Corporate Activism Breaks the Deal Between a Company and Its Customers

You went to the store to buy a toothbrush. You did not go to be enlisted. And yet there is a growing class of companies that, in addition to selling you a toothbrush, would like to tell you where they stand on the great issues of the day, and would prefer that you notice.

This is an argument about whether that is a good idea, and it is not an argument about whether it is legal. It is legal. A company may speak, and the Court said so broadly in Citizens United v. FEC in 2010. The question is wisdom, and also fairness: whose money is being spent, whose opinion is being expressed, and what the customer, who only wanted the toothbrush, is supposed to do about it. My thesis is that when a company takes sides in political fights, it spends the owners' money on the executives' opinions and pushes customers to choose sides they never asked to choose, and a company that stays neutral serves a free society better.

The terms

Corporate activism means a company's public advocacy on contested political or moral questions that are not part of its business: taking a position on a bill, a referendum, a court case or a social controversy, through statements, campaigns, donations or the products it chooses to sell. It does not mean advocacy on matters that directly affect the firm, such as a tariff on its inputs or a licensing law that bars its competitors. A company that lobbies about its own regulation is acting in its own interest. That is a separate debate.

Neutrality means the company sells its product to all comers, says nothing about contested questions outside its business, and leaves its employees, owners and customers free to hold their own views. Neutral is not the same as silent about everything. A neutral company can still have values: honesty, safety, quality, fair dealing.

Stakeholder means anyone affected by a company: customers, employees, suppliers, the community, shareholders. The stakeholder theory is that a company should serve all of them, not only its owners.

Premise one: whose money is it?

Open with the first fact of corporate life. A company belongs to its owners. In a publicly traded firm those owners are shareholders, who include ordinary people with retirement accounts, pension funds, and the savings of teachers and firefighters. The executives are employees, hired to run the firm on the owners' behalf.

In 1970 the economist Milton Friedman put this into one of the most quoted essays in the history of the New York Times Magazine, published on September 13 of that year under the title "The Social Responsibility of Business Is to Increase Its Profits." His argument was that a corporate executive is the employee of the owners. If he spends the company's money on a social cause that does not serve the business, he is spending someone else's money, and he is deciding for them what cause deserves it. Friedman said in effect that this is a tax, levied by an official nobody elected, and spent on a purpose nobody voted for. The key sentence is that there is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits "so long as it stays within the rules of the game," meaning open and free competition without deception or fraud. Friedman's 1970 Essay on Business Responsibility Still Answers Its Critics works through the essay's replies to its critics, and Milton Friedman's 1970 essay against stakeholder capitalism still wins makes the economic case.

The point in this premise is not that a company must be selfish. It is that the executive does not own the shareholder's conscience. If the shareholder wants to give to a cause, she can give to a cause, and she keeps her own judgement about which. A firm that gives on her behalf has substituted its judgement for hers. The principle is as old as agency law: a person entrusted with another's property must use it for the purpose the owner intended.

Premise two: the customer did not sign up for a vote

The second premise is about the customer. When you buy a product, the transaction is a trade of money for goods. Nobody has asked you to endorse a view. That is the great virtue of the market: it lets people with radically different politics cooperate in making and buying things, because they do not have to agree about anything except the price. A baker serves the congregation and the atheist. A hardware store sells the same hammer to a man who voted one way and a man who voted the other.

Corporate activism changes that deal. It adds a clause: we will serve you, and we also want you to know what we think. For customers who agree, nothing is lost. For customers who disagree, the company has made the purchase into a statement, and they must either accept the sermon or take their business elsewhere. As What the 2023 Beer Boycott Taught Corporate America About Its Customers shows, the second option is not hypothetical, and it can be expensive.

There is also a quieter cost. A society in which every brand has a politics is a society in which every purchase is a political act. The shopping aisle becomes a front line. Free societies benefit from having arenas that are not politicised, places where neighbours deal with each other as neighbours. The more commerce is sorted by faction, the thinner those places become.

Premise three: executives are not elected, and are not experts in the question

The third premise is about competence and authority. A chief executive is selected for skill in running a company. That skill does not make him wise about the moral questions of the age, and it gives him no mandate to speak for his employees or his customers. When he takes a public position on a contested question, he speaks with the borrowed authority of an institution that he does not own.

Compare this with the ordinary way a free people settles disputes. Citizens argue, vote, elect representatives and live with the outcome, while keeping the right to argue again. The process has legitimacy because it is public, accountable and reversible. A corporate statement has none of those features. It was written by a communications department, approved by a few executives, and issued under the name of tens of thousands of employees who were not asked. The Virginia Statute for Religious Freedom, drafted by Jefferson in 1777 and enacted in 1786, called it "sinful and tyrannical" to compel a man to furnish contributions of money for the propagation of opinions he does not hold. That was written about the church, but the principle behind it is the one at issue here: a person should not be made to pay for someone else's creed. The Supreme Court applied a version of that thought to government employees and union fees in Janus v. AFSCME in 2018.

The strongest case for the other side

The stakeholder argument deserves its best form, and in 2019 it received a famous endorsement. On August 19, 2019, the Business Roundtable, an association of chief executives of large American companies, issued a statement on the purpose of a corporation, signed by 181 of them. It replaced an earlier statement, from 1997, that had said corporations exist principally to serve shareholders. The new statement committed its signers to deliver value to customers, to invest in employees, to deal fairly with suppliers, to support communities, and to generate long-term value for shareholders.

The reasoning behind that statement, put at its strongest, runs as follows. First, a company depends on the society around it: its workers are educated there, its roads are paved there, its contracts are enforced there. A company that ignores the health of that society is sawing off the branch on which it sits. Second, long-term value often requires attention to employees and communities, and a firm that squeezes them for quarterly gains destroys what makes it valuable. Third, employees and customers increasingly care about a company's stance, and a firm that ignores them loses talent and sales. Fourth, the pretence of neutrality is itself a choice: a company that says nothing about a practice it could change is not neutral, it is complicit.

Some of this is true, and conservatives should say so. A firm should care about its workers, its neighbours and its reputation, and the best firms do. The question is not whether to care. The question is how the caring is organised and who decides. On that question, the stakeholder case has four problems.

The answer, point by point

One: the long-term-value argument proves the opposite. If attention to employees and communities pays off in the long run, then profit-seeking already requires it, and Friedman's rule covers it. His own essay allows spending on things that really serve the business. The argument for activism has to go beyond what profit already justifies, and when it does, it is asking the firm to spend owners' money on something that does not pay.

Two: "serve all stakeholders" gives managers no yardstick. Shareholders have a measurable aim: the return on their investment. A manager told to balance the interests of customers, workers, suppliers and communities has no common measure, and every choice can be defended as serving some stakeholder. A rule that says "serve everyone" in practice says "do what the manager prefers." That increases his power and weakens the owner's ability to hold him to account.

Three: complicity is the wrong test. If silence about contested questions counts as complicity, then every company is complicit in everything, and the word does no work. A neutral firm has not endorsed the practices of every society it trades in. It has declined to use its resources as a megaphone. The rest of us, the citizens, retain every right to speak, vote and organise. The place for political advocacy is the political arena, where speakers are accountable to their own followers and not to someone else's pension fund.

Four: the employees and customers are not unanimous. A firm that takes a side is not speaking for its people. It is speaking for the people who agree with it and disregarding the rest. A workforce of ten thousand contains the whole range of American opinion. A statement that purports to represent them all has a good chance of misrepresenting a large fraction. Neutrality respects that diversity of conviction; activism overrides it. If the goal is a workplace where people of different views can work together, a company that announces the correct view is making that harder.

What a neutral company still does

None of this makes the neutral company a cold one. It pays fair wages, keeps its promises, treats people with dignity, gives employees the freedom to volunteer and give as they choose, and may encourage them to do so. It obeys the law, including the anti-discrimination laws. It can speak on questions that bear directly on its own business, like the rules governing its industry. And it can decline to carry a product or sponsor an event that it finds objectionable, as a private business may do, so long as it applies its own stated standards consistently.

The distinction is between conduct and campaigning. A company can behave well without lecturing. The best brands in American history, the ones that earned people's trust for a century, mostly did exactly that. They sold a good product honestly and left the country's arguments to the country.

One related practice deserves a mention because it shows the principle in a different setting. Pension funds and asset managers who vote or invest according to a cause, instead of to the beneficiaries' returns, are spending other people's retirement money on their own convictions. ESG investing with your pension money bends the fiduciary duty owed you looks at that question under the law of fiduciary duty. And when an activist campaign touches on compelled speech inside the firm, Speech, Pronouns and Compelled Words, Where the First Amendment Draws the Line sets out where the First Amendment draws its lines.

The Founding test

The Founders feared concentrated power in any hands, and the same instinct applies to private institutions that command resources and audiences on a scale no one in 1787 imagined. We do not need to treat companies as enemies. We need to hold them to the bargain they offered: we will make something good and sell it to you at a fair price. A company that keeps that bargain does more for liberty than one that uses its platform to push the nation's politics in one direction, because it leaves the arguing where the Founders left it, in the hands of citizens.

The case in brief

1. A company belongs to its owners, and an executive who spends corporate money on causes unrelated to the business spends their money on his opinions, as Friedman argued in 1970.
2. Customers trade for goods, not for creeds. Activism turns a purchase into a statement and pushes people to pick sides they never asked to pick.
3. The Business Roundtable's 2019 stakeholder statement is the strongest case for the other side, but it fails on the yardstick, the complicity test and the claim to speak for a divided workforce.
4. A neutral company can still be honest, fair and generous. The difference is between good conduct and political campaigning.
5. The place for political argument is the political arena, where speakers answer to their own supporters, not to someone else's pension fund.

What you can do: if you own shares, directly or through a fund, read the proxy statement's shareholder proposals and vote them according to your own judgement, or ask your fund how it votes.