Paper on The Shareholder Theory Critique: Unpacking the Legal, Social, Economic, and Moral Dimensions

In September 1970, Milton Friedman introduced a theory known as The Shareholder Theory through an essay in The New York Times Magazine titled "The Social Responsibility of Business is to Increase its Profits." In this article, he claimed that a company does not have a social responsibility to society and that its only commitment is to its shareholders. He further claimed that companies, through shareholders, should focus solely on activities that will generate profit and forgo any charitable activities that do not generate profits. He argued that by the shareholders spending the company's money on charitable or social activities, they would be paying someone else's money. Friedman's theory seems simple and straightforward, but why is it met with so much criticism that claims that it is legally, socially, economically, and morally wrong?

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Milton claimed that the corporate executive would be spending someone else's money for general social interest. Insofar as his actions according to 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 some employees' wages, he is spending their money (The New York Times Magazine, 2). Milton based his theory that the shareholders are hired to run the business company and are therefore morally and legally obliged to serve their interests. According to Milton, the shareholders can decide for themselves whichever social activities they would like to take part in rather than having the executive appointed by the shareholders for business purposes to resolve such issues for them. He further added that the shareholders the customers, or the employees could separately use their own money on the specific activities that they wished to do.

Milton quoted his Capitalism and Freedom book from 1962, where he stated that there is one and only one social responsibility of business: to use the business's resources and engage in activities that will increase profit as long as it stays within the rules of the game. He believes that if profits are sought by adhering to the law and without deception or fraud, society as a whole will benefit, thereby making the social responsibility of the corporation purely through economic profit-making (Jahn et al. 4). In 2017, Paine claimed that Friedman's theory was preventing companies and their leaders from seeing the bigger picture by distracting them from innovations, investing in their future, strategy renewal and consequently putting them at risk of shareholder attack and putting pressure on the executives to deliver better returns faster leading to risky investments.

Milton Friedman’s theory is simple and straightforward. Still, it might not be as accurate and right as it appears because: Economists are governed and function within a set of norms that impact overall economic success. These societal norms are about community obligations, gender roles, how much executives and employees should be paid, appropriate behavior toward customers, and the seriousness of tax laws, therefore proving that the game rules are beyond the government-enforced ones. Milton's theory focuses on the shareholders and places them above all others, which has led to high pay gaps between the CEO and workers, short-term planning, and results, among other problems.

Friedman disregarded the idea that a corporation or company can have social responsibilities terming it as an artificial person and stating that only people can have responsibilities. However, he failed to acknowledge the fact that corporations have acquired more civil rights than most individuals. By gaining freedom of speech, religion, etcetera through these civil rights, corporations are no longer artificial people, and therefore, corporations now have social responsibilities just like ordinary people do (Carson, 27). Because corporations have civil rights, they are bound and have an obligation to do good for society just like citizens do. This implies that social responsibilities should be upheld and carried out by the corporation. The proponents of the stakeholder theory argue that Friedman's thesis is morally wrong since it is the corporation's responsibility to take into account the interest of all those who could be potentially affected by the company's decision. They also argue that by taking into account the stakeholder's part, both the company and its shareholders will benefit. For example, a company donating towards a particular cause, world hunger, for example, will eventually benefit both the company and its shareholders through building alliances in the community by showing its willingness to help the less fortunate (Shi-Min et al. 60).

Friedman's theory has led to executives enriching themselves by enforcing stock buybacks, which was encouraged by a rise in stock-based compensation, which led to the destruction and possible collapse of the corporations they were working for. This action takes funds away from avenues that would have potentially been more profitable to the corporation and society as a whole, like research.

However, Friedman was right when he stated that insincere social responsibility actions of a corporation could be harmful to society. This is because even though these are corporations and companies that are not "real individuals," they have human resources who work there. Whatever choices are made by the executive affect them, and eventually, like a ripple effect, it will ultimately affect the community and society. Through the executive, social activities held by the executive show the employees and shareholders that the company desires and thrives from teamwork and unity (Elrick & Clifford, 15). Lack of this will promote individualism in the workplace, leading to lousy competition among employees as everyone will be looking out for herself. Eventually, the company will feel its effect through losses, bankruptcy, or, worse, the entire company's collapse.

Friedman" theory appears simple and straightforward, but it is not what it seems. Friedman Milton was inaccurate in saying that social responsibility is to increase its profit because each company has a civil right to society and a responsibility to its employees. We can now see the change from the shareholder theory to better theories of business governance like the stallholder theory. Businesses have increased their social responsibilities and have increased their duties to be reasonable, and responsible. Due to this, they have now seen that social responsibility programs add value to their business and shareholders by attracting and maintaining clients and increasing operations' efficiency, among others. However, he was not wholly wrong in his assessment as he noted the consequences of insincere social responsibility activities of a corporation to society. Maybe Friedman saw or experienced hypocritical social action for a company that led him to arrive at such a conclusion in his theory. Perhaps he was trying to look out for the needs of society but failed to consider the responsibility the company has to the community through its civil rights. Whichever the reason, his theory has been a significant milestone in the business world and has led to better suggestions that help the company, executive, shareholders, and the community.

Works Cited

Carson, Thomas, L. "My Correspondence with Milton Friedman about the Social Responsibilities of Business." Business and Society Review 123.2 (2018): 217-242.

Elrick, John, and Clifford F. Thies. "The Social Responsibility of Business: Milton Friedman Reconsidered." Journal of Markets & Morality 21.2 (2018).

How, Shi-Min, Chew Ging Lee, and D. Michael Brown. "Shareholder theory versus stakeholder theory in explaining financial soundness." International Advances in Economic Research 25.1 (2019): 133-135.

John, Johannes, and Rolf Brühl. "How Friedman’s view on individual freedom relates to stakeholder theory and social contract theory." Journal of Business Ethics 153.1 (2018): 41-52.

The New York Times Magazine, September 13, 1970. Copyright @ 1970 by The New York Times Company. Reprinted by permission of The New York Times Syndicate, Paris, France.