Shareholder Theory By Milton Friedman

What is ethically responsible management? How can a corporation, given its economic mission, be managed with appropriate attention to ethical concerns? These are central questions in the field of business ethics. There are two approaches to answering such questions. The first one is Milton Friedman’s shareholder theory of management and the second one is Edwards Freeman’s “Stakeholder” theory of management, two different views about the purpose and aims of a business.

In this essay we are taking a look at the famous Milton Friedman's essay "The Social Responsibility of Business is to Increase Profit ". The following paper is an attempt to critically evaluate the article in consideration of Freeman Stakeholder Theory.

Because corporations are established to profit and shareholders invest money with expectations of a greater return, managers cannot be given a directive to be “socially responsible” without providing specific criteria of checks and balances to which needs to adhere. Therefore, it is imperative to the success of a corporation for managers to not act solely but rather to act within the policies of the shareholders.

In their theories of how a business should operate, R. Edward Freeman and Milton Friedman hold virtually opposite beliefs as to what businesses’ responsibilities should be. In favor of the Stakeholder theory, Freeman believes that any person or organization that has a “stake” in the business should also play a role of participation in the business’s actions and decisions. In the other corner of the ring stands Milton Friedman, who holds the belief that said business is only responsible for those that actually own stock in the business – the owners, or stockholders.

Prior to this class, I would’ve viewed the purpose of a business to be exactly as Milton Friedman describes in his article “The Social Responsibility of Business is to Increase its Profits.” In this article, he claims that corporate executives have responsibility to their employers, those employers being shareholders whose monetary contribution gives them capital to work with so they can expand the business, and the only way they will fulfill that duty is to make them as much money as possible. Businesses do not have a duty to provide any sort of contribution, monetary or time, to foundations that assist the less fortunate. Either of these contributions effects the profits the company can generate for their shareholders, and since it is not the executives’ money to work with, they should not be using it for things that the shareholders did not intend their money to be used for. As individual businessmen, acting as a sole entity not as an arm of the corporation, it is perfectly fine to engage with the community and make contributions to the betterment of the community because you’re using your own time and money, not the company’s. In certain cases, this argument makes a lot of sense. Businesses are not always the best equipped to make decisions for the improvement of the less fortunate, as seen by the example of Tom’s Shoes. Sure they donate a pair of shoes to communities where people don’t have them, but shoes are not the most necessary item for the citizens in that

In Friedman’s article, The Social Responsibility of Business is to Increase Its Profit, he gives two arguments for what, if any, social responsibilities a business has and why they have it. In his arguments, he presents a businessman in charge of running the business on behalf of the owner. The first point he raises in dictating what responsibilities the businessman should fulfill involves defining the businessman’s purpose. He was hired as an agent of the shareholders, the owners of the business, etc. to make the business profitable. Barring some eleemosynary functions, as Friedman states, such as hospitals and schools, the general purpose of a business is to make money, therefore, the responsibilities of an agent of the business would be to increase said profits. To do otherwise would be to fulfill a purpose other than the one he was hired for and betray the owners.

Economist Milton Friedman was a huge advocate of the stockholder approach. One of the points Friedman made in support of the stockholder theory was that social issues should be left up to the people who are qualified to address social issues, these people are civil servants and it is their job to regulate markets like these. Trying to act on social issues as a CEO would result in a tax being imposed on either the consumer or the stakeholders, which should not be the responsibility of a CEO. This theory goes against Freeman’s beliefs that business and ethics should be integrated. Freeman’s idea stated that businesses not only have an obligation to their stakeholders but also to their shareholders- e.g. consumers and employees. This idea replaces profit with value which is measured in more ways than one, unlike profit which is purely measured by financial gains. Supporters of Freeman’s views would find it very cynical to view peoples lives as figures in the Pinto case and find it wrong to put a car on the market that has imperfections. I can see why some people would be angered by Ford’s decision in the 1970’s, however, it is common practice in business because it is how markets function. In order to have a

In general ,the stakeholder approach may be more conducive to balancing a wide variety of corporate interests and thereby discouraging impropriety.Executives and boards should take the perceptions of both shareholders and stakeholders into account when formulating strategy and enunciate their stance in all organizational communications. Only within that kind of clearly delineated context, can managers be expected to make appropriate decisions. Indeed, some of the most successful businesses are those which have embraced stakeholder values for example Bodyshop. However, we see that generally, shareholder value

In this paper, I show that Friedman’s argument that it is immoral for managers to act on social responsibilities, fails. He relies on that assertion that shareholders expect a maximal return on their investment and if managers spend corporate funds on “social responsibilities,” they are in turn taking profits away from shareholders and using their money for an unintended purpose. However, this claim is false, as shareholders cannot expect maximal profits and cannot dictate exactly what company funds are spent on.

Milton Friedman was a respected economist that posited numerous new ideologies within the economic realm during the 20th century. In 1976, Friedman was awarded the Nobel Memorial Prize in Economic Sciences for his examination of monetary history and philosophy, consumption analysis, and the theory of stabilization policy. Another theme Friedman is generally known for is his position with respect to the responsibilities of corporations. He had expressed that "few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible" (Chandler and Werther Jr., 2014, p. xxxii). By this, Friedman is saying that maximization of property for the sake of shareholder return jeopardizes and subverts the possibility of corporations acting ethically and socially responsibly. He does not trust that their fundamental center inside their operations ought to be focused on the part of corporate social obligation. Not at all like individuals, Friedman trusts that an organization cannot have an obligation. They have one obligation and that is to make a profit (Friedman, 2013).

That there are compatible aspects even to Friedman’s perspectives on corporate social responsibility and more liberal views not only highlights how the role of social responsibility falls upon various players who cannot shirk their duty, but also illuminates a certain shallowness for the conclusions drawn upon Friedman’s arguments. One may extract from Friedman’s arguments that the value of a firm is limited only to the profits and financial health of the firm, when upon closer inspection there are more complex social functions which the business is involved in that need to be considered.

This paper will have a detailed discussion on the shareholder theory of Milton Friedman and the stakeholder theory of Edward Freeman. Friedman argued that “neo-classical economic theory suggests that the purpose of the organisations is to make profits in their accountability to themselves and their shareholders and that only by doing so can business contribute to wealth for itself and society at large”. On the other hand, the theory of stakeholder suggests that the managers of an organisation do not only have the duty towards the firm’s shareholders; rather towards the individuals and constituencies who contribute to the company’s wealth, capacity and activities. These individuals or constituencies can be the shareholders, employees,

Friedman and the supporter of his views argue that for all publically traded firms, CEOs are agents of the shareholder, and by virtue of them being in that role, their primary fiduciary responsibility is to watch the interest of the shareholders and maximize the returns to the shareholders. Inasmuch as that, all decisions from the managers of these firms have to be for one and only one purpose – maximizing the shareholder’s profit. These include decisions that authorize spending of the firm’s money on activities of Corporate Social Responsibilities (CSR). Any act performed by the managers that violates their primary fiduciary responsibility and reduces the returns to the shareholders can be compared to the act of stealing, thereby making that act illegal and unethical.

In his paper titled The Social Responsibility of Business is to Increase Its Profits”, Milton Friedman addresses the key issue of weighing social responsibility against profit maximization for shareholders. This conflict is the basis for Friedman’s whole paper, as he explores the two sides of the situation. In order to set up his argument, Friedman lays down a framework by explicitly stating a certain premise. This is that businessman view “social responsibility” and profit as not being mutually exclusive. In other words, the majority of businessman believe that they can operate a socially responsible operation, while still optimizing profits in the long run. Friedman argues in favor of this viewpoint by making a claim and providing a solid line of reasoning to support his claim. Friedman’s main claim in this paper is that corporate executives must conduct business with the aim to satisfy the desires and wishes of shareholders. He says that often the principal desire of shareholders is to maximize profits for the company, while still conforming to the rules of society. These rules can be purely legal, but can also be ethical and moral rules that are imposed by society. Friedman argues that any social responsibilities that go beyond the scope of maximizing profits is “pure and unadulterated socialism” (239). To reinforce his main claim, Friedman uses a logical flow of reasons that is predicated upon the role of executives and shareholders.

The firm through focusing on stakeholder consider moral since it deals with all ingredients in a similar way, giving a decent amount of benefits and weights, privileges and obligations to all stakeholders (Alkhafaji, 1989). The stakeholder approach to deal with corporate governance is likewise financially productive while firms consider the attentions of and create trust associations with providers, customers, representatives, and groups can develop upper hands, which, thus, prompt to unrivaled corporate performance (Svendsen, 1998).