[Update (10/22): We have revised the second paragraph of this post.]
Thus far, we have revisited the first two paragraphs of Professor Friedman’s scathing critique of corporate social responsibility or CSR. (To sum up: we dismissed the opening paragraph as pure hyperbole, but at the same time, we concluded that the criticisms set forth in the second paragraph must be reckoned with.) Prof Friedman concludes the second paragraph by asking, to whom does CSR apply? Do all business firms and businessmen have a moral duty to act in a socially responsible way? Having now set the stage, so to speak, Milton Friedman devotes the remainder of his essay to this key question. In particular, he defines the scope of his inquiry in the third paragraph of his classic essay as follows: “Most of the discussion of [CSR] is directed at corporations, so … I shall mostly neglect the individual proprietor and speak of corporate executives.”
Although this clarification might seem like a minor caveat, it is a major strategic move on Professor Friedman’s part. Why? Because most business firms consist of sole proprietorships, i.e. firms that are owned and operated by an individual. In this particular case, it makes sense to talk about the social responsibility of business, since the firm and its owner are one and the same. (It’s also worth noting that, today, many small business are organized as limited liability companies (LLCs), privately-owned ventures that are often operated directly by their owners, who are called “managers” or “members” depending on their level of involvement in the firm, and many LLCs are single-member LLCs. Yet, as our friend and colleague Haskell Murray has pointed out to us, although LLCs are common today, this type of business entity did not exist in 1970, when Milton Friedman published his classic essay. For the record, Wyoming became the first State to recognize LLCs in 1977.)
But as Prof Friedman notes in the fourth and fifth paragraphs of his classic essay, managers of a corporation occupy a different legal and moral position than sole proprietors or LLC members. In Friedman’s own words, “the [corporate] manager is an agent of the individuals who own the corporation [i.e. the shareholders], … and his primary responsibility is to them.” Indeed, legally speaking, corporate managers have a broad fiduciary duty to act in the best interest of the owners of the corporation, the shareholders. Therefore, unless the shareholders themselves (or at least a majority of them) want the corporation to promote “social responsibility” — however this fuzzy term is defined — corporate managers have a legal and ethical duty to maximize the value of the shares owned by the stockholders.
Before proceeding any further, this counter-intuitive aspect of Friedman’s profit-maximization theory of business ethics is worth repeating. According to Friedman, greed is good, for corporate managers not only have a legal duty but also an ethical duty to maximize profits! But how can such a counter-intuitive theory be right? And even if this profit-max theory of business ethics were true, what time horizon should corporate managers consider when making business decisions? Stay tuned; we will proceed with our review of the remainder of Friedman’s essay in our next post …