Milton Friedman's Argument Analysis

There is an ongoing dispute about what the purpose of a typical corporation should be. In one view, Milton Friedman proposes the argument of the Shareholder Theory – that managers primarily have a duty to maximize shareholder returns as long as their actions remain within the rules of competitive business, abide by the law, and are of ethical custom. Conversely, Edward Freeman argues another viewpoint, the Stakeholder Theory, which implies that a manager’s duty is to balance the shareholders’ financial interests in conjunction with the interests of other stakeholders such as employees, customers, and the local community. In other words, Freeman expresses that the purpose of a corporation is to serve the broader societal interests beyond economic

The executive has a direct responsibility to his employers… which 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 society, both those embodied by law and ethical custom” (p. 34). Moreover, the Shareholder Theory asserts that shareholders are the ones who spend their money to employ the corporate executives, who are in return supposed to spend corporate funds only in ways that have been authorized by the shareholders. Primarily, this argument is based on the notion that corporations are only “artificial persons” and cannot have responsibilities like “natural persons” (p. 34). Instead, the argument is based on the basic principles of ownership and employment. In essence, the shareholders are the owners of the firm, and the corporate executives are those whom they employ. Therefore, the corporate executives should be acting primarily on the interests of shareholders for the single purpose being to maximize shareholder wealth. Additionally, Friedman goes so far to state that any actions that are performed external to the shareholder’s benefit would be violations of a corporate executive’s duty. To put this statement into better terms, by not complying with the duty of serving the owners’ interest, an executive would be considered to be allocating resources arbitrarily.

More specifically, Freeman is correct in his emphasis because he proposes the claim that “no stakeholder interest is viable in isolation of the other stakeholders” (p. 40). Additionally, the Stakeholder Theory is superior to the Shareholder Theory because it includes all groups, as well as the shareholders, that share a part in the control of the firm as opposed to excluding every related group except one (the shareholders). This is where Friedman begins to become faltered in his claims because if a corporation makes it their purpose to exclusively maximize shareholder interests above all else, shareholders are likely to suffer because that removes the incentive for other stakeholders to create value for the company. However, this is not to say that the purpose of upholding stakeholders’ interests should conflict with the idea of shareholder value maximization. Rather, serving the interests of stakeholders can create profit for the firm and create value for the shareholders at the same time. Freeman’s point is simple: the main goal of the company is still to advocate shareholder value maximization; however, while still also balancing all of the stakeholder’s interests simultaneously. For example, a company which treats its employees badly by paying them a lower salary than what’s mandated or not