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.
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.
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.
Overview
Friedman introduced the theory in a 1970 essay for The New York Times. In it, he argues that a company has no "social responsibility" to the public or society; its only responsibility is to its shareholders. 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.
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.
Influence
Shareholder theory has had a significant impact in the corporate world. 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.” In 2016, The Economist called shareholder theory "the biggest idea in business," stating "today shareholder value rules business."
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.
Criticism
The Friedman doctrine is controversial, with critics variously claiming it is financially wrong, economically wrong, legally wrong, socially wrong, or morally wrong.
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.
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." 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."
A number of critics of shareholder theory, including Jerry Useem of The Atlantic and prominent Democratic Senators Chuck Schumer and Bernie Sanders, 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.
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. They argue it is morally imperative a business takes into account all of the people who are affected by its decisions. They also argue that taking into account the interests of stakeholders can benefit the company and its shareholders;
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."
