Milton Friedman postulated that maximising economic profit justifies the existence of the private corporation. This “shareholder primacy” doctrine of Friedman resonated deeply in times when financial scarcity overshadowed concerns about the depletion of human, natural, and social resources.

Contrary to this thinking, a parallel narrative also championed by the icons of management and economic thought, like Peter Drucker and Carl Kaysen. They argued that corporations should prioritise a range of interests beyond just those of the shareholders, emphasising a duty to the company as an institution.

The inapplicability of the Friedmanian doctrine was highlighted by Porter and Kramer in their 2011 magnum opus, Creating Shared Value where they state that “… The capitalist system is under siege”.

Businesses’ pursuit of a narrow conception of profits at the cost of the environment and natural resources is perceived as a major cause of the accelerating impacts of climate change, rampant air pollution, and increasing natural resource conflicts.

At the heart of numerous global environmental crises lies the inability of free markets, and therefore corporations, to adequately consider the social costs of their indiscriminate rent-seeking behaviours. In the modern era, profit can no longer remain a private good but should be associated with creating shared values and expanding the connections between private returns and societal progress.

Therefore, companies need to bring in climate and environmental goals in the framework of their central strategy and profiteering activities. This necessitates a broader delineation of “profit” by inculcating the dimension of public goods into it.

UNEP’s 2023 Adaptation Gap Report reveals that the chasm between the climate adaptation finance needs of developing nations and the actual funds flowing in is widening at an alarming pace.

Uncertain returns

The financing agencies reveal a stepmotherly treatment towards adaptation finance precisely because of their public goods nature, and imperceptible economic rate of return.

Here comes the role of modern corporations where investment in schemes like adaptation projects or nature-based solutions with high social rates of return is tantamount to creating shared values through the creation of sustainable bottomlines for themselves and bringing about broader societal benefits.

The case for making profit a public good should not be interpreted as altruism, but as a step towards ensuring sustainable bottomlines — profit and societal good are more strongly correlated than one might imagine.

Research reveals that corporations with the highest investment in environmental, social, and governance (ESG) practices realised superior financial returns and ensured long-term business continuity.

Therefore, a longer planning horizon for a firm renders an unconventional economic rationale for its existence that is not accommodated by the Friedmanian doctrine: moving from a short-term economic rate of return to a long-term social rate of return.

Due to its scalability over time and space, the social rate of return emerges to be significantly higher than the short-term economic rate of return measured through myopic profiteering endeavours.

However, the smaller firms of the Global South might not have the same bandwidth and capacity as the large-cap firms to realise such a vision — many of them struggle for survival in the short and medium run.

In other words, the Friedmanian doctrine hinges on the primacy of the market forces that are reactive to short-term stimuli. In an aberration to this reality, if markets begin exhibiting the clairvoyance of anticipating the future, the shared value creation will emerge as a market-driven norm.

Given that this is not the case, governmental interventions at various levels will have to find a way to work with private corporations to create the right framework and incentives for making profit a public good. That will be the pathway to circumvent the crisis of capitalism.

Ghosh is Director, and Mookherjee is Associate Fellow at the Observer Research Foundation.

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