations, but is it self-defeating?

“These guys are mad. Call off the invasion. Their system’s going to eat them so we won’t have to. They have these company things that they’re allowing to bust the whole place up. Let’s just sit tight and clean up once they’re done wrecking it.”

That’s what an alien might very well say upon looking at the way the titans of the capitalist system have been operating. You want examples? Ten years on from the financial crisis that caused a brutal recession and a lost economic decade from which we have still to fully recover and it isn’t hard to find people who’ll tell you that the banks could easily do it again.

Tech giants make money from people taking out ads that are designed to corrupt democratic elections, while other companies wreck the environment. Meanwhile, the carnival of corporate scandal adds a new float every few months. Yet according to the Nobel prize-winning economist Milton Friedman, whose influence permeates through the Anglo-Saxon capitalist world, they’re all only doing what they’re supposed to do: increasing profits by whatever means necessary within the law.

In his seminal work Capitalism and Freedom, Friedman baldly stated that “the social responsibility of business is to increase its profits”.

He had no truck with companies having any regard for the societies in which they operate, much less furthering socially useful goals such as “providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers”.

“Businessmen who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades,” he opined. That view is at odds with what you’ll often hear from modern executives, who like to talk about how important the “values” of the businesses they run are and big up their role as “good corporate citizens”.

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Facebook isn’t about making money. It exists to “connect people”. “Don’t be evil” famously used to be at the centre of Google’s corporate philosophy until it was quietly removed. Now it says: “The Google Code of Conduct is one of the ways we put Google’s values into practice. It’s built around the recognition that everything we do in connection with our work at Google will be, and should be, measured against the highest possible standards of ethical business conduct.”

Isn’t that nice? Milton must be turning in his grave. You hear similar things on this side of the Atlantic. I once suggested to a very senior executive at a rather famous FTSE 100 company over dinner that his talk about values was basically window dressing, and that cash was king. He became visibly upset.

Yet Friedman would have found nothing to take issue with in the investor presentations put out by the aforementioned executive’s employer. He might have found today’s fiction of corporate social responsibility frustrating, even infuriating, but he wouldn’t need to scratch too far below the surface to be reassured.

The majority of western companies and western executives subscribe to and live by his doctrine in nearly every respect, even if they’re sometimes reluctant to admit it. That shouldn’t surprise anyone. They are legally required to do so.

Britain’s Companies Act of 2006 – passed by a Labour government by the way – has the fiduciary duty of directors to shareholders at its core.

It states that a director must act “in the way he (sic) considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”. In the case of big public companies, the members are shareholders, who invest in them, as Friedman stated, for the purpose of making money.

Capitalism red in tooth and claw rules, say his fanboys, because it has proved far better at delivering prosperity to those living under it than any of the alternatives (Friedman was writing at a time when the main one was Soviet-style communism).

So, you corporate executives, it’s time to bin all that fluff about values. Go get yourself some CREAM (Cash Rules Everything Around Me, with apologies to the Wu-Tang Clan).

The trouble with that view is it isn’t working so well any more, at least not for the masses, which might explain why extremists of one sort or another are finding such favour, extremists who are mostly bad for business – and yes that includes those on the right, in case you hadn’t noticed Donald Trump’s trade war.

The Pew Research Centre recently pointed out that today real wages in the US, adjusting for inflation, have about the same purchasing power as they did 40 years ago. Only those at the very top have made real gains. Since 2000 their real wages have risen by a cumulative 15.7 per cent, to $2,112 (£1,628) a week – nearly five times the usual weekly earnings of the bottom tenth ($426).

Real wages for the average American worker actually peaked 45 years ago, a couple of years after Friedman published a piece expounding on his profits argument in The New York Times Magazine. Similar issues are at work in the UK labour market. Pawel Adrjan, UK economist at Indeed, a job site, recently noted that average pay is still below its 2008 pre-crisis peak.

“If real wages had continued growing at their pre-crisis trend, the average person would now be earning £130 more per week than they actually do,” he said.

In the boardroom it’s a different story. In a 2015 report, the High Pay Centre noted that CEOs in the UK had seen their pay increase by a factor of five since the late 1990s – despite no evidence that this resulted in better corporate performance, productivity or economic performance. The latter point was eloquently made by Charles Cotton, senior performance and reward advisor at the Chartered Institute of Personnel and Development, during a hearing of the parliamentary business committee in June.

Yet despite the occasional shareholder rebellion, there is scant sign of any real slowdown. A more recent report by the centre found that CEO pay leapt by 11 per cent in 2017, more than four times the pace at which the average worker’s pay increased. Friedman argued that a corporate executive has direct responsibility to his employers “to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society”.

But, while they conform to that for the most part, when it comes to the question of their pay – they clearly break the rule. They and the non-executive directors who set it frequently act in ways that are ultimately opposed to shareholders interests.

The situation reached its nadir in the UK with Persimmon Homes and its potential payment of £600m, slated to be shared among just over 130 executives. CEO Jeff Fairburn was due to receive more than £100m through it, although a public furore eventually saw him agreeing to reduce it to £75m.

The company had been successful on his watch, it’s true, but that success was largely fuelled by the government-funded help to buy scheme, which underwrites mortgages for the first-time buyers Persimmon targets. It thus owed much of its success to a de facto public subsidy.

The chair, and the chair of the remuneration committee who resigned in the midst of the scandal, admitted that the bonus scheme should have been capped, but this was too late to save the shareholders they were supposed to represent, who ended up handing over nearly 10 per cent of their company to its executives. No wonder one commentator referred to it as an act of “corporate looting”.

Fiduciary duty? Forget about it! Part of the reason for the repeated occurrence of this sort of thing is the way the modern company has become, in effect, ownerless – widely held by diverse groups of institutional investment funds which buy and sell electronically, rarely vote on company resolutions and sometimes may only be on the shareholder register for a matter of days, even hours.

Remuneration committees would have you believe that they seek to align the interests of executives with those of shareholders, despite their lack of oversight, by making them shareholders too. CREAM for all!

The problem with that analysis is executives get their shares for free, and if something is free you don’t really value it. They rarely put their own money at risk. Perish the thought. This too often leads to them throwing caution to the wind in pursuit of potentially huge payouts. Why not?

If their employer fails really badly, keels over and dies halfway down the track from an overenthusiastic application of the whip, they may lose their jobs. But corporate executives are rarely out of work for long. Take a look at the career of Andy Hornby, as an example. The HBOS CEO had his hand on the tiller when the bank fell off a cliff, and the government had to step in and find a rescuer (Lloyds) which it then had to bail out.

Mr Hornby, who was sharply criticised in a report by the Parliamentary Commission on Banking Standards, ought to have been unemployable after that. But it wasn’t long before he found a new role as the chief executive of Alliance Boots, before moving on to bookmaker Coral. ​RBS’s Fred Goodwin wasn’t so lucky thanks to his status as the bogeyman of British banking. But nearly all of his boardroom colleagues had secured alternative work within a couple of years of that bank’s collapse. One wonders what will now happen to those who spent time in the Carillion boardroom. Its executives also went for the bonus long shot jackpot. Expansion and profits uber alles, until the roulette wheel threw up a double zero.

There was no bailout in that case, but the taxpayer was nonetheless left with a hefty bill in the wake of yet another glaring example of the capitalism Friedman advocated eating itself. But there are some companies that have eschewed Friedman’s ideas in another, more laudable respect, and with intriguing results.

I’m not talking here about the corporate social responsibility programmes most big businesses like to run. They’re often little more than extensions of the marketing budget, designed to send a message to consumers: “Hey you lot, come spend with us. You can feel good about it because even though we screw up the environment, look we’ve built a well in Senegal and we let our people go and help inner-city kids in their lunch hours.”

I am instead thinking of those businesses that have actively sought to promote diversity (a favourite of the current crop of reformers) through their hiring practices. Far from suffering through doing so, they have benefited, and handsomely.

McKinsey, a management consultant renowned for its hard-headed intellectual rigour, sought to study the impact on the corporate profitability of hiring both more women and more staff from a minority ethnic background.

Its report – Delivering Through Diversity – shows that companies that do this make more money. The firm examined 1,000 companies from 12 countries for the 2017 study. Those with workforces in the top 25 per cent for ethnic diversity were 33 per cent more likely to see higher than average profits than those in the lowest. When it came to gender diversity the figure was 21 per cent.

The findings particularly stressed the importance of these groups being hired to both management roles (where they are often hardest to find) and in revenue-generating “line” positions from where executives are typically drawn. Companies that do so comply with Friedman’s demands that they maximise profits by taking his prescription and doing the opposite.

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But the question of whether the “profit at all costs” aim isn’t still destructive remains. Putting profits first has left Britain with water companies that impose hosepipe bans while gallons upon gallons of water pours into its streets from leaking pipes. It has produced the railway debacles that have shattered the faith of the public in privatisation.

It was for the purposes of bringing in a few extra dollars that Facebook allowed itself to be used by those seeking to influence the US presidential election and the Brexit referendum.

All these demonstrate how self-defeating corporate behaviour that puts profits above society can be. The water industry is now dealing with tougher regulation, while the government is poised to announce a review into how rail services are delivered. If Labour comes to power both industries face nationalisation, an idea that is finding increasing favour with the public.

Facebook has had its reputation trashed, and paid fines, while also dealing with new rules. There might be worse to come. There probably should be. Would all this have happened were these businesses to have taken their “social responsibilities” more seriously?

It's not just in the field of hiring that companies would benefit from thinking a little more carefully about what they do and how they do it. Eco-friendly buildings? That’s your energy bill down.

Act to cut emissions and curb other environmentally damaging behaviours? The costs of environmental destruction could be reduced, resulting in, for example, lower insurance premiums. Socially responsible businesses could serve to benefit shareholders, at least those with a time horizon beyond five minutes.

It’s worth considering the experience of Nationwide and John Lewis, one a member-owned mutual, the other an employee-owned partnership, at this point. They aren’t without their failings. Nationwide, for example, is as guilty of overpaying its executives as some banks.

But as a rule, they manage to balance both long-term financial success, something their owners are still interested in, with a more enlightened stance towards the society they operate within than some of their peers.

John Lewis’s constitution is a particularly worthy example. It sets out employee partners’ rights and responsibilities and defines “how power is shared and our collective responsibilities to others”.

Mutuals and partnerships fail just as public companies do. But as often as not it is when they follow the destructive playbook of the latter, with too little oversight brought to bear on over-powerful and overpaid executives seeking to maximise profits above all else and taking silly risks to do so.

Perhaps it’s time to consider a revised Companies Act to better balance shareholders’ interests with those of other stakeholders. A very senior Tory, from the party’s sane (non-Brexiteer) wing, pooh-poohed this notion in conversation with me. They argued that an employee, for example, could never be ranked alongside the shareholder owner. But why not? As I’ve tried to demonstrate, it might ultimately work in their favour.

John Lewis, where the employees are the owners, hasn’t been immune from the challenges afflicting the high street. But most of its stock market-listed department store rivals would kill to be in the position it is in. Works councils are commonplace in Europe, as is employee representation on boards, something Theresa May briefly talked about before beating a hasty retreat.

It is true that they haven’t necessarily served to curtail executives’ worst instincts – it isn’t hard to find examples of excessive pay at German companies for example. But look at Germany and look at Britain and ask yourself which has the better way of doing things. Would anyone other than a die-hard nationalist say anything other than “Vorsprung Durch Technik”?

Britain, and other western nations, have also given businesses responsibility for functions they never had when Friedman was writing. So, yes, society does have a big stake in how they are run, and governed. It is high time that was recognised. Society needs seats on the board, a place in the constitution, a role in corporate thinking. So do workers. When Tony Blair coined the phrase “stakeholder” it was widely criticised as a buzzword (he was rather fond of them).

But businesses are stakeholders in society, just as society is a stakeholder in businesses. The betterment of one favours the other, not least because, as that McKinsey study shows, more society can ultimately lead to more money. More CREAM for everyone.

It’s time for us to recognise that and to start looking at ways of reforming the system. It really isn’t serving us very well.