What is it?
In 1970 American economist Milton Friedman wrote a New York Times essay titled “A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits.” The theory argues that the main responsibility of a business is to maximise their revenue and increase returns to shareholders. According to Friedman, no company is obligated to engage in social responsibility unless the shareholders choose to. It is also referred to as shareholder theory.
What is its influence?
In 2016, The Economist called shareholder theory “the biggest idea in business”, stating that “shareholder value rules business.”
The following year, Harvard Business School professors Joseph L. Bower and Lynn S. Paine argued that maximizing shareholder value “is now pervasive in the financial community and much of the business world” and “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.”
What are its core beliefs?
The core tenant of the doctrine is that business decisions should always be made with the financial interests of shareholders in mind first and foremost.
So, if funds are being used on social initiatives, the company is in effect spending somebody else’s money for their own purposes, unless there is shareholder approval.
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits,” he concludes in his NYT article. The only other consideration, according to Friendman, is to “sta[y] within the rules of the game, which is to say, engages in open and free competition without deception or fraud.”
“There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits.”Milton Friedman
The case against it
The doctrine has been criticised for not considering the responsibility a company has to its employees, the communities it operates in and the environment.
In 2019 the Business roundtable, a group that represents CEOs of big corporations including Apple, JP Morgan, General Motors and more, declared that it had changed its mind about the “purpose of a corporation.” That purpose is no longer to maximize profits for shareholders, but to benefit other “stakeholders” as well, including employees, customers, and citizens.
“Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”The Business Roundtable
Further reading on the debate
- Greed is good. Except when it’s bad. (The Beautiful Truth, via The New York Times).
- Milton Friedman Was Wrong (The Atlantic)
- Is the Friedman doctrine still relevant in the 21st century? (Chicago Booth Review)
- The Shock Doctrine, Naomi Klein (2007)
- Prosperity, Colin Mayer (2018)
- Grow the Pie, Alex Edmands (2020)