What is ethically responsible management? How can a corporation, given its economic mission, be managed with appropriate attention to ethical concerns? These are central questions in the field of business ethics. There are two approaches to answering such questions. The first one is Milton Friedman’s shareholder theory of management and the second one is Edwards Freeman’s “Stakeholder” theory of management, two different views about the purpose and aims of a business. Milton Friedman’s shareholder theory of management says that the purpose of a business is to make money for the owner or the stockholders of the business. Friedman says that there is only one social responsibility for the business: to use its resources in order to increase …show more content…
It says that you cannot look at any one of those stakes / stakeholders in isolation. Their interest has to go together, and a job of a manager or an entrepreneur is to figure out how the interest of customers, suppliers, communities, employees and financiers go in the same direction. Each of these groups is important for the business to be successful and if one of the groups is having problems to associate with the rest then it has a negative impact to all the rest.
In my opinion I believe that both theories have their own advantages and disadvantages and every business has to follow a theory that complies with its goal, when in my case I would rather follow the theory of Freeman in one extend. Friedman’s position we can see it as a theory for short term investment and businesses, while Freeman’s theory targets businesses that are planning to stay for a longer term. Also I believe that Friedman’s theory affects society in an inefficient way when costs are not really paid, as for example pollution, traffic congestion, no taxes, and poorly educated workforce. Another problem with Friedman’s position is that it assumes that forces of competition are sufficiently vigorous, but they are not. In addition the distribution of income that results from profit maximization is very
Freeman believes that business decisions cannot be fundamentally separated from ethical decisions. His argument is compelling; in his “Open Question Argument” he identifies several ways in which business decisions inherently have an ethical dimension, including “Who is harmed and/or benefitted by this decision?” (Freeman, 59). If business is only concerned with profits, they will undoubtedly harm other stakeholders along the way- most directly other businesspeople who are outcompeted! Freeman also contends that businesspeople will in fact accept responsibility for their actions outcomes. A directive from bosses to solely pursue profits regardless of outcomes will not be tolerated by employees or executives, thus in practice profit focused business cannot work if employees see the ethical implications of their actions as wrong (Freeman,
First thing let us start with a little overview of what Milton Friedman exposed in his article. It seems that the whole point of his essay revolves around one basic statement which clearly says that the only social responsibility of business is to use its resources and engage in activities designed to increase its profits so long it stays within the rules of the game (Milton Friedman, the social responsibility of business is to increase profit).
Mr. Friedman was influenced by Fredrich von Hayek a free-market thinker and believed that the government should stay out of peoples affairs whenever possible letting and that market could solve economic problems more efficiently than government officials could. This idea became known as the “Chicago School” of economics, a concept of free-market capitalism. (Placeholder2)
The prevalent view of business’ social responsibility is Milton Friedman’s agent-owner theory. His thesis mainly says that“ There is one and only one social responsibility of business – to use its resources and engage
Who should benefit, and at whose expense when running a business? Milton Friedman maintains that profit is the only true goal, benefitting the stockholders. However, R. Edward Freeman proposes that the needs of all a business’s stakeholders must be balanced when acting. I support Freeman’s view because the environment has changed since the time of Friedman.
Instead, Friedman says federal government expenditures make the economy less stable and do not, in fact, assist its growth. Friedman uses evidence he has gathered from his research to prove the correlation between the rise in government expenditures and the rise in gross domestic product. Friedman is quick to point out how this is not consistent with the Keynesian multiplier theory. He goes on to discuss many other reasons for this difference. Friedman moves onto the topic of capitalism. He says that in a capitalist society, it indirectly costs the government money to discriminate. With this in mind, he suggests that the government should not pass fair employment laws, as these give employers the freedom to employ somebody based on whatever qualifications or factors they wish. Friedman uses the same logic to support the abolishment of right-to-work
According to Milton Friedman social responsibility of business was to increase profits to stay within the rule of the game specifically avoiding deception and fraud. He argued that only individuals have social responsibility to increase profits and corporation is an artificial person (Milton Friedman, p.1) in the sense may have artificial responsibility but business as a whole cannot have responsibility (System not individual). A good corporation in Friedman’s view is not one that attempts activities only because they are ethically good, but because they are economically good.
In actuality, Friedman admits that the market system has many more complications, not the least of which was the introduction of money, but at its center still stands the two principles of a truly voluntary system: “ (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary” . These factors are the building blocks of economic freedom, where each individual holds an equal vote in the way the market works.
Milton Friedman and Richard Freeman represent differences that exist on the positions held by scholars with regards to the obligations of a business firm. The major difference between the two is on the issues of corporation’s responsibilities to the society and the obligations to different groups. To whom does the corporation owe much responsibility? Friedman offers his views based on the shareholders theory. In his theory, he adopts the view that a corporation as an entity is just an artificial person defined under the law, and thus can only have artificial responsibility. His major disagreements are with those who hold the position that corporations have social responsibilities (Kaler, 2012, p. 250). In his view, the obligations of a firm are first to the stockholders. As a result, its primary should to maximize the stockholders profits under the set rules and regulations. This obligation should always prevail against others. On social responsibilities of an organization, his views are restricted to the position that only individuals are in a position to be held socially responsible. However, he insists that those individuals in management are employees of the stockholders and thus should only do that which is beneficial to the stockholders and in line with set legal obligation (Kaler, 2012, p. 255).
In contrast with Galbraith, Milton Friedman never appreciated the limitations of the market, he was a forceful critic of government. He takes as a starting point Adam Smith’s skepticism, but he is much more toward the relationship between morality and capitalism. He launched a point of view which later generated controversy. He asserts that only people have responsibility. A corporation is an artificial person and in this sense may have artificial responsibility, but business as a whole cannot be said to have responsibilities. The only responsibility of companies is to get involved in economic activities designed to make profit, any expense incurred for social and moral reason affecting this fundamental goal, such as any extra expense to support some communities or to protect and restore the environment, will result in decreasing the profitability and, in the end, everyone will have something to lose. The member of a corporation, their position such as a stakeholder can undertake moral responsibilities, but as individual, not as representatives of the corporation. According to Friedman, there must not be any connection between business and ethic is that a corporation is a legal entity, not a person, and morality is a distinct attribute, belonging to human being. Thus, he stated that moral criteria have no place in the economy, especially in capitalism; economy and business are in the horizon of amorality and it is there that they should remain. To me, I do not completely
This paper will have a detailed discussion on the shareholder theory of Milton Friedman and the stakeholder theory of Edward Freeman. Friedman argued that “neo-classical economic theory suggests that the purpose of the organisations is to make profits in their accountability to themselves and their shareholders and that only by doing so can business contribute to wealth for itself and society at large”. On the other hand, the theory of stakeholder suggests that the managers of an organisation do not only have the duty towards the firm’s shareholders; rather towards the individuals and constituencies who contribute to the company’s wealth, capacity and activities. These individuals or constituencies can be the shareholders, employees,
In this essay I evaluate Milton Friedman’s essay: “The Social Responsibility of Business Is to Increase Its Profits” in 1970, on the Social Responsibility of a business and his theory, which is called the “Efficiency Perspective”. In every article and book that I have read about social responsibility, Friedman’s “Efficiency Perspective is placed centrally. During my research I found that Friedman is often criticized for being too classical. Friedman believes that manager’s foremost objective or even moral obligation to the firm should be to maximize profits always. There is however one condition that makes his perspective more complicated, not only for me, but also for several well-known authors. According to Friedman, the managers’
Friedman has been at the forefront of undermining the concept of business ethics ever since the 1960s. In his view, the purpose of any business is to maximize profits and so return as much value for shareholders as possible (Friedman, 2002). Friedman also argues that the current trend toward greater corporate social responsibility is working in opposition to the advantages that stand to be gained through the adherence to unfettered free-market capitalism. Friedman (1991) states: 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 (p. 245).
According to Friedman (1970) shareholders theory believes that businesses do not have any moral responsibilities or social responsibilities at all, other than to maximize their own profit. The goal of most businesses is the profit. Typically, a business that does not profit will not be a business for very long.
However, there is some debate as to whether Friedman’s doctrine of the pursuit of profit has any relevance to modern day corporations; a recent study by Shipley