ROGER STEWART | Was Milton Friedman wrong?

Recent exchanges in Business Day on shareholder primacy and company well-being suggest that a decades-old debate remains unresolved (“Shareholder primacy trumps value creation”, March 17). Was Milton Friedman wrong to argue that the social responsibility of business is to increase its profits? The persistence of the question is revealing, but it may also be misdirected.

The familiar critique is that Friedman’s doctrine has legitimised a narrow, even harmful, focus on shareholders at the expense of employees, communities and the environment. In response, others defend the discipline and clarity shareholder primacy provides. Yet both positions often rest on a truncated reading of Friedman’s original argument.

Friedman did not advocate profit maximisation at any cost. He qualified his claim carefully: corporate executives are to pursue profits while conforming “to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” This rider is not incidental. It is foundational. It recognises that companies and markets operate within a broader social order shaped not only by formal regulation but by norms, expectations and shared moral understandings.

The phrase “ethical custom” is particularly significant. It points to something more subtle than compliance. Companies do not operate in a vacuum; they exist within a living social system that confers legitimacy on their activities. When a firm’s conduct falls out of kilter with that system — when there is a gap between what it claims to value and how it behaves — it enters a state of dissonance. The consequences are familiar: loss of trust, reputational damage, employee disengagement, customer backlash and, ultimately, regulatory intervention. What is often described as a loss of “social licence to operate” is, in essence, a breakdown of consonance.

Seen in this light the pursuit of profit is not inherently at odds with societal well-being. On the contrary, a well-functioning profit company contributes to society in multiple, tangible ways. It produces goods and services that meet real needs. It creates employment and develops skills. It pays suppliers and taxes. It generates returns for investors, including pension funds that underpin long-term savings. In doing so, it participates in and sustains the broader economic system on which social welfare depends.

The phrase “ethical custom” is particularly significant. It points to something more subtle than compliance. Companies do not operate in a vacuum; they exist within a living social system that confers legitimacy on their activities. When a firm’s conduct falls out of kilter with that system — when there is a gap between what it claims to value and how it behaves — it enters a state of dissonance.

South Africa’s Companies Act reflects this duality. It distinguishes clearly between profit companies — incorporated for the financial gain of their shareholders — and nonprofit companies that are established for public benefit or social purposes. This distinction matters. It recognises that different institutional forms serve different primary ends. Yet the act also affirms that companies, including profit companies, are instruments through which economic and social benefits are realised. The connection between profit and social good is not spelled out in detail — perhaps because it is not a mechanical relationship but an emergent property of how firms operate within society.

Where Friedman’s argument becomes more contentious is in his scepticism about corporate involvement in explicitly social or charitable activities that do not clearly advance the firm’s interests. His concern was that executives, in deploying corporate resources for such purposes, are in effect spending other people’s money — shareholders’, employees’, or customers’ — without a clear mandate or accountability.

There is force in this argument. But it also reveals a limitation. Corporations may be artificial legal entities, but they are governed and directed by people — directors and executives — who carry fiduciary responsibilities; and ownership itself carries judgement and responsibility, whether acknowledged or not. These responsibilities are not purely technical. They require judgment, often under conditions of uncertainty, and frequently with moral implications. To suggest that only individuals, and not the corporations they steward, can bear responsibility is to draw too sharp a distinction between the two.

Recent shifts in business models further reinforce this point. As firms move toward platform-based, AI-enabled and ecosystem-driven forms of organisation, the boundaries of the enterprise become more fluid, value is increasingly co-created and less directly observable, and outcomes unfold over multiple, often conflicting time horizons. In such contexts the idea that performance can be governed primarily through metrics, incentives or contractual alignment becomes progressively less tenable. What comes to the fore instead is the quality of judgment exercised by those entrusted with the enterprise — not only in making decisions, but in discerning where the enterprise begins and ends, how value is truly created and how continuity and consonance are sustained under conditions that resist simplification.

Recent shifts in business models further reinforce this point. As firms move toward platform-based, AI-enabled and ecosystem-driven forms of organisation, the boundaries of the enterprise become more fluid, value is increasingly co-created and less directly observable, and outcomes unfold over multiple, often conflicting time horizons.

The real issue, then, is not whether companies should serve shareholders or stakeholders. It is how those entrusted with directing companies exercise judgment within a complex social system. Profit is not a standalone objective pursued in isolation; it is a signal and a constraint within a broader context. Long-term value creation depends on maintaining consonance between a company’s economic activities and the ethical and social environment in which it operates.

This reframing also clarifies the often confused debate about corporate social responsibility. The question is not whether companies should engage in socially beneficial activities beyond their immediate commercial interests. Rather, it is whether such actions can be justified as part of the responsible stewardship of the enterprise over time. Investments in employee well-being, environmental sustainability or community development may, in many cases, strengthen the firm’s long-term position and legitimacy. Where they do not, the case for them must be made transparently and, where appropriate, with the consent of those whose resources are being deployed.

The enduring task of directors and executives is therefore not simply to maximise profit, nor to balance an abstract set of stakeholder claims. It is to steward the enterprise in a way that sustains its capacity to generate value over time, while remaining in harmony with the society that makes that value possible.

Friedman was not wrong in the way the debate often suggests. But nor was he complete. His insight — that profit-seeking must be bounded by the rules and ethics of society — points beyond the binary that continues to dominate discussion. The real challenge lies in the quality of judgement exercised within those bounds.

It may be time to move the conversation on to how continuity and consonance are sustained under conditions that cannot be reduced to rules.

• Stewart is a coach and adviser with business coaching and consulting firm Grow, focusing on value growth, enterprise stewardship and long-term value creation.