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he Friedman doctrine, also called shareholder theory or stockholder theory, is a

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he Friedman doctrine, also called shareholder theory or stockholder theory, is a normative (Links to an external site.) theory of business ethics (Links to an external site.) advanced by economist Milton Friedman (Links to an external site.) which holds that a firm’s main responsibility is to its shareholders (Links to an external site.).[1] (Links to an external site.) This shareholder primacy (Links to an external site.) 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 (Links to an external site.) to shareholders.[1] (Links to an external site.) Friedman argues that the shareholders can then decide for themselves what social initiatives to take part in, rather than have an executive (Links to an external site.) whom the shareholders appointed explicitly for business purposes decide such matters for them.[2] (Links to an external site.) The Friedman doctrine has been very influential in the corporate world but has also attracted criticism,
Friedman introduced the theory in a 1970 essay for The New York Times (Links to an external site.) titled “A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits”.[3] (Links to an external site.) In it, he argued that a company has no social responsibility (Links to an external site.) to the public or society; its only responsibility is to its shareholders (Links to an external site.).[2] (Links to an external site.) He justified this view by considering to whom a company and its executives are beholden:
In a free-enterprise (Links to an external site.) , private-property (Links to an external site.) system, a corporate executive (Links to an external site.) 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 argued that an executive spending company money on social causes (Links to an external site.) 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 argued 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.” He concluded by quoting from his 1962 book Capitalism and Freedom (Links to an external site.): “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 Capitalism and Freedom (Links to an external site.), Friedman had argued that when companies concern themselves with the community rather than profit it leads to totalitarianism (Links to an external site.),[4] (Links to an external site.) consistent with his statement in the first paragraph of the 1970 essay that “businessmen” with a social conscience “are unwitting puppets of the intellectual forces that have been undermining the basis of a free society”.
The Friedman doctrine was amplified after the publication of an influential 1976 business paper by finance professors William Meckling and Michael C. Jensen (Links to an external site.), “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure”, which provided a quantitative economic rationale for maximizing shareholder value.[5 (Links to an external site.)
Shareholder theory has had a significant impact in the corporate world.[6] (Links to an external site.) In 2017, Harvard Business School (Links to an external site.) professors Joseph L. Bower and Lynn S. Paine 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.”] (Links to an external site.)In 2016, The Economist (Links to an external site.) called shareholder theory “the biggest idea in business”, stating “today shareholder value rules business”.[7] (Links to an external site.)
Shareholder theory has led to a marked rise in stock-based compensation (Links to an external site.), particularly to CEOs (Links to an external site.), in an attempt to align the financial interests of employees with those of shareholders.[5] (Links to an external site.)
In September 2020, fifty years after publishing “A Friedman Doctrine”, The New York Times published 22 short responses to Friedman’s essay written by 25 prominent people.[8] (Links to an external site.) In November 2020, the Stigler Center of the University of Chicago Booth School of Business (Links to an external site.) published a compendium of 28 articles on the legacy of Milton Friedman.] (Links to an external site.) Finance professor
Alex Edmans compared Friedman’s article to the Modigliani–Miller theorem (Links to an external site.), arguing that Friedman’s conclusion is incorrect but that the article is instructive because it highlights the assumptions required for it to be true.[10] (Links to an external site.) Accordingly, Stigler Center director Luigi Zingales (Links to an external site.) argued that the Friedman doctrine should be considered a theorem, not a doctrine.
Questions:
Do you agree with Milton Freidman that “The Social Responsibility of Business is to Increase Its Profits?”  Explain your response.
Describe how a business can act responsibly to satisfy society.
In what ways do companies demonstrate their social responsibility?
What are some of the major criticisms of the Friedman Essay?
Choose a company that you admire and briefly explain how they are being socially responsible.

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