Milton Friedman
"An entity’s greatest responsibility lies in the satisfaction of the shareholders"
The Friedman Doctrine, as a theory of business ethics, is also referred to as the Shareholder Theory. American economist Milton Friedman states that “an entity’s greatest responsibility lies in the satisfaction of the shareholders.”
The shareholders of what?
Friedman argues for economic freedom as a precondition for political freedom.
He believed economic freedom had been corrupted since even before the Great Depression and certainly by the New Deal it was moving in a destructive direction on at least two fronts.
Government was incerting more and more control over the economy. First, through entities like the Federal Reserve but also through regulation of Business. But the greatest destructive force for the whole of society was was the distribution of aid and benefits to the people by government.
To remove the source of corruptions you must remove the concentration of power while strengthening the individual and their power to choose.
"The evil was not in the bread and circuses, per se, but in the willingness of the people to sell their rights as free men for full bellies and the excitement of the games which would serve to distract them from the other human hungers which bread and circuses can never appease." Marcus Tullius Cicero
Matthew 4:4 "But he answered and said, It is written, Man shall not live by bread alone, but by every word that proceedeth out of the mouth of God."
Milton Friedman responded to Phill Donahue's claim that capitalism as an economic system "runs on greed". Milton qualified his response and use of Donahue's term with the phrase "self interest".
There is nothing wrong with "self interest" in the Doctrines of Jesus as long as we have an equal interest in our neighbor's interests as our own. This same precept of social evonomy is found in the maxim of Moses and Christ to love thy neighbor as our self.
Those who want to limit their neighbors' right to choose or force the contributions of their neighbor for their welfare the are denouncing the "perfect law of liberty". If people judge they have a right to force their neighbor to serve their desires they themselves will go into bondage despite saying Lord, Lord in their churches or home churches.
Therefore, the business should always endeavor to maximize its revenues to increase returns for the shareholders.
Friedman believes that the shareholders form the backbone of the entity, and they should be treated with the utmost respect. Profits maximization requires the entity to find ways of generating additional revenues through value addition and creating more products and services while minimizing costs. Friedman also stated that shareholders should be in charge of key decisions such as social initiatives rather than getting an outsider to make the decision on their behalf.
Summary The Friedman Doctrine, also known as the Shareholder Theory, provides insights on how to increase shareholder value. According to the doctrine, shareholder satisfaction is an entity’s greatest responsibility. However, the doctrine also faces expansive criticism since it turns a blind eye to social responsibility activities.
Background of the Friedman Doctrine The Friedman Doctrine first appearing in the New York Times in 1970 as an essay by Milton Friedman. In the essay, the economist explained that a business entity does not have any social responsibility to the society around it whatsoever. Instead, he stated that the only responsibility that an entity should abide by is its shareholders.
Friedman justified his claim by explaining that any executives in business are employees of the owners, and they are, therefore, required to deliver quality service to the employer first before any other party. Individuals employed in corporate entities are required to conduct their roles in the business according to the expectations of the employer.
What is Social Responsibility? The Friedman Doctrine sees that social responsibility rest on the shoulders of the shareholders, not the executives of a business. An entity is not obligated with any social responsibilities unless the shareholders decide to that cause.
But the business of society is not business but rather society itself. Society is the soil in which business may grow.
Therefore social responsibilities rests with society and if society is to remain free so must the social safety net of society remain free and the product of charity not business.
All social responsibilities to members of society requires resources and since charity is an individual choice the welth of every individual becomes paramount.
, therefore, be arranged before they are executed. The use of a company’s resources is subject to approval by the shareholders, who are the final decision-makers on important decisions such as the use of financial resources.
Social responsibility activities such as the development of social amenities for the community are capital-intensive and will affect the financial resources of the entity. Friedman insisted that such responsibilities should not be forced on the company, and the final decision on whether or not to carry them out depends on the shareholders.
Friedman Doctrine Influence As an indication of the Friedman Doctrine’s influence in the business arena, many business owners believe that companies should focus on maximizing shareholder value rather than focusing on other activities such as corporate social responsibility.
The primary goal for any entity should be to increase the profitability of the business since that is what the shareholders are interested in. Other activities that are not central to maximization of shareholder value should not be given priority when allocating financial resources.
The influence of the Friedman doctrine has been confirmed by various researchers and academicians. Joseph Bower and Lynn Paine, both long-time professors at Harvard University, confirmed that the doctrine has had an influence on the financial community, and business owners have been seen to practice the Friedman Doctrine and its principles. The doctrine also elaborates on a number of topics, including shareholder rights compensation, performance appraisal and measurement, corporate responsibility, and the role of directors in the business world.
Criticism of the Friedman Doctrine Despite its success, the doctrine faces its own fair share of criticism from the surrounding society. The doctrine is seen, to a large extent, as individualistic, especially from the societal perspective. Critics consider the doctrine as defective from many fronts, including legally, morally, economically, socially, and financially.
Most critics hold that the doctrine gives shareholders an upper hand while neglecting the society surrounding the entity. In as much as the shareholders are the financial engine for the business, the entity also needs the community for it to be successful. The business sells its products and services to the community. Its success depends on the goodwill from the community to purchase the products and services. Therefore, both parties have a mutual relationship, and the business has a responsibility towards the community.
What did Milton miss? https://youtu.be/DvNzi7tmkx0