“The only Social responsibility of business is to increase its profits” Milton Friedman, economist
What is Friedman’s argument, in a nutshell (or 4 steps)? What is Friedman’s argument, in a nutshell (or 4 steps)?
The Friedman Problem: Business as Maximizing Shareholder Value
Milton Friedman’s New York Times Magazine article, “The Social Responsibility of Business is to increase its profits” has been long juxtaposed against stakeholder theory and the ensuing debates have revealed few new or useful insights. In an attempt to move beyond the narrow supposed stakeholder/stockholder dichotomy, we spell out our reading of Friedman’s controversial article which we believe to be compatible with Stakeholder theory—in fact we see Friedman as an early stakeholder theorist.
“In a narrow sense, the stakeholders are all those identifiable groups or individuals on which the organisation depends for its survival, sometimes referred to as primary stakeholders: stockholders, employees, customers, suppliers and key government agencies. “In a narrow sense, the stakeholders are all those identifiable groups or individuals on which the organisation depends for its survival, sometimes referred to as primary stakeholders: stockholders, employees, customers, suppliers and key government agencies.On a broader level, however, a stakeholder is any identifiable groups or individual who can affect or is affected by organisational performance in terms of its products, policies and work processes. In this sense, public interests groups, protest groups, local communities, government agencies, trade associations, competitors, unions, and the press are organisational stakeholders”. (R.E. Freeman,1984)
The Friedman Problem: Business as Maximizing Shareholder Value The Friedman Problem: Business as Maximizing Shareholder ValueFriedman writes, “It may be in the long-run interest of a corporation that is a major employer in a small community to devote resources to providing amenities to that community or to improving its government,” he goes on to say that it is wrong to call this social responsibility because, “they [the actions] are entirely justified in its [the corporation’s] self interest”. For Friedman supporting stakeholder interests is not about social responsibility; it’s about capitalism. According to Friedman the purpose of business is 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”. All this sounds well and good to us. A key difference between our view and Friedman’s is what makes business successful. Friedman believes that it is maximizing profits. We believe that in order to maximize profits in the long-run, companies need great products and services that customers want, solid relations with suppliers that keep operations on the cutting edge, inspired employees who stand for the company mission and push the company to become better, supportive communities that allow businesses to flourish. So in our view Friedman could have written the above quotation as: “Business is about making sure that products and services actually do what you say they are going to do, doing business with suppliers who want to make you better, having employees who are engaged in their work, and being good citizens in the community may well be in the long-run (or even possibly the short run) interest of a corporation”. Stakeholder management is just good management and will lead to maximizing profits.
Under this reading Friedman is at least an instrumental stakeholder theorist... There is a difference in the theories about the way the world works. Friedman may actually believe that if you try to maximize profits you will. We believe that trying to maximize profits is counterproductive because it takes attention away from the fundamental drivers of value – stakeholder relationships. There has been considerable research that shows that profitable firms have a purpose and values beyond profit maximization (Collins & Porras, Waddock et al.) Both we and Friedman agree that business and capitalism is not about social responsibility. Despite the differences we believe the Friedman’s maximizing shareholder value view is compatible with stakeholder theory – after all the only way to maximize value sustainably is to satisfy stakeholder interests.
The Separation Fallacy: The Separation Fallacy: It is useful to believe that sentences like, “x is a business decision” have no ethical content or any implicit ethical point of view. And, it is useful to believe that sentences like “x is an ethical decision, the best thing to do all things considered” have no content or implicit view about value creation and trade (business). This fallacy underlies much of the dominant story about business, as well as in other areas in society. There are two implications of rejecting the Separation Fallacy. The first is that almost any business decision has some ethical content. To see that this true one need only ask whether the following questions make sense for virtually any business decision - If this decision is made for whom in value created and destroyed?
- Who is harmed and/or benefited by this decision?
- Whose rights are enabled and whose values are realized by this decision (and whose are not)?
- What kind of person will I (we) become if we make this decision?
Business is about the creation of value for stakeholders. Value has economic, social, political, technological, and other aspects to it. Business is about the creation of value for stakeholders. Value has economic, social, political, technological, and other aspects to it. Separating “business” from “social” is a mistake. It marginalizes “social” and gives business and capitalism a bad name, as “anything goes”.
Corporate Stakeholder Responsibility is practical, and leads to a more robust idea of value creation.CStakeholderR is the essence of capitalism as a system of social cooperation and value creation
Sacconi:CSR as a Governance model
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