Part 4: Duties and Stakeholder Theory
46 Who is Milton Friedman, and why are his views on social responsibility significant?
Milton Friedman was a famous economist at the University of Chicago. He championed a strong view of corporate social responsibility: a business is socially responsible when it increases its profits. In discussion on ESG / CSR, Friedman’s views are valuable, and not simply as a contrast with broader stakeholder theory.
To begin, please visit an editorial Friedman published in the New York Times in 1970. An excerpt is below, but reading the entire article is worth it. How Friedman’s views contrast and complement the later material in this Part is important to understanding the following content.
“The Social Responsibility of Business Is to Increase Its Profits”
Milton Friedman, New York Times Magazine, September 13, 1970
What does it mean to say that “business” has responsibilities? Only people can have responsibilities. A corporation is an artificial person and in this sense may have artificial responsibilities, but “business” as a whole cannot be said to have responsibilities, even in this vague sense.. . .
Presumably, the individuals who are to be responsible are businessmen, which means individual proprietors or corporate executives.. . . In a free enterprise, private-property system, a corporate executive 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, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.. . .
. . . [T]he manager is that agent of the individuals who own the corporation or establish the eleemosynary institution, and his primary responsibility is to them. . .
Of course, the corporate executive is also a person in his own right. As a person, he may have other responsibilities that he recognizes or assumes voluntarily—to his family, his conscience, his feeling of charity, his church, his clubs, his city, his country. He may feel impelled by these responsibilities to devote part of his income to causes he regards as worthy, to refuse to work for particular corporations, even to leave his job. . . But in these respects he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes. If these are “social responsibilities,” they are the social responsibilities of individuals, not of business.
What does it mean to say that the corporate executive has a “social responsibility” in his capacity as businessman? If this statement is not pure rhetoric, it must mean that he has to act in some way that is not in the interest of his employers. For example, that he is to refrain from increasing the price of the product in order to contribute to the social objective of preventing inflation, even though a price increase would be in the best interests of the corporation. Or that he is to make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment. Or that, at the expense of corporate profits, he is to hire “hardcore” unemployed instead of better qualified available workmen to contribute to the social objective of reducing poverty.
In each of these cases, the corporate executive would be spending someone else’s money for a general social interest. Insofar as his actions. . . 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.
This process raises political questions on two levels: principle and consequences. On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary, and judicial provisions to control these functions, to assure that taxes are imposed so far as possible in accordance with the preferences and desires of the public. . . .
Let’s examine several points Friedman makes:
- Friedman first invokes the law of agency (which we have just studied). He notes that “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” (emphasis added).
- Friedman contrasts this with the personal views of a manager, who may wish to aid “his family, his conscience, his feelings of charity, his church, his clubs, his city, his country.” When a manager, in their personal life, aids these causes, “he is acting as a principal, not an agent; he is spending his own money or time or energy, not the money of his employers or the time or energy he has contracted to devote to their purposes” (emphasis added). Note the contrasting use of the two parties to an agency relationship!
- Friedman’s central point is then that “[i]nsofar as his actions in accord with his ‘social responsibility’ reduce returns to stock holders, he is spending their money.” Friedman’s manager is failing to act as an agent for the stockholders, and is instead acting as the principal he is in his personal life.
- Finally, Friedman highlights the problem with social responsibility in practice–if the stockholders don’t like it, you’ll lose your job, if the customers don’t like it, they will go elsewhere, and employees may find another job.
With that summary in mind, several points are worth considering. First, note that Friedman’s argument hinges on a significant “insofar”. Only insofar as social responsibility efforts reduce returns is the manager potentially violating the agency relationship. If practicing social responsibility keeps employees loyal, or draws in customers, then such practices could be a substantial asset to a corporation. In this sense, much of the writing on the dichotomy between Friedman and stakeholder theory evaporates. (We will consider this writing later.)
Second, there is a caveat to Friedman’s argument hiding in the agency relationship itself. If the principals, the stockholders, wish a company to engage in socially responsible behavior, then again there is no violation of the agency relationship because the views of the principal and the agent are aligned, not in opposition.
Third, Friedman himself noted that the duty to maximize profits existed “while conforming to the basic rules of . . . society, both those embodied in law and those embodied in ethical custom.” Again, once we say that companies should obey the law and be ethical, much of the difference between Friedman and his detractors simply hinges on what we believe ethics requires! If behaving ethically requires the considerations involved in stakeholder theory, such as considering the effects one’s actions have on all those influenced by them,[1] then again the difference between Friedman’s view and the remaining arguments in these parts vanishes.
In sum, we begin stakeholder analysis by considering a prominent theory of business behavior before stakeholder theory was introduced. This theory, popularized by Milton Friedman, equated social responsibility with profit maximization based on agency theory, at least on its face. This is often used as a contrast for stakeholder theory. If we consider Friedman’s theory with the caveats above, then much of the difference between Friedman and stakeholder analysis disappears.
Exercises
- In your view, what is the purpose of business? How does this compare to Friedman’s view?
- You will remember this as embodied in utilitarianism! ↵
