Milton Friedman vs Jim Sinegal

“So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no they do not”
-Milton Friedman

I came across this quote during my MBA studies and rejected it instantly.  Several years prior, while reading Double Dip, I realized the potential for business to create positive change and decided I wanted to leverage that power to make my impact.  My personal commitment to that idea is Atayne, the company I launched to inspire positive environmental and social change through the power of sports and active lifestyles.

Recent events (and no, not just the financial crisis) made me think about this quote again, specifically in regards to organizations where the primary purpose appears to be to maximize shareholder wealth in the short-term.

Last week I took a business trip to Seattle.  I booked with an airline I am not very fond of to save $50 versus traveling with my favorite, Southwest. ($50 makes a difference to an entrepreneur!)  I will not mention the other airline by name, as my intention is not to malign them.  However, examples of poor customer service prevailed throughout my trip.

On the flight to Seattle, I learned that Airline X no longer offered complimentary beverages.  No big deal. I typically bring my own water.  But $2 for a can of soda or bottle of water?  I understand times are tough, especially for airlines (and banks!), but $2 for a beverage that probably cost them no more than $0.30 is outrageous.

By the time I landed in Phoenix for a 4-hour layover heading home on a Saturday afternoon, my feelings toward Airline X were less than charitable.  Eager to get home, I approached Customer Service to see if I could fly standby on a flight leaving 3 hours earlier.  I was told that to go standby, it would cost me a $150 fee plus the difference in fares, even though the flight was half-empty.  Did it cost them $150 to change the flight?  The agent responded, “Yes it will cost you $150.”  I replied, “But will it cost Airline X $150 to print me a new boarding pass?” I got a blank stare and walked away, vowing that I would never fly Airline X again. (A side note: I had “elite” status on Airline X for the past 2 years.  You would think that might mean something.)

As I sat in the airport – still fuming — I began to read November’s Fast Company, which includes an interview with Costco CEO Jim Sinegal. The interview opened with this statement, “Wall Street grumbles that Costco cares more about its customers and employees than its shareholders; it…covers 90% of health-insurance costs for both full-timers and part-timers.  Yet revenues have grown by 70% in the past five years, and its stock has doubled.”  Mr. Sinegal further remarked, “You have to recognize…that people in the business (Wall Street) are trying to make money between now and next Thursday.  We’re trying to build a company that’s going to be here 50 and 60 years from now.”

Google Finance)

Stock Chart (Source: Google Finance)

Here is Costco, a company that puts its customers and employees first and shareholders second; their stock price has gone up 21% in the past 3 years.  Then you have Airline X, which in my opinion puts their shareholders first, with customers and employees #2: their stock price has dropped ~65% in the past 3 years. As reference: Southwest’s stock has dropped ~27% over the last 3 years.

Milton Friedman was a smart man, but even the smartest people are sometimes wrong.  Companies exist in a larger community beyond their shareholders.  Those companies which look at their existence in a more holistic way, with a time horizon well beyond the next bonus, are the ones that are much more likely to be successful in the long run. For those who want to make money between “now and next Thursday,” please go to Vegas and get out of the way of companies doing great things in the larger community beyond Wall Street.

Check out the Aspen Institute’s Corporate Values Strategy Group and B Corporation for more information.

8 responses to “Milton Friedman vs Jim Sinegal

  1. What a great entry Jeremy – it all makes so much sense! Thanks for writing it and I so hope many people read this one. See you Thanksgiving. Love you much, Mammie

  2. Great entry! I am e-cheering you on for that post!

  3. I’m with you 100% on this one Jeremy! More companies should ‘mirror’ Costco’s way of doing business…and ATAYNE’s…you are certainly on the right path!!! You continue to amaze me with your thoughts and writing. See you at Thanksgiving…I may try to help you sell shirts on the Sat after turkey day. Your proud aunt…jil :O)

  4. Pingback: Treat Your Customers Like Human Beings « The Story of a Red Shirt

  5. Milton Friedman was right. Costco is looking to make money, ensuring money for its stock holders. In order to do so, it has to provide for the market. In order to provide for the market, it has to hire employees. In order to keep those employees, it has to provide competetive benefits. But notice that everything traces back to making money for the company and its share holders. The airline that you were complaining about is pursuing a different market. Ultimately, its survival will depend on whether people feel that the money saved is worth the bad service. You complain on this blog, but at the same time , you saved a lot of money. So keep in mind that different companies cater to different markets. I don’t see how this blog disproves Friedman’s quote, as Friedman was stating a simple fact about the market and how it works.

    • Thanks for the comment Limepickle. I think we will have to agree to disagree on this one. A company choosing to not offer complimentary beverages or having “poor” customer service has nothing to do with addressing a market. It is cost cutting to maximize profits for the next quarter. Keep in mind Southwest is the the discount airline in this story, not Airline X.

      The reality is, corporations exist in a complex system larger than just shareholders. Therefore, decisions are not simply linear and you cannot solely consider maximizing shareholder value. That is just one piece of a much larger puzzle.

      As a side note, since this article, Arline X has started to offer complimentary beverages again. Apparently losing passengers in a effort to maximize shareholder value was not in the best long term interest of the company.

      Thank you for the comment and debate.

      • Chuck Richards

        Airline X is doing bla bla bla and losing market share and stock price. Costco is doing yadda yadda yadda and gaining market share and stock price. What specifically are they doing? It doesn’t matter. Costco is attracting investors and growing while Airline X is not, and that is the measure of who’s policy is successful and which company will stay in business long term. There is not universal, pre determined standard of what makes good business. Airline X’s general short sitedness may be their downfall (allowing Southwest to gain their market share), not some objective social good of some minute policy change.

      • Thanks for going the conversation Chuck. Although, I can’t say I fully understand the point you are trying to make.

        The reason for this post is to point out the fact that the approach of focusing solely on maximizing shareholder value often leads to short-termism. This rarely maximizes value. Companies that focus on all the stakeholders (employees, community, the environment, shareholders, etc.) tend to take a long term value maximization approach, which is turn tends to maximize shareholder value. This is an argument that many prominent business people including Warren Buffett, John Bogle, Jim Rogers, Lou Gerstner, and John Whitehead agree with as well –

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