Philosophy:Friedman doctrine

From HandWiki
Revision as of 20:45, 25 June 2023 by WikiG (talk | contribs) (fixing)
(diff) ← Older revision | Latest revision (diff) | Newer revision → (diff)
Portrait of Milton Friedman

The Friedman Doctrine, or Shareholder Theory, is a normative theory of business ethics advanced by economist Milton Friedman which holds that a firm's main responsibility is to its shareholders.[1] This approach views shareholders as the economic engine of the organization and the only group to which the firm is socially responsible. As such, the goal of the firm is to maximize returns to shareholders.[1] Friedman argues that the shareholders can then decide for themselves what social initiatives to take part in, rather than have an executive the shareholders appointed explicitly for business purposes decide for them.[2]

Overview

Friedman introduced the theory in a 1970 essay for The New York Times .[3] In it, he argues that a company has no "social responsibility" to the public or society; its only responsibility is to its shareholders.[4] He justifies this view by considering who it is a company and its executives are beholden to:

"In a free-enterprise, private-property sys­tem, a corporate executive is an employee of the owners of the business. He has direct re­sponsibility to his employers. That responsi­bility is to conduct the business in accordance with their desires...the key point is that, in his capacity as a corporate executive, the manager is the agent of the individuals who own the corporation...and his primary responsibility is to them."

Friedman argues that an executive spending company money on "social causes" is, in effect, spending somebody else's money for their own purposes: "Insofar as [a business executive's] actions in accord with his 'social responsi­bility' reduce returns to stockholders, he is spending their money. Insofar as his actions raise the price to customers, he is spending the customers' money. Insofar as his actions lower the wages of some employees, he is spending their money." He argues that the appropriate agents of social causes are individuals—"The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so."

Friedman thus concludes that "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, engages in open and free competition without deception or fraud."

In his book Capitalism and Freedom, he further argues that when companies concern themselves with the community rather than profit it leads to totalitarianism.[5][6][7]

The idea was further amplified after the publication of an influential 1976 business paper by finance professors William Meckling and Michael C. Jensen, which provided a quantitative economic rationale for maximizing shareholder value.[8]

Influence

Shareholder theory has had a significant impact in the corporate world.[9] Harvard Business School professors Joseph L. Bower and Lynn S. Paine have stated that maximizing shareholder value “is now pervasive in the financial community and much of the business world. It has led to a set of behaviors by many actors on a wide range of topics, from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility.”[8] In 2016, The Economist called shareholder theory "the biggest idea in business," stating "today shareholder value rules business."[10]

Shareholder theory has led to a marked rise in stock-based compensation, particularly to CEOs, in an attempt to align the financial interests of employees with those of shareholders.[8]

Criticism

The Friedman doctrine is controversial,[1] with critics variously claiming it is financially wrong, economically wrong, legally wrong, socially wrong, or morally wrong.[3]

Left-wing social activist Naomi Klein argues in her book The Shock Doctrine that adherence to the Friedman doctrine impoverishes most citizens while enriching corporate elites.[11]

Other scholars argue that it is unhealthy and counterproductive to the companies that practice it. Harvard Business School professors Joseph L. Bower and Lynn S. Paine have said it is "distracting companies and their leaders from the innovation, strategic renewal, and investment in the future that require their attention", puts companies at risk of "activist shareholder attack", and puts "managers...under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs."[12] The Economist has argued that a focus on short-term shareholder value has become "a license for bad conduct, including skimping on investment, exorbitant pay, high leverage, silly takeovers, accounting shenanigans and a craze for share buy-backs, which are running at $600 billion a year in America."[10]

A number of critics of shareholder theory, including Jerry Useem of The Atlantic[13] and prominent Democratic Senators Chuck Schumer and Bernie Sanders,[14] have argued that shareholder theory, which promoted a rise in stock-based compensation, has lead executives to enrich themselves by implementing stock buybacks—often to the detriment of the companies they work for.[15] Critics argue this diverts company funds away from potentially more profitable or socially valuable avenues, like research and design, reduces productivity, and increases inequality by delivering money to higher-paid employees who receive stock-based compensation and not to lower-paid employees who do not.

Shareholder theory has been criticized by proponents of Stakeholder theory, who believe the Friedman doctrine is inconsistent with the idea of corporate social responsibility to stakeholders.[16] They argue it is morally imperative a business takes into account all of the people who are affected by its decisions.[17] They also argue that taking into account the interests of stakeholders can benefit the company and its shareholders;[18] for example, a company donating services or goods to help those hurt in a natural disaster is not acting in the direct interest of its shareholders, but in doing so builds community allegiance to the company, ultimately benefitting the company and its shareholders.

Friedman's characterization of moral responsibility has been questioned. John Friedman, writing in the Huffington Post, states: "Mr. Friedman argues that a corporation, unlike a person, cannot have responsibility. No one would engage in a business contract with a corporation if they thought for one minute that a corporation was not responsible to pay its bills, for example. So clearly, therefore, a corporation can have legal, but also moral responsibilities."[19]

References

  1. ↑ 1.0 1.1 1.2 Smith, H. Jeff (15 July 2003). "The Shareholders vs. Stakeholders Debate". MIT Sloan Management Review (Summer 2003). https://sloanreview.mit.edu/article/the-shareholders-vs-stakeholders-debate/. 
  2. ↑ "The Social Responsibility of Business is to Increase its Profits, by Milton Friedman". https://web.archive.org/web/20060207060807/https://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html. Retrieved 3 September 2017. "The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so." 
  3. ↑ 3.0 3.1 Denning, Steve (27 April 2017). "The 'Pernicious Nonsense' Of Maximizing Shareholder Value". Forbes. https://www.forbes.com/sites/stevedenning/2017/04/27/harvard-business-review-the-pernicious-nonsense-of-maximizing-shareholder-value/#2d6fd4f071f0. Retrieved 12 July 2019. 
  4. ↑ "The Social Responsibility of Business is to Increase its Profits, by Milton Friedman". https://web.archive.org/web/20060207060807/https://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html. Retrieved 3 September 2017. 
  5. ↑ Friedman, Milton (1962). Capitalism and Freedom. University of Chicago Press. ISBN 0-226-26421-1. 
  6. ↑ "Archived copy". Archived from the original on 2010-12-04. https://web.archive.org/web/20101204093307/http://www.spectrummagazine.org/articles/column/2009/01/23/adam_smith_selfishness_or_selfinterest. Retrieved 2009-02-16. 
  7. ↑ Friedman, Fulton (13 September 1970). "A Friednzan doctrine‐". https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html. Retrieved 3 September 2017. 
  8. ↑ 8.0 8.1 8.2 Denning, Steve (17 July 2017). "Making Sense Of Shareholder Value: 'The World's Dumbest Idea'". Forbes. https://www.forbes.com/sites/stevedenning/2017/07/17/making-sense-of-shareholder-value-the-worlds-dumbest-idea/#479e45682a7e. Retrieved 15 July 2019. 
  9. ↑ Bower, Joseph L.; Paine, Lynn S. (June 2017). "The Error at the Heart of Corporate Leadership". Harvard Business Review. https://hbr.org/2017/05/managing-for-the-long-term#the-error-at-the-heart-of-corporate-leadership. Retrieved 15 July 2019. "These events illustrate a way of thinking about the governance and management of companies that is now pervasive in the financial community and much of the business world." 
  10. ↑ 10.0 10.1 "Analyse this". The Economist. 31 March 2016. https://amp.economist.com/business/2016/03/31/analyse-this. Retrieved 15 July 2019. 
  11. ↑ "Archived copy". Archived from the original on 2012-10-13. https://web.archive.org/web/20121013194030/http://www.thestar.com/printArticle/254550. Retrieved 2017-08-28. 
  12. ↑ Bower, Joseph L. (June 2017). "The Error at the Heart of Corporate Leadership". Harvard Business Review. https://hbr.org/2017/05/managing-for-the-long-term#the-error-at-the-heart-of-corporate-leadership. Retrieved 12 July 2019. 
  13. ↑ Useem, Jerry (August 2019). "The Stock-Buyback Swindle". The Atlantic. https://www.theatlantic.com/magazine/archive/2019/08/the-stock-buyback-swindle/592774/. Retrieved 25 July 2019. 
  14. ↑ Schumer, Chuck; Sanders, Bernie (3 February 2019). "Schumer and Sanders: Limit Corporate Stock Buybacks". The New York Times. https://www.nytimes.com/2019/02/03/opinion/chuck-schumer-bernie-sanders.html. Retrieved 25 July 2019. 
  15. ↑ Teitelbaum, Richard (7 March 2019). "Share Buybacks May Be Bad — Just Not for the Reasons You Think". Institutional Investor. https://www.institutionalinvestor.com/article/b1dfj9g9mfnqxb/Share-Buybacks-May-Be-Bad-Just-Not-for-the-Reasons-You-Think. Retrieved 25 July 2019. 
  16. ↑ Stout, Lynn. "The Shareholder Value Myth". http://scholarship.law.cornell.edu/cgi/viewcontent.cgi?article=2311&context=facpub. 
  17. ↑ Harrison, Jeffrey S.; Freeman, R. Edward; Cavalcanti Sá de Abreu, Mônica (2015). "Stakeholder Theory As an Ethical Approach to Effective Management: applying the theory to multiple contexts". Review of Business Management 17 (55): 858–869. https://www.researchgate.net/publication/283194075_Stakeholder_Theory_As_an_Ethical_Approach_to_Effective_Management_applying_the_theory_to_multiple_contexts. Retrieved 15 July 2019. 
  18. ↑ Dooms, Michaël (2019). Green Ports. pp. 63–84. ISBN 978-0-12-814054-3. 
  19. ↑ Friedman, John (12 May 2013). "Milton Friedman Was Wrong About Corporate Social Responsibility". The Huffington Post. https://www.huffpost.com/entry/milton-friedman-was-wrong_b_3417866. Retrieved 15 July 2019. 

See also




Retrieved from "https://handwiki.org/wiki/index.php?title=Philosophy:Friedman_doctrine&oldid=2940230"