What is Friedmans view on the social responsibility of business in the narrow sense?
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Journal of Business Ethics Vol. 5, No. 4 (Aug., 1986) , pp. 265-269 (5 pages) Published By: Springer https://www.jstor.org/stable/25071587 Abstract The main arguments of Milton Friedman's famous and influential essay are unsuccessful: He fails to prove that the exercise of social responsibility in business is by nature an unfair and socialist practice. Much of Friedman's case is based on a questionable paradigm; a key premise is false; and logical cogency is sometimes missing. The author proposes a different paradigm for socially responsible action in business and argues that a commitment to social responsibility can be an integral element in strategic and operational business management without producing any of the objectionable results claimed by Friedman. Journal Information The Journal of Business Ethics publishes original articles from a wide variety of methodological and disciplinary perspectives concerning ethical issues related to business. Since its initiation in 1980, the editors have encouraged the broadest possible scope. The term 'business' is understood in a wide sense to include all systems involved in the exchange of goods and services, while 'ethics' is circumscribed as all human action aimed at securing a good life. Systems of production, consumption, marketing, advertising, social and economic accounting, labour relations, public relations and organisational behaviour are analysed from a moral viewpoint. The style and level of dialogue involve all who are interested in business ethics – the business community, universities, government agencies and consumer groups. Speculative philosophy as well as reports of empirical research are welcomed. In order to promote a dialogue between the various interested groups as much as possible, papers are presented in a style relatively free of specialist jargon. Publisher Information Springer is one of the leading international scientific publishing companies, publishing over 1,200 journals and more than 3,000 new books annually, covering a wide range of subjects including biomedicine and the life sciences, clinical medicine, physics, engineering, mathematics, computer sciences, and economics. Rights & Usage This item is part of a JSTOR Collection. On September 11, 1970, Milton Friedman, a popular economist from Chicago, wrote an article that "The Social Responsibility of Business Is To Increase Its Profits" in the New York Times. It is called the Friedman Doctrine it has had a lasting impact on a generation of businesses, business leaders, government, and academics. The 1970 article and conversation around it is worthwhile and relevant as we continue to ponder the purpose of a business and the kind of capitalism we want to pursue (add the current pandemic to the mix). I first read Friedman's article as a business student, some 20 months ago. It was a mandated reading for a class on Corporate Governance. It was one of those very memorable classes. Back then, without a doubt, I was on the anti-Friedman team. I was all out for stakeholder capitalism. It has been 50 years since the article was first published, and to mark the occasion this month, several experts, editors, CEOs have put out their views on Friedman's idea and its impact or relevance for businesses today. Quite by chance, I also watched a well-crafted movie that enabled me to understand shareholder/stakeholder dilemma like never before. I realized that my own view has become less rigid than earlier. All these made me want to revisit the idea. I have structured it as a 3 part series (the other two installments will come out tomorrow and the day after) with the following parts:
What did Friedman Say? - The Friedman Doctrine in ShortFriedman's ultimate thesis was this: "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." He expands that it should not be the responsibility of business to look out for the interests of other stakeholders (employees, local communities, environment, etc.,), over and above what is called for by law, which might not be in the best interest of the business, can affect its profits, and can negatively impact shareholder value. Why does he say so?Among the arguments he put forth in favor of this thesis, the most potent one is the principal-agent argument. The corporate executive (agent) is an employee of the shareholder (principal) who has put money into the business and so it is the executive's responsibility to act in accordance with the shareholder's desires which in most cases is to make as much money as possible. If the executive makes decisions considering the impact on other stakeholders, in so far as it affects the profits of the firm or inhibits shareholder value maximization, will be going against the fiduciary obligation to the shareholders. Friedman also draws other corollaries:
The Impact of the Friedman DoctrineThe above is what has come to be referred to as the shareholder theory or shareholder capitalism, wherein the interests of the shareholder (value maximization) trumps any other objective in business. I will refrain from identifying the flaws or rebutting Friedman's arguments in this article. Half a century later, the opposing arguments are so commonplace and intuitive to most of us, in addition to established views by experts (links in further reading). But even while there were views about why Friedman's argument was flawed, the shareholder primacy idea with its simplicity and laser focus has come to have a great impact on how businesses were run, how the financial community thinks, or even how some governments made their policies. Stock-based executive compensation, hostile takeovers in the 1980s (corporate raiders like Carl Icahn - we will revisit in Part-3), and the deregulation policies of Ronald Reagan and Margret Thatcher could be said to have had their origins in Friedman's Doctrine. The Pushback - Enter Stakeholder CapitalismWhile there have always been voices against shareholder capitalism (in the form of stakeholder capitalism), that voice has grown stronger in the last decade and a half, in which the great recession, widening economic inequality and the dangers of climate change have exposed the notion of profits as the only goal of a business. In 2009, even Jack Welsh, who practiced shareholder value maximization with great efficacy during his tenure as CEO of GE (1981-2001), referred to it as the dumbest idea. As I sift through my corporate governance class notes, my professor concluded that this was a narrow view (shareholder value) of management took only the financial economics perspective into account (Friedman was an economist, surprise!), while management was a cross-section of financial economics, sociology, and psychology. This has indeed lead to the excessive financialization of the economy (remember CDOs?). In the last decade, Stakeholder Capitalism, ESG (Environment, Social, Governance), CSR (Corporate Social Responsibility) have become buzzwords. Doing well by doing good has become a mantra. Not many firms will admit publicly that all they care about is shareholder value maximization, they make an effort to at least pose that they care about other stakeholders. In August 2019, 181 CEOs signed the Business Roundtable Pledge committing to lead their companies for the benefit for all the stakeholders - customers, employees, suppliers, communities, and shareholders. Does Chucking Away Shareholderism Make Things better?Doesn't it sound like progress? Shouldn't we celebrate that we have replaced (at least in idea) the parochial approach of shareholder value maximization with the holistic stakeholder approach? I'm afraid it may not necessarily be so. That is the story for tomorrow. Friedman may not be a villain after all. Come back to check out Part 2 of the series tomorrow! What do you think? Is Friedman a villain or just a messenger of a bitter truth?*** Further Reading:
What is the narrow view of social responsibility?Generally, views on CSR are divided into two categories: narrow and broad (Crane and Matten, 2007). Narrow view considers the only objective for business entities to consist of profit maximisation.
What is Friedman's view?The Friedman Doctrine holds that decisions concerning social responsibility rest on the shoulders of the shareholders, not the executives of the company. He argues that an entity is not obligated to any social responsibilities unless the shareholders decide to such an effect.
What did Milton Friedman view as the social responsibility of business quizlet?"[In a free economy] there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits". -The social responsibility of business is to increase its profits.
Why does Friedman think that social responsibility is inefficient?Friedman argued for a direct form of capitalism and against any activity that distorts economic freedom. Socially responsible activities conducted by a corporation are, according to Friedman, distorting economic freedom because shareholders are not able to decide how their money will be spent.
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