Reinterpreting Friedman: The Journey from Cost-Cutting to Employee Engagement to Shareholder Value.

Introduction

Milton Friedman's assertion in 1970 that "The social responsibility of business is to increase its profits" became a powerful mantra in the corporate world. The shareholder value maximization principle he championed radically transformed business priorities. However, it's crucial to note that while Friedman’s principle wasn't fundamentally flawed, its interpretation by many corporate leaders led to problematic outcomes. The often-overlooked aspect is that employees, rather than being seen merely as costs to be minimized, are the greatest assets in driving profit growth.

Misinterpretation of Friedman's Principle and Its Impact

Many corporate leaders adopted Friedman's principle, but instead of recognizing employees as a valuable resource, they saw them as another cost to be managed. This cost-cutting mindset led to decisions like squeezing wages, resorting to automation, or outsourcing jobs overseas. While these measures might have boosted short-term profits, they also risked reducing employee morale, productivity, and loyalty.

In the years preceding Friedman's era-defining theory, companies often had a more balanced approach to stakeholder management. Employees were essential stakeholders, whose interests mattered. From paternalistic companies providing employee services to strong labor movements that shaped working conditions, employees had a notable influence on corporate decision-making.

This change is glaringly evident in the current debate around work-from-home policies, and in the contradictory messages managers are often forced to communicate.

In response to the pandemic, many employees began working from home and quickly adapted to this new norm. Survey after survey, including Gallup's, shows that employees appreciate the flexibility and would prefer to continue with this setup. Yet, many companies are resisting this change, often ordering employees back to the office.

At the same time, Gallup's research reveals that a manager accounts for 70% of the variance in employee engagement. Managers are at the heart of an employee's experience. They deliver the company's messages, drive team engagement, and influence individual satisfaction. Yet, they often bear the brunt of corporate policies that create a rift in the trust between employees and managers.

Take this common scenario: a manager communicates that the company is experiencing record profits, but questions about low compensation increases or flexible work options are met with non-committal corporate lines or disempowering statements like "that's what I'm being told." It's no wonder that employees question the trustworthiness of their managers when faced with such contradictions. Without trust, employee engagement greatly suffers.

The True Spirit of Shareholder Value

Friedman's argument was not meant to dismiss the importance of employees. Rather, it emphasized the objective of profit maximization. But profit is not just a result of cutting costs; it's equally about maximizing output, including the productivity and creativity of employees. Recognizing and investing in this potential represents a more enlightened interpretation of Friedman's principle.

The Gallup Path: A Paradigm Shift

In their compelling work "Culture Shock," Jim Clifton, Chairman of Gallup, and Jim Harter, Chief Scientist of Gallup, provide a roadmap for an enlightened approach, called "The Gallup Path." According to Culture Shock, the path to growth and increased stock prices starts with great managers. These leaders understand how to leverage the Clifton Strengths of their employees. This focus on strengths leads to improved employee engagement, which in turn delights customers, leading to revenue growth, earnings growth, and ultimately, increases in stock price.

Realigning Corporate Practices with the Gallup Path

Companies that shift their focus to this culture-first approach, viewing their employees as assets rather than costs, have shown consistently higher levels of success. By fostering a culture that empowers employees, supports their development, and values their contributions, organizations can achieve sustainable growth and profitability.

Conclusion: Redefining Corporate Responsibility

The redefinition of corporate responsibility lies in adopting a more holistic understanding of Friedman's principle, recognizing that maximizing shareholder value involves far more than just cutting costs and improving efficiencies. It involves investing in the human capital of an organization, leveraging strengths, and enhancing engagement. This enlightened interpretation of shareholder value aligns perfectly with the Gallup Path and promises a sustainable and inclusive path to corporate success. It's time we embrace this cultural revolution in the workplace, where businesses are not just cost-cutting and efficiency entities, but also platforms for empowering people to realize their full potential.