In the 1970s, economist Milton Friedman famously declared that the social responsibility of business is to increase its profits. This idea crystallized into “shareholder primacy,” the legal and cultural norm that a corporation’s sole duty is to maximize returns for its shareholders.
This governance model fundamentally changed how American companies operate. To boost short-term stock prices, executives began prioritizing stock buybacks and dividend payouts over long-term investments in research, equipment, and worker wages.
The result is a corporate structure that is highly optimized for extracting value in the short term, but increasingly fragile and extractive in the long term. It treats workers, communities, and the environment as costs to be minimized, rather than stakeholders to be invested in.
The legal reality is more nuanced than the cultural norm. Corporate law actually gives boards of directors broad discretion to balance the interests of various stakeholders. But the financial markets punish companies that don’t prioritize short-term shareholder returns, creating a structural trap for executives who want to play the long game.
Reforming corporate governance requires changing the incentives. This could mean giving workers a seat on the board (codetermination), changing tax laws to penalize excessive buybacks, or redefining the legal fiduciary duty to include long-term stakeholder health.
When evaluating a company’s decisions, look at their capital allocation. Are they investing in their people and their products, or are they just engineering their stock price? The governance structure dictates the behavior, and shareholder primacy has structurally aligned corporate behavior with extraction rather than creation.