Corporate Social Responsibility: Friedman's Stockholder Model

Overview of three papers on corporate social responsibility:
- Milton Friedman: "The Social Responsibility of Business Is to Increase Profits."
- Edward Freeman: "Managing for Stakeholders."
- Joseph Heath: "Business Ethics Without Stakeholders."
Three models of corporate social responsibility:
- Friedman's stockholder model.
- Edward Freeman's stakeholder model.
- Joseph Heath's market failures model.

Managers must always manage for shareholders.
Three main arguments:
- Managers as occupying a social role.
- Shareholders as having property rights.
- Profit as contributing to social utility.
Friedman advances a moral argument for maximizing profit.

Quote from page 74:
- "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 will be to make them as much money as possible while conforming to the basic rules of society."
An executive is an employee/agent of the owners (shareholders).
Executives have a responsibility to their employers.
It is morally wrong for an executive to promote social ends because it interferes with the shareholders' desires.
Shareholders want maximum profit.
Executives must conform to the basic rules of society, including laws and ethical customs.
Managers are constrained by the laws and ethical customs of the society in which they operate.

A manager must adhere to the responsibilities that define their social role.
A corporate executive is an agent of the individual shareholders who own the firm.
Spending time and corporate money on social responsibility is acting as a principal, not an agent.
Managers are hired to manage resources to maximize shareholder profit.
Spending shareholder money to make the world a better place is irresponsible because it's not their money to spend.

Friedman doesn't explicitly mention property rights, but it is implicit in his account.
Managerial duties are grounded in the rights of owners/principals.
Managing the firm with a view to exercising social responsibility violates the owner's property rights.
Spending someone else's money for general social interest is problematic.

Friedman's argument on page 75:
- Spending money on social interests involves imposing taxes.
- This raises political questions on the level of principle and consequences.
In a constitutional democracy, legislative, executive, and judicial functions are separated.
This provides checks and balances to assure taxes are imposed in accordance with the public's preferences.
Taxation without representation was a battle cry of the American Revolution.
There's a system of checks and balances to control these functions.

Managers who spend money on social ends are like socialists in the political domain.
They impose their will on shareholders and thereby fail to represent shareholder interests and violate their property rights.
Friedman's famous line:
- "Here, the businessman, self selected or appointed directly by stockholders, is to be simultaneously legislator, executive, and jurist."
- "He is to decide who to tax by how much and for what purpose."
The doctrine of social responsibility involves acceptance of the socialist view that political mechanisms rather than market mechanisms are the preferred way to distribute or allocate resources.
The corporate executive is an employee of a company, and social responsibility is not part of that particular social role or job description.

Businessmen who talk about social responsibility are "unwitting puppets" undermining a free society.
Friedman purports to be working in the spirit of Adam Smith.
He shares Smith's skepticism of those who trade for the public good.
Social responsibility undermines the efficient working of the market mechanism.
Companies self-interestedly pursuing profit will promote the public good by creating more wealth.
The market is based on individuals who are self-interested, and there are no social responsibilities other than the shared values and responsibilities of individuals.

The political principle that underlies the market mechanism is unanimity.
- In an ideal free market resting on private property, no individual can coerce any other.
- All cooperation is voluntary.
- All parties as cooperation benefit, or they need not participate.
- There are no values, no social responsibilities in any sense other than the shared values and responsibilities of individuals.
- Society is a collection of individuals and of the various groups they voluntarily form.
The political principle that underlies the political mechanism is conformity.
- The individual must serve a more general social interest, whether that be determined by a church or a dictator or a majority.
- The individual may have a vote and say in what is to be done, but if he's overruled, he must conform.
- It is appropriate for some to require others to contribute to a general social purpose whether they wish to or not.

The doctrine of social responsibility taken seriously would extend the scope of the political mechanism to every human activity.
It does not differ in philosophy from the most explicitly collectivist doctrine.
In a free society, 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.
Engage in open and free competition without deception or fraud.

Corporations have agents (managers) and principals (owners).
Managers have a fiduciary obligation to owners to maximize profit and increase the value of their investment over time.
Managers must comply with the laws and ethical customs of the society in which they operate.
Ideally, these laws represent the will of the people and help to keep the rules of the game competitive and free.
Corporations operate within the free market economy and a constitutional democracy.
Corporations that operate under the political constraints of the law and ethical custom will serve the interests of a free market economy much better than corporations that strive to exercise social ends.

Why are shareholders primary?
Are shareholders entitled to having their interests satisfied?
Even if shareholders are primary, why should they have their interest fully satisfied?
If you're not gonna fully satisfy their interests, who else to satisfy?
How to decide if you're not gonna fully satisfy their interests?
Why does ethical custom not take priority over shareholder interests?
Further is complying with the law enough?
Can the model account for ethical dilemmas?
What about the market failure issue?