Milton Friedman is well known for his opinion that in business, the only aim is making a profit for shareholders. This shareholder primacy view has been the focus of many discussions. Others claim that this has resulted in significant businesses pursuing greed over and above ethics, thereby harming society. However, another group contends that shareholder capitalism as a whole is still a viable economic model if practiced responsibly. This article will discuss Friedman’s argument, the challenges it faces, and social entrepreneurship as a reorientation of business goals. I support a two-pronged strategy.
The top economist of the time, Milton Friedman, emphatically said that companies are supposed to maximize profits for the owners only. The corporate executive, according to his standpoint, should administer the business in a manner that entails no deceptions nor fraud intended toward making as much profit as possible for shareholders. Friedman refuted the proposition that companies should have social responsibilities or take into account the interests of the stakeholders above their shareholders’ interests (Friedman, 1970). He regarded corporate social responsibility as absolutely and unquestionably socialism. Shareholders are the bosses of executives, in Friedman’s view, and executives must serve the shareholders. The company’s fundamental fiduciary responsibility is to increase shareholder wealth. Friedman regarded the idea that a business should engage in sharing profit with social issues as essentially erroneous.
The pro-Friedman article holds its stand by Milton Friedman’s opinion of the matter. Businesses are supposed to obtain profits only in terms of shareholders, subject to ethical and legal limits. First, it offers corporate executives the right direction and goal in regard to its purpose. Rather than dealing with multiple interests that are hard to reconcile, such as employees, the environment, and the community, they have a single goal that determines their actions: to maximize shareholder value through profits (Friedman, 1970). Moreover, it is better to assume that a firm will thrive in a specific economic task than try to resolve complicated social problems. The core competencies for businesses lie in the delivery of products and services, not environmental protection or income inequality, which are issues no businesses can handle; thus, focusing on an economic bottom line suits them well. Next, the fiduciary duty is a legal obligation that the executives of a company and the members of its board have to act in the owners’ instead of their interests. As the shareholders provide the firm’s capital and bear its financial risk in the end, according to it, these profits should benefit them primarily. Corporate assets diverted from their economic purpose to achieve other social objectives lead to the erosion of the property rights of the owners. The following are the main arguments that present Milton Friedman’s doctrine of shareholder capitalism as its defense.
The article against Friedman’s dogma fights his theories by using various critical arguments against Milton Friedman’s doctrine of shareholder capitalism. It can also lead to short-termism as executives decide to focus on the next quarter, prompting them to concentrate on boosting profits rather than investing in long-term projects. The latter is detrimental to the creation of long-term value. Second, there is the shareholder primacy principle that does not take into account other stakeholders whose considerable risk from the company’s actions is present, specifically employees and the communities hosting the plants. It makes the environment where they are subject to the externalities and disproportionate costs of their impacts.
Additionally, extreme shareholder value maximization results in poor practices such as predatory pricing, labor injustices, leaving production to offshore countries for lower wages, and overly generous executive compensation tied to the share prices (Zwillinger, 2020). Thus, the destructive behaviors lead to such issues as inequality, mistrust in corporations, as well as to the instability of global scales. Last of all, companies depend on such public services as infrastructure, an educated workforce, surrounding communities, and a sound environment – a reasonable return for these assets is expected. As these responsibilities are ignored, not to mention the erosion of public goods businesses need to operate, are inevitable. The prescriptions of Friedman faced outright criticisms.
Milton Friedman believed that a company’s responsibility is to maximize profits for shareholders.” He rejects extended social roles for business, regarding them as a form of unfair taxation and unnecessary regulation. Critics respond that people, in turn, do have an effect on companies and, therefore have moral duties which go beyond the profits. This discussion still needs more consensus as to whether business entities should strive for social progress or concentrate solely on profits. The incorporation of views on both sides exists on the issue of the proper role that business plays in society.
Nevertheless, after weighing the pros and the cons, I agree with the idea that companies should pursue responsible profits rather than maximize shareholders’ value above ethical standards. In the end, profit focus is advisable, but there should be no sacrifice of ethics or society. Businesses depend very much on public infrastructure, education, communities around them, the goodwill of employees, customer loyalty, and the natural environment (Friedman, 1970). Developing well these core inputs in the long term can permit companies to achieve levels of profits that are acceptable. Because excessive short-termism, financial engineering, being unfair to labor and customers and imposing the costs of pollution on others threaten these resources and lead to resistance (Friedman, 1970). I favor an approach that relies on stakeholder analysis where the managers will have to take into account employee welfare, the impact of the company on the community, environmental considerations, customer needs, and the returns to shareholders when making decisions.
Nevertheless, it is still necessary to constrain the excesses via external regulation. If shareholders do not uniform in calling for accountability, executives always have the pressure to deliver above constantly- expectations of short-term gains (Friedman, 1970). Defining the purpose of companies as trustees of the social good, the right government policy can keep markets balanced by keeping businesses on a fair and level playing field while still enabling them to make profits.
In conclusion, Milton Friedman’s fundamental idea was that businesses should produce profits for the shareholders. Nevertheless, the excessive pursuit of shareholder primacy has given rise to harmful excesses. Businesses likewise, like other societal organizations, also utilize societal resources in need of stewardship. A stakeholder model where stakeholders’ interests are balanced can best meet the interests of the company and society by allowing for reasonable profits, ethical conduct, sustainability, and accountability. The issue of the best place of business in society is still contested.
References
Friedman, M. (1970). The Social Responsibility of Business Is to Increase Its Profits. In Corporate Ethics and Corporate Governance (pp. 173–178). The New York Times Magazine. https://doi.org/10.1007/978-3-540-70818-6_14
Jr, L. E. S., & Zwillinger, J. (2020, September 10). What Milton Friedman Missed About Social Inequality. The New York Times. https://www.nytimes.com/2020/09/10/business/dealbook/milton-friedman-inequality.html
Strain, M. (2020). Milton Friedman was right about shareholder capitalism. American Enterprise Institute – AEI. https://www.aei.org/op-eds/milton-friedman-was-right-about-shareholder-capitalism/
write