Shareholder Theory By Milton Friedman

Decent Essays

Shareholder theory
Milton Friedman in his 1970 article titled” The social responsibility of business is to increase its profits”, argues that the main purpose of the corporation is to maximize profit for shareholders (or stockholders) as long as it is in the confines of the law. He is of the view that a business is not an individual and has no moral responsibility, therefore only the employees have a moral responsibility for the actions of the firm. The managers are viewed as agents of stockholders and have a moral obligation to manage the firm in the interest of the stockholders. It is seen as illegitimate if the shareholder money is used to contribute to charity, however if public financing is needed it is the government’s responsibly to raise such through taxation He further stated that shareholders are owners and corporate profits belong to them. Freidman posits that shareholders are entitled to their profit as a result of the contract among the corporate stakeholders. Each stakeholder group (customers, employees, suppliers, managers) has a contract relationship with the firm. In …show more content…

Freeman is of the view that stockholders are the most important stakeholders and are essential to the profitability and sustainability of the organization. Thus, in order to maximize profits, then the best interests of all stakeholders ought to be recognized. According to Freeman’s stakeholder theory, managers have an ethical duty to manage the organization for all stakeholders. Their ethical duties are governed by the principle of corporate rights, in which the organization has an obligation not to violate the rights of others; and the principle of corporate effect, which outlines that the organization is responsible for the effects of its actions on

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