Shareholder Doctrine: Corporate Moral Code of Friedman Theory - Essay Sample

Introduction

The Friedman theory (Shareholder doctrine) refers to a normative approach of corporate moral code advocated by economist Milton Friedman which states that an organization's primal responsibility remains that of its shareholders, which entails generating revenue. The theory looks at stakeholders like the economic instrument of the company and the only class to which the organization remains socially responsible (Foss & Klein, 2018, p 17). In this regard, the objective of the enterprise involves increasing profits to shareholders. Friedman's assertion entails stakeholders deciding for themselves regarding social inventiveness to undertake instead of having an executive appointed by the company to oversee the execution of such duties.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

Friedman's doctrine argues that an organization does not have a social responsibility to the community or public and only serves its stakeholders. The theory looks at the free-market model and asserts that a chief executive officer remains an employee of the proprietors of the organization (Foss & Klein, 2018, p 19). Besides, the approach argues that the executive has a direct duty to his bosses. The responsibilities of the executive entail managing ventures in a manner that satisfies the desires of firm owners. Under such an obligation, the executive's fundamental responsibility involves generating income for his masters.

The theory asserts that a corporation using its resources on social initiatives means spending someone else's capital for their resolutions. The doctrine claims that as long as an organization's business initiatives decrease revenue to stockholders, those initiatives depletes the proprietor's investments. The statement claims that activities that increase prices to customers mean using the money of consumers (Foss & Klein, 2018, p 21). Besides, the approach asserts that decreasing the wages of some workers means spending their income. Friedman's argument, therefore, assumes that the suitable negotiators of social causes remain people. In this regard, the shareholders, employees, and customers can separately use their resources on specific initiatives if they willingly wanted to do so.

The conclusion of Friedman's theory asserts that there exists only a single social responsibility of enterprises. The responsibility entails the employment of resources and involvement in initiatives intended to maximize revenue so far as it remains within the regulations of the plan, which means, engrossing in free and open competition devoid of dishonesty or deceit (Foss & Klein, 2018, p 25). The argument further claims that when organizations take considerations with society instead of creating income leads to absolutism.

The shareholder approach has had a considerable influence in the corporate sector, in which some economists argue that growing stockholder net worth has become universal in the business community and most financial undertakings across the globe. The theory has transformed how companies define their performance, such as the introduction of performance assessment, managerial reimbursement, duties of executives, and corporate responsibility (Foss & Klein, 2018, p 27). The approach has created an increase in stock-based benefits, especially to chief executive officers, to streamline the business interests of workers with those of stockholders.

Criticism of Friedman's Theory

However, critics assert that the theory remains financially, legally, morally, economically, and socially incorrect. Some critics argue that implementing Friedman's approach impoverishes most people, whereas it improves the corporate privileged. Besides, others state that such measures remain counterproductive and unhealthy to the organizations that implement the doctrine. Economists say that the method keeps firms away from their objectives, innovations, future growth plan, and strategic renewal (Foss & Klein, 2018, p 31). Furthermore, the theory puts firms at threats of activist stockholder attacks and places executives under strain to deliver quickly and more liable revenue.

Furthermore, companies remain at positions that inhibit riskier investments intended at realizing future requirements. Some economists have also indicated that since the theory emphasizes short-term stakeholder worth, it has become leverage for unethical dealings, such as economic investment, high leverage, excessive wages, unreasonable acquisitions, obsession for stock buybacks, and accounting mischiefs (Foss & Klein, 2018, p 31). Shareholder theory that encouraged the increase in stock-based payment has resulted in managers accumulating wealth by employing stock buybacks. The actions usually become disadvantageous to the organizations since they distract the firm's finances away from possibly more lucrative or socially worth possibilities. Such possibilities include design and research, decreases efficiency, and enhances unfairness by delivering resources to highly remunerated workers who get a stock-based return and not to poorly salaried staff who do not.

Friedman's theory has received criticism from people who value the notion of corporate social responsibility in that it remains inconsistent with the philosophy of business ethics that considers the entire populace influenced by the decisions of companies operating in a given region. Besides, finding the interest of shareholders involves implementing initiatives that increase the gains made by such people, such as providing services or commodities to the less privileged or those affected by natural calamities creates a loyal customer base to the company and generally contributes to a growth in revenue collection (Foss & Klein, 2018, p 32). Some critics illustrate the limitation of the theory by stating that most business personalities engage in investments that indicate responsibilities to settle its bills, in that it can demonstrate the ability to resolve its social and legal obligations. From these arguments, Friedman's theory remains a theory that requires empirical evidence.

Conclusion

According to the contemporary world, globalization and free markets require that companies give back to society. Besides, most successful companies associated with the community from which they operate and tap considerably from the locals. High technology has advanced the methods of doing business, making corporate social responsibility an integral part of any significant company.

Reference

Foss, N.J. and Klein, P.G., 2018. Stakeholders and corporate social responsibility: An ownership perspective. Sustainability, Stakeholder Governance, and Corporate Social Responsibility (Advances in Strategic Management), pp.17-35. www.emerald.com/insight/content/doi/10.1108/S0742-332220180000038005/full/html