This critical review delves into Milton Friedman’s shareholder theory on corporate social responsibility (CSR), analyzing its emphasis on maximizing shareholder value. Through a comparison with modern CSR theories, such as Carroll’s Pyramid, this critical analysis explores the broader implications of business responsibilities towards society, ethics, and sustainability.
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CRITICAL REVIEW OF MILTON FRIEDMAN’S ESSAY “THE SOCIAL RESPONSIBILITY OF BUSINESS IS TO INCREASE ITS PROFITS”
Assignment Question:
Critically analyze Milton Friedman’s shareholder theory on corporate social responsibility (CSR) and compare it with modern CSR frameworks.
Word Count: 2,500 words
Referencing Style: APA (7th Edition)
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Critical Review of Milton Friedman’s Shareholder Theory: CSR and Business Ethics
Table of Contents
Introduction
The social responsibilities of a business refer to taking part in some specific actions to increase the benefits of society by increasing the profit of the company. A famous essay “The Social Responsibility of Business Is to Increase Its Profits,” was written by Milton Friedman and was published by the “New York Times Magazine” almost 53 years ago (Tepper and Curry, 2020). This work remains as polarising today as it was done five decades ago. This doctrine is also known as the shareholder theory. According to this theory, the shareholders are considered the economic engine of the business. According to Friedman’s essay, the goals of the organizations are to increase revenue and profits and maximize the return to the shareholders.
In this doctrine, Friedman described that a company has no social responsibility to society. It has only responsibilities to its shareholders. This doctrine has explained that the corporate executive is considered an employee of the owners of the organization and this executive has direct responsibility to the employees. The corporate executive also works for the agency of the person who owns the business or the corporation. Friedman also described in the shareholder theory that an organization’s only social responsibility is to use the available resources and enhance the engagement of activities to maximize its profits. The present study is going to present a critical review of Friedman’s essay on CSR.
Discussion
“Corporate Social Responsibility” (CSR) is regarded as a management concept through which it is possible to incorporate the integration of the business of the society and environment in the business operation. In Friedman’s essay social responsibility has been given importance but it narrows down the responsibility of the business to society. Friedman has explored that a business has only one responsibility which is to increase profitability and increase the amount of revenue. The personality also said that the business has a responsibility to the shareholders not to the public or civil society. On the other hand, Apaydin et al. (2021) have discussed that CSR has become important in the economic challenge of the business. Apart from that CSR is necessary for the economic activities of an organization and it is also focused on the enhancement of the profitability of the business.
CSR is also important in describing and creating the values of the business. On the other hand, Friedman has described that the social responsibilities explore the lack of rigor and analytical looseness of the business. It is not only notable for the analytical looseness but it also is important to increase the integration of the business. The importance of CSR is increasing because it is positively impactful on the business (Arraiano and Hategan, 2019). As CSR is relevant in increasing the integration of the business, therefore, CSR of the business is also relevant in increasing the engagement of customers. That is important in increasing the sales which tends to increase the profitability. Apart from that CSR is important in increasing the profitability of the business. Friedman has focused on polarising between persons who believe that a business has a greater social responsibility and those who believe that the social mission of the organization is relevant in increasing profits. Considering these two sides the businesses become more complicated and it is necessary to prioritise CSR.
According to Friedman’s essay, a public business must maximize the profitability and values of shareholders above all other objectives and goals. CSR is relevant in encouraging enterprises to increase the sustainability of the environment (Chen et al. 2020). Though Friedman focuses on the importance of increasing profitability, it narrows down the activities of the business that are related to CSR and helps in enhancing revenue. First of all, CSR has an important positive impact on society. As it is relevant to the sustainability of the environment, it is also capable of attracting people which increases the number of customers. The increasing customer number is relevant in increasing sales which enhances profitability and increases the business areas. CSR of the business is also important for the ethical practice of the organization The ethical practice of the organisation also helps to increase the engagement of customers.
According to the Friedman analysis, the main role of the corporate executives is to give much more return to the shareholders of the business. Therefore, Friedman outlines the role of the corporate executive and that shows capitalism in the essay. CSR is effective in meeting the commitment of the organization towards society and the environment (Zaman and Nadeem, 2019). Apart from that this is not enough to limit the social responsibility of the business to the shareholders. It is also necessary to explore the responsibilities of the business to society to increase its sustainability and profitability. Apart from that it can be said that Friedman limited the responsibilities of the business to society and focused on the shareholders. Only the shareholders of the business cannot operate the business with its profit. Besides the shareholders, the support of common people is also required to increase the sales and profits of the business.
As per Friedman’s essay, the corporate executives of the businesses are poorly equipped to enact social changes. Confusion also arises in this essay: how a bank can make good investment deals with its clients but how it can prepare people or take action to curb pollution. Therefore, these kinds of thoughts of Friedman explore that this personality wants to avoid the social and environmental responsibilities of the business. CSR is important for building the reputation of a business (Yu and Liang, 2020). The reputation of a business plays an important role in enhancing the profitability of the business. It helps the business to be socially responsible and differentiate itself from its competitors. It helps the organization to launch unique products and create a positive brand image. This result is also relevant in improving the financial performance of the business and the loyalty of the customers. All these sides of CSR are neglected in Friedman’s essay.
Integration of a business is one of the most important factors to make impactful actions on the society. In this context, the business needs to be integrated with the people of the society. Friedman has not focused on the integration of the business with the public or the society, it only focuses on the integration of the business with its shareholders. CSR of the business constructs the future and development of the business. In explaining the CSR of the business Caroll’s model is important. Caroll’s model on CSR of the business was developed by Archie Carroll (Carroll, 2021). This model is also known as an effective business strategy. Caroll developed the CSR model by taking the structure of the pyramid (Štreimikienė and Ahmed, 2021). Caroll’s model of CSR focuses on the legal, ethical, philanthropic, and economic factors of the business in analyzing the responsibilities of the business. On the other hand, Friedman only focuses on the shareholders of the business. Only the shareholder of the business cannot define the social responsibility of the business. Therefore, a business needs to consider all its aspects to increase sustainability and profitability.
The core point of Friesdman’s essay is that the social responsibility of a business is such a strategy that is important for increasing profits. The profit increase is the prime objective of the business which is above all kinds of goals of an organization. The primary responsibility of the business also includes returning value to the stakeholders. The integration of the business with only the shareholders can enhance the areas of the business. The enhancement of business areas is more important for increasing the profitability of an organization. Therefore, Caroll’s business model is more important than Friedman’s shareholder model in the CSR of the business. Analysis of the impact of the responsibilities of the business is important for customer retention (Cabrera-Luján et al. 2023). Integration of the business with the public society also plays an important role in retaining customers and ensuring the profitability of the business.
It has been understood that Friedman’s Shareholder theory is not bothered about the CSR of the business and it cannot give detailed evaluation regarding this. On the other hand, Caroll’s model of CSR is relevant in evaluating all the aspects of the CSR of a business. This model breaks down the responsibility of the business into four areas. According to this model, the business is accountable for all these areas to ensure the successful CSR of the organization. All these responsibilities are economic, legal responsibilities, ethical responsibilities, and philanthropic responsibilities. Caroll’s model is considered an exploratory model (Bastos et al. 2019). Therefore. This model can be used in analyzing the impact of the responsibilities of the business on society. On the other hand, the Triple bottom line theory also can be used in analyzing the CSR of a business and the impact of its responsibilities on society. Therefore, in analyzing the impact of a business’s responsibility on society, the triple bottom line theory and Caroll’s model are more significant than Friedman’s shareholder model as they focus on only the shareholders of the business.
In analyzing the impact of the responsibilities of the business on society, besides using the models related to CSR it also is necessary to follow some specific techniques. After selecting the framework or model to analyze the impact of the business’s responsibilities on society it is important to collect data and analyse those. Data collection helps to know the thoughts of customers and society regarding the business. The specific techniques help to define the responsibilities of the business which affects the society (Brammer et al. 2020). According to Friedman’s essay, the responsibilities of the business only need to focus on the shareholder and this is the only responsibility of the organization to foster. In this case, the responsibility of the corporate executives is also considered the responsibility of the business. They also need to focus on the satisfaction and return of the stakeholders’ value. On the other hand, through data collection and analysis processes it is possible to capture the CSR activities and their impact on society.
Businesses may face dilemmas in confronting their responsibilities if they follow Friedman’s essay on the social responsibility of the business. Friedman narrowed the understanding of the responsibilities of the business (Dmytriyev et al. 2021). There are some issues in managing the business also if it follows the social responsibility of the business. The business may have several types of challenges in fostering the business responsibilities but those are not discussed in Friedman’s essay. A business may face dilemmas in fostering its responsibilities if it cannot hire proper people as employees. The challenges of the businesses in fostering responsibilities are considered as the dilemmas of an organization in its responsibilities (Buhmann et al. 2020). The responsibilities of the business include its societal responsibility, economic responsibility, environmental responsibility, legal and philanthropic Friedman is not concerned regarding all these kinds of responsibilities and only focuses on the shareholders which may create issues in business operation.
Only the shareholders of the business cannot help foster all kinds of business. It also cannot meet all kinds of requirements which may be received from society. The shareholder of the business may give financial support to the business but it cannot help in increasing the engagement of customers and their retention. Most of the businesses also face challenges in implementing the responsibility plan. The Essay of Friedman also failed to give solutions to this dilemma of the business. It is important to bring innovation in fostering the responsibilities of a business (Uyarra et al. 2019). It helps to attract customers and also reduces dilemmas in fostering business responsibilities. The business faces dilemmas in confronting business responsibilities if it fails to build a brand image and an effective customer base. Apart from that, integration of the business is one of the keys to building a customer base of a business.
As per Friedman’s essay, the competition in the market is challenging for the confrontation of the responsibilities of business. In this case, the business authority needs to think about its necessity and its activities to meet the necessities. Friedman overlooks all these things in business responsibilities and only focuses on responsibilities towards the shareholders and increases profitability. The social responsibilities of a business can foster the development of society (Sheth and Parvatiyar, 2021). Friedman has not mentioned any things about the responsibilities of the business towards the common people and environment. This person only focused on the business and shareholders. Apart from that, Friedman’s essay supports capitalism. It is possible to extend the scope of political mechanisms to the activities of human beings if the social responsibilities of the business are seriously taken. Dependency of the businesses on clients can create issues in fostering business responsibilities and in this case, the organization needs to diversify its client base.
Friedman has not provided any discussion regarding money management which affects the business’s responsibility. The changes in the strategies of the business also create issues in confronting the business responsibilities. Methodological innovation is required to meet the dilemmas of the business in confronting the business responsibilities (Sheng et al. 2021). According to Friedman one of the most important responsibilities of businesses is to return stakeholder values and to increase profits. Thus, other dilemmas of the responsibilities are ignored in the social responsibility essay of Friedman. Apart from that it can be said that the responsibility areas of the businesses are limited in Friedman’s essay related to social responsibilities. Apart from that this shareholder model does not apply to all businesses.
Conclusion
Friedman’s essay has focused on social responsibility and this social responsibility does not give importance to the responsibilities of the organizations towards the civil society. According to the essay of Friedman, the business has only one responsibility to its shareholders and that is to return the shareholder value to satisfy them. Apart from that it has been understood that Friedma’s shareholder theory is also limited and it cannot analyze the CSR of a business. Friedman tries to limit the responsibility of the business to its shareholders. This limitation also can create issues in the operation of the entire business. Friedman has not talked about the use of models or frameworks in analyzing the business responsibilities of society and the environment. This personality has given importance to the shareholder model to point out the responsibilities of the business.
After the entire discussion, it can be said that Friedman’s social responsibility is not appropriate or effective in developing a good customer base for a business. In fostering the social responsibilities of the business Friedman kept the corporate executives in the frontline. The corporate executives focus on fostering the responsibilities towards the shareholder as they remain satisfied with the return. Another important responsibility of the business is to increase profitability. Besides these, the businesses need to focus on the development of the society and the sustainability of the environment. All these kinds of responsibilities and activities of the businesses are relevant in increasing the profitability and sustainability of the business. Therefore, in this essay of Friedman about social responsibilities, all kinds of business responsibilities towards society are not mentioned.
Reference List
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