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Milton Friedman, winner of the Nobel Prize in Economic Sciences in 1976, claimed that “the business of business is business”. But is this the case? Oliver Hart seems not to think so and explained why to university students at the Warwick Economics Summit 2021.

The principle on which Hart and his colleague, Luigi Zingales, base their theory on is quite straightforward: in our daily life, do we just care about money? Although some might do, the majority of people would answer no to that question.

Picture this scene: Sara goes to grocery shopping. She has recently bought an electric car as to reduce her carbon footprint, and once she reaches the super market, she decides to spend a bit more of money for fair trade coffee because she wants to support workers’ welfare. As an individual floating in the sea of everyday choices, Sara is willing to “waste” money to safeguard the wellbeing of society. Professor Hart suggests that these ethical concerns could and should lead shareholders that, owning shares in a company, gets the right to vote on how it is controlled, to act as to promote cleaner companies rather than just profit maximization. In Companies Should Maximize Shareholder Welfare Not Market Value, Zingales and Hart write: “if consumers and owners of private companies take social factors into account and internalize externalities in their own behavior, why would they not want the public companies they invest in to do the same?”.

What Hart told the students is that shareholders have the power to influence boards’ choices, producing a bottom-up change towards a more socially responsible economy. This idea seems to go along well with the tendency in Europe to give great importance to ESG ratings, which measure the environmental, social and governance sustainability.

Hart and Zingales’ latest work identifies two ways to lead companies to more prosocial choices: one is “exit”, which requires shareholder to issue an ultimatum to the company and eventually stop investing in it, and which might lead to consumers’ boycotting of the product. The other, the “voice” option, would mean that prosocial shareholders act through voting or engaging with the management, persuading other investors that the possible social gain is way bigger that the negligible capital loss that is likely to follow a cleaner turn.

A voting system through which shareholders can put forward proposals on how to improve the social impact of the company and express their agreement or disagreement is what the authors suggest to implement the “voice” alternative. In the essay mentioned above, they explain how giving a vote opportunity to shareholders could make them feel more engaged in the decision-making process of the company they are investing in and, thus, make them feel that their voice is pivotal in shaping a cleaner economy. Then, if they are socially responsible people, they will be socially responsible investors too.

During the seminar he added that, although political restrictions are necessary in order to obtain “cleaner” companies or guarantee workers’ rights, those are not always implemented and they are difficult to achieve. For instance, the Carbon Tax, which by several economists is considered to be the best solution to cut off on CO₂ emissions, has met the resistance of many governments. Therefore, according to Hart, it is high time for shareholders to take individual responsibility and lead change in their companies.

The 1976 Nobel Prize award to Milton Friedman marked the beginning of almost three decades of neoliberalism. Whether 2016 award to Oliver Hart marked the beginning of a period of prosocial voices, it will be seen soon.

by Gaia Tilotta