The Principles Of Primacy Theory In Corporate Law

Another challenge for companies when considering social responsibility is the possible negative perception of shareholders. Historically, publicly-owned companies had a primary focus of maximizing shareholder value. Now, they must balance the financial expectations of company owners with the social and environmental

Profit maximisation is when firms maximise their profits through sales and increasing the price of products. Profit maximisation occurs when total sale revenue is furthest above total cost which is when MR= MC. Firms are usually controlled by the managers, in order for managers to keep its position its must gain enough or maximise the firms’ profits, so it can satisfy the shareholders. However managers may want to take a different approach rather than maximising the firms’ profits. Managers may want to maximise managerial objectives such as maximising its sales rather than profits. However although they are taking a different approach, they still must gain enough profits to satisfy the firms’ shareholders in order to avoid losing their

Milton Friedman’s shareholder theory of management says that the purpose of a business is to make money for the owner or the stockholders of the business. Friedman says that there is only one social responsibility for the business: to use its resources in order to increase

In the article, “The Social Responsibility of Business Is to Increase Profits,” Friedman states that “businessmen believe that they are defending free enterprise when they proclaim that business is not concerned merely with profit but also with promoting desirable social ends.” This social responsibility is defined as Corporate Social Responsibility (CSR), which is the belief that “corporations owe a greater duty to their communities and stakeholders” by having a “social conscience.” This, among other things, includes being environmentally responsible, contributing to non-profit organizations, and eliminating discrimination.

Over the years, firms have increasingly been maximising shareholder value. However, Steve Denning, a former director of the World Bank, author of six leadership and management books and columnist for Forbes, disagrees. His article “The Origin of the ‘World’s Dumbest Idea’: Milton Friedman”, was published on June 26, 2013 on Forbes, debates against Friedman’s argument that the social responsibility of corporations is to make money for its shareholders. The main issue here is whether the maximisation of shareholder value as the guiding principle of executives is detrimental to the corporation. Although Denning has exhibited valid points in his argument, his lack of citation, biased view on most arguments and his tone has dampened the credibility

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.

The appointment of independent directors became very necessary, as shareholders looked for a way by which management became more responsible and accountable, and as such; the need for independent directors, who would not only checkmate the excesses of the board of directors, but also have the interest of the company and the shareholders at heart.

The prevalent view of business’ social responsibility is Milton Friedman’s agent-owner theory. His thesis mainly says that“ There is one and only one social responsibility of business – to use its resources and engage

Does the maximaization of shareholder value reward socially destructive actions by corporations?Certainly not.A company is not an instrument of shareholders, but a coalition between various resource suppliers, with the intention of increasing their common wealth and hence is contradictory to Mr Al Dunlaps view of share holder primancy.

Nevertheless, Friedman pointed out that the profits has taken the firms in to the hand of business intellectuals by which Friedman recommend that the financial system by which the organisation run its business is in the restricted responsibility protection which makes the organisations to privatise their profits (Friedman 1970 pp. 177-184). Friedman also suggested that according to him the shareholder theory in terms of socially responsible can only increase the profit. But on the other hand shareholder theory of Edward Freeman completely support the theory of shareholder towards its role to be socially responsible in the society and maximising the profits for the benefits of shareholders within the firms and society as well (Freeman 2008 pp. 162-165).

Milton Friedman wrote in his famous 1970’s article in The New York Times Magazine, that “the one and only social responsibility of business, is to increase profits for shareholders.” Milton Friedman's view on business responsibility accentuates the importance of maximizing firm's value. He pointed that the “there is one and only one social responsibility of business –to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engaged in open and free completion without deception or fraud’’ and by taking on the burden of social cost, the business becomes less efficient (Milton Friedman, 1962).

Some business leaders are taking good moral decisions and the reason behind that idea is that the core part of their business strategy is to create mutual benefit for both wider society and business as well. The growing desire of top management is to find out ways to create mutual benefit for both the organizations and the stake holders but the public still believes that companies are greedy entities which make decisions only in their self-interest, even at the cost of greater public welfare. It is the utmost obligation of the companies to discern the social issues while making the decisions (Yashiro, Yoshida and Suzuki, no date; Godwin, 2006; Schwab, 1996; Godwin, 2008; Werhane, 1998; Werhane, 2002; Heath, 2008; Mehalik and Gorman, 2006).

The principals (the shareholders) have to find ways of ensuring that their agents (the managers) act in their interests.

“Corporate finance theory, teaching and the typically recommended practice at least in the US are all built on the premise that the primary goal of a corporation should be the maximization of shareholder value.”

Companies with extensive responsibilities even argue about the system in pursuing social responsibility of business. According to Ulrich Steger, the company should prioritize the shareholders’ incessant interest but they should also be concerned of their social responsibilities, morals and environmental goals that the public expects them to be. Without a doubt, companies’ primary goal is to earn a profit. Emphasizing on profitability affects the fundamental values in the company, its morality. Companies ignore the ethics just to earn a mountainous income. This often causes extensive repercussions in the companies.