[pjmorris]

The butcher and baker a) have to understand what it takes to produce quality meats and breads and b) stand face to face with the customer, so they have both professional and reputational stakes in the game. Their stakeholder brothers and sisters may or may not have the same knowledge or reputational risk, and so their self-interested measures may correlate more with what puts money in their pockets in the short term than what makes the business viable over the long term.

[simonh]

Shareholders don’t care about the reputation or quality of service of the company? That seems a stretch.

As I’ve commented elsewhere I don’t entirely agree with Friedman because I think some social spending can make commercial sense for a company, but I think what he’s saying is just a pretty direct refinement of the exact same points Smith made.

[nowherebeen]

> Shareholders don’t care about the reputation or quality of service of the company? That seems a stretch.

Not a stretch at all. Proven time and time again that shareholders focus on short term gains over long term.

When hired CEOs pay is tied to equity (i.e. shareholder) they make decisions based on how it affects the share price during their tenure, not after. GM after Jack Welch left is a good example.

Shareholders can sell their shares anytime. They care about the horse winning current race more than the next because they can bet on another horse next time. So they only care about the horse as long as they are betting for it.

[simonh]

Given the hundreds of thousands of listed companies you can find examples of anything, but there's nothing inevitable about companies being run purely for short term concerns. Not every company is run that way, shareholder theory or no. Plenty of listed companies are capable of extremely long term investments.

The drive for the short term is one possible strategy and outcome, that's all. In a competitive environment sometimes it even makes sense. Even when it doesn't the existence of failure modes in a system doesn't invalidate the entire system. All systems have failure modes, they need to be evaluated as a whole.

[pjmorris]

> Shareholders don’t care about the reputation or quality of service of the company? That seems a stretch.

It is a stretch beyond what I am arguing. On the other hand, I don't think it is a stretch to say that you are arguing that every shareholder has quality and reputation concerns indistinguishable from that of the direct proprietor. I claim that that is what would be necessary for Friedman and Smith to be saying the same thing.