June 27, 2022

Was Accepting Elon Musk’s Offer the Only Moral Choice for Twitter’s Board?

There’s a reason Milton Friedman said the desire of corporate owners is “generally” to make as much money as possible. So what if Twitter’ executive board had cared about more than making money for shareholders?

After a week of drama between Elon Musk and the Twitter board of executives, Twitter has been sold to Elon Musk for a cool $43 billion dollars.

This purchase price is higher than the market valuation of Twitter. The value of Twitter’s shares hovered around the mid $40 range before Elon’s offer, which comes to approximately $54 dollars per share.

Despite this above-market-price deal, Twitter’s board initially elected to take a “poison pill” strategy, which would make a purchase of the company without the board’s direct approval (commonly known as a hostile takeover) much more difficult.

However, after a week of Musk hinting at making a “tender offer” to shareholders, threatening to cut board pay to $0, and announcing that funding had been secured, the executive board of Twitter reconsidered.

Many proponents of social media censorship have decried the purchase, worrying that Musk will allow people to spread “disinformation” on Twitter.

This controversy highlights an interesting question. Given the clear financial benefit of Musk’s purchase, how should the executive board have handled the dissent concentrated among the “verified” Twitter crowd?

To answer this, we need to go back about 50 years ago, to a famous article in the history of business ethics.

Make as Much Money as Possible (Usually)

Over 50 years ago, economist Milton Friedman wrote an extremely influential article on the responsibility of corporate executives. The message, though somewhat controversial, was clear:

[the] responsibility [of corporate executives] is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society.

While many bristled at Friedman’s argument, his claim was simple. Owners of corporations are the bosses of executives, and it is the obligation of executives to fulfill their contracts.

If the executive board decided that, instead of making more profit, the money should be donated to charity, they would be using resources that aren’t their own to further their own desires.

Often, those who argue against Friedman claim to be supporters of stakeholder theory, which argues that everyone influenced by company decisions should be considered in the decision-making process.

Economists call the possibility that executives will use owner resources in a way other than they intend a principal-agent problem. Ironically, one explanation for why corporate managers exist is to ameliorate the principal-agent problem that exists between laborers and owners.

There are several downsides to corporate executives taking advantage of their principals (the owners). The first issue is that executives can use stockholder resources in a way that’s self-serving. For example, a famous CEO will likely get the invite to a luxurious charity dinner, while company owners get little recognition.

CEOs could also pursue causes that are particularly interesting to them. This could result in millionaire CEOs having a large influence on what causes society’s resources are used to support—an outcome progressives would seemingly dislike.

Finally, the use of company resources to do something other than maximizing profit can provide “cover” to incompetent managerial decision-making.

Stakeholder theorists sometimes claim that considering groups like workers, for example, would help the profitability of the business. But insofar as this is true, it renders stakeholder theory unnecessary. Decisions which support profitability collapse into Friedman’s view.

If we take Friedman’s view seriously, the reasonable conclusion is the board likely did the right thing in accepting Elon’s offer. Why? Elon provided the shareholders more money than Twitter was worth to anyone else.

Consider if the board claimed Elon’s bid was too low. If, for example, they claimed Twitter was actually worth $50 billion.

If this were true, the board would be able to improve Twitter’s value on the market. Any greedy capitalists who believed Twitter was actually worth $50 billion would make a killing by outbidding Musk and selling the shares to reflect that value of $50 billion.

But no one really believes Twitter is worth that much, because no one is willing to buy shares at a value that reflects that belief. In short, talk is cheap.

What if Owners Don’t Want to Make Money?

So we’ve established that an executive board wanting to fulfill their obligation to make more money for their employers would be right to take Musk’s offer. But this brings up another interesting question.

What if Twitter owners care about more than money?

There’s a reason Friedman says the desire of corporate owners is “generally” to make as much money as possible. It’s imaginable that owners of a corporation could transcend the desire to make money. Maybe owners would be willing to sacrifice profits for the good of workers, or to prevent disinformation from destroying democracy (to use the language of the current fear).

Admittedly, it seems unlikely that a company owned by thousands of people could reasonably agree to some other end, and it’s unclear why the owners would choose to use the company as a vehicle rather than their own wealth, but it’s certainly possible.

And, in the abstract, this might not be such a bad thing. I tend to think the world would be a better place if the mainstream media would peddle fewer falsehoods for clicks or views, even if deception generates more profit.

But, while this may sound nice, it’s important to note that this sort of thinking isn’t without trade-offs.

When companies make an economic profit, what they are doing is transforming inputs (land, labor, and capital) into an output which consumers value more than all the inputs put together. Profit is based on the total revenue (simply people’s willingness to pay for some quantity of a good) minus the cost of all the resources used in production.

In other words, profitable companies are creating value for society. The more successful they are, the more material well-being they create.

If the attitudes of society change, such that owners are willing to use less profitable business strategies, this implies they will be able to create less value for consumers.

For example, if well-meaning company owners want to offer some employees more money in wages than they bring in in revenue, this may make the workers better off, but it means the company will be able to produce fewer goods and services for customers.

Furthermore, the more society abandons profit as a goal and substitutes other goals, the more we lose the ability to use the knowledge generated by profit and loss. Profit acts as a signal to entrepreneurs. An entrepreneur who generates something valuable for society can learn of that success by making a profit.

Losses send an alternative signal. A company making a loss is receiving knowledge that its products are less valuable than the resources used to create the products.

As businesses move away from consideration of profit and loss signals, capitalism’s institutional benefit of enabling economic calculation fades away.

Like Friedman, I have no problem with company owners pursuing ends other than profit. Likely, if I owned a business, I would pursue other ends as well. However, we should be acutely aware of what we give up as a society when we do so.

The more we inject our personal politics into our business, the more capitalism’s tendency to improve material well-being is sacrificed. This doesn’t mean it should never happen—but we should be honest about the costs. As Ludwig von Mises explains,

The fact that men have developed a method of ascertaining as far as possible the expediency of their actions and of removing uneasiness in the most practical and economic way does not prevent anybody from arranging his conduct according to the principle he considers to be right. The “materialism” of the stock exchange and of business accountancy does not hinder anybody from living up to the standards of Thomas à Kempis or from dying for a noble cause.

And, at least in this case, I’m personally happy that the board considered the cost and decided the monetary interests of owners were the most pressing concern.

This article, Was Accepting Elon Musk's Offer the Only Moral Choice for Twitter's Board?, was originally published by the Foundation for Economic Education and appears here with permission.  Please support their mission.