Friedman’s Best Business Model
The Stockholder Theory
‘The Social Responsibility of Business is to
make profit’ (1970) an article by Milton Friedman, which was published
in The New York Times, has remained a highly controversial article and has ignited
unending academic debates on business and ethics. Just as the title suggests,
Friedman in this work condemns the argument of abandoning the primary objective
of a business in a bid of becoming socially responsible. The Economist and
noble laureate believes that the stakeholders who are either the customer or
the employees could, on their own independent of the contribution of any
business enterprise, spend their own money on any action they so desire,
therefore businesses owe them nothing since they have invested nothing.
Friedman argues that since the directors are agents, they must not use what is
not theirs. In his view, business executives will be exercising a separate
responsibility rather than serving as an agent of the shareholders if they
spend money or behave in a socially responsible manner other than to maximize
profit for its shareholders. This also purports that shareholders own the
corporations.
Without any prejudice to the
respected author, I bet to differ in his rather weak understanding of two
important issues in this debate, a stakeholder and a company.
One of the important issues that seek
more clarification is the issue of who a stakeholder is; Friedman and other
stockholder proponents have criticized the stakeholder theory without having to
first determine on a wider scope, who a stakeholder is. According to Oxford
Dictionary, “A stakeholder is one with an interest or concern in something, especially
a business”. By virtue of this definition; it
then suggests that the investors, the shareholders, the employees, consumers
and even the competitors are all stakeholders. Friedman and many other
shareholder value thinkers in their arguments sound as though the stakeholder
theory is there to erase the primary purpose of a business i.e. their economic
responsibility. This is untrue; the stakeholder theory is only literally
asking, what if the firm can make profit, which they actually can, and still
serve public good?
According to Black’s Law Dictionary,
Ownership is defined as “The bundle of
rights allowing one to use, manage, and enjoy property, including the right to
convey it to others."[1]
One must also bear in mind that
ownership can only be effective where there is an object or thing capable of
being owned. It might seem harmless to reify corporations for convenience but
could also be misleading. Theoretically, a corporation cannot be classified as
a thing or object capable of being owned but a legal fiction regarded as an
artificial person by law, separate from its founders, capable of entering into
a contract in its own name, having the ability to sue and be sued and also
enjoys perpetual succession. A corporation enters into a voluntary contract in
its capacity as an artificial person in the eyes of the law, between itself and
the shareholders to whom he renders its services and this cannot at any point
crystalize into ownership, as a corporation enjoys its legal personality
statutes in perpetuity.
I quite agree that shareholding has
some ownership-like features that come with it, such as right to vote, right to
transfer shares and the fiduciary duty owed by the directors and other
executives of the corporation but this does not ipso facto mean ownership and
even with all its ownership-like features, shareholding still lacks some very
essential features of ownership. One would expect an owner of a property to be
able to sustain an action for trespass over his property, should have the
ability to acquire and use the corporation’s assets and finances, and the right
to its income. Sadly, these features are never transferred alongside the share
certificate to the shareholders. In W. Clay Jackson Enterprises v. Greyhound
leasing and financial corp.[2], the court confirmed that the
shareholders have no independent right capable of being violated upon the
conversion of or trespass upon a corporate property. For example, a shareholder
of A stores cannot prosecute a customer for shoplifting from the store,
but the same shareholder can be prosecuted for shoplifting from A stores. The reason is simple; one cannot lay claims over what is not his or
hers.[3]
In summation, it could be said that
Friedman jumped pell-mell into conclusion without carefully evaluating the
issues he discussed and the implication of his conclusion on a corporation such
as compromising the long-term goals, corporate scandals and epileptic economic
growth.
AUTHOR: Forster Ene, LLB. BL. LLM. ACIArb
Associate at Rockville & Co.
Email: Fene@rockvilleandco.com
[1]
Black’s Law Dictionary (p. 1138).
[2]
463 F. Supp. 666, 670 (D.P.R 1979)… For one to claim ownership over a thing,
such a person must have rights and liabilities over such property or thing. A
dog owner has the right to protect anyone from possessing his or her dog and
also has the responsibility to protect others from the dog. The same applies to
a corporation; a corporation has the right to protect its properties from
external interference and also has the responsibility to protect legal
occupiers of its properties from avoidable harm.
[3]
See Lee, Ian. “Corporate Law, Profit Maximization and the ‘Responsible’
Shareholder.” 2005, Stanford Journal of Law, Business
& Finance. March, p.11
