The Milton Friedman Constraint: A Proposal for Improving Corporate Governance

This paper presents a proposal for improving corporate governance. It is designed to increase incentives for corporations and their leaders to adhere to the constraint that Milton Friedman laid out in his 1970 New York Times article, “The Social Responsibility of Business Is to Increase Its Profits.” The constraint, which I call the Friedman Constraint, is that in conducting its business the firm should conform to the “basic rules of the society, both those embodied in law and those embodied in ethical custom.” The increased incentives are established by creating an entity that has a board seat and is thus a corporate insider. The entity has significant financial incentives to minimize corporate fines for wrongdoings, but receives none of the potential benefits of any bad conduct.