Milton Friedman’s Shareholder Theory on Corporate Social Responsibility: A Critical Analysis

This is a critical review of Milton Friedman’s 1970 essay “The Social Responsibility of Business Is to Increase Its Profits”, written for a postgraduate business ethics module and referenced in Harvard style. It sets the shareholder theory against the three frameworks most modules pair it with: Carroll’s CSR pyramid, Freeman’s stakeholder theory and Elkington’s triple bottom line.

The assignment question: Critically analyse Milton Friedman’s shareholder theory on corporate social responsibility (CSR) and compare it with modern CSR frameworks.

If you have a similar brief, our MBA and management assignment help covers business ethics, CSR and critical reviews, and you can read more MBA assignment samples first.

The review below works in four moves: what Friedman actually claimed, where modern CSR departs from it, what Carroll’s pyramid and the triple bottom line add, and where the shareholder model fails. Quotations are taken from the essay as published in The New York Times Magazine on 13 September 1970.

What Is Milton Friedman’s Shareholder Theory?

Friedman held that a company’s only social responsibility is to increase its profits within the rules of the game. The executive is an employee of the owners, so money spent on social causes is the shareholders’ money spent on something they did not agree to buy. Social problems, on this view, belong to government and to individuals.

The argument runs through a single relationship. “In a free-enterprise, private-property system,” Friedman wrote, “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 generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom” (Friedman, 1970).

Two things follow, and students often miss the second. The first is the famous conclusion that “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, which is to say, engages in open and free competition without deception or fraud” (Friedman, 1970). The second is the caveat inside it. Friedman does not say a firm may do anything profitable. The rules of the game include law and ethical custom, and competition has to be open and free, without deception or fraud. A great deal of what is now filed under CSR, from honest marketing to not bribing officials, already sits inside Friedman’s own constraint.

His objection is narrower than it is usually reported to be. An executive who spends company money on a social purpose is, in Friedman’s words, spending someone else’s money: the shareholders’, the customers’ through higher prices, or the employees’ through lower wages. He is imposing a tax and deciding how to spend it, which Friedman regarded as the job of an elected government rather than of a manager. That is an argument about who has the authority to redistribute money, not a claim that businesspeople should be indifferent to society.

How Does Friedman’s Theory Compare with Modern CSR?

Modern CSR treats society and the environment as parties the firm answers to, not as costs outside it. Friedman recognises only the owners. The practical difference is that CSR research links responsible practice to reputation, customer loyalty and staff commitment, and therefore back to profit, which is the very outcome Friedman wants to protect.

Friedman’s shareholder theory compared with stakeholder theory and modern CSR

Point of comparison	Friedman (1970)	Stakeholder theory and modern CSR
Who the firm answers to	Friedman (1970) Its owners: the executive is their employee and runs the business as they wish	Stakeholder theory and modern CSR Employees, customers, suppliers, communities and regulators as well as shareholders (Freeman)
Law and ethical custom	Friedman (1970) Binding: both are part of the rules of the game	Stakeholder theory and modern CSR Binding: Carroll’s legal and ethical layers
Corporate giving	Friedman (1970) Spends the owners’ money on the executive’s preferences; the choice belongs to the owners or an elected government	Stakeholder theory and modern CSR Desired rather than required: the firm draws on the community and owes something back (Carroll)
How performance is measured	Friedman (1970) One bottom line, profit, with no instrument for social impact	Stakeholder theory and modern CSR Three accounts: profit, people and planet (Elkington)
When the law is silent or differs between countries	Friedman (1970) No answer: “stay inside the rules of the game” fails when there are two sets of rules	Stakeholder theory and modern CSR Stakeholder analysis at least says whose interests to weigh

The clearest challenge is R. Edward Freeman’s stakeholder theory. Freeman defines a stakeholder as “any group or individual who can affect or is affected by the achievement of the organization’s objectives” (Freeman, 1984, p. 46). That definition does not deny the shareholder’s claim; it says the shareholder is one claimant among employees, customers, suppliers, communities and regulators, each of whom can help or damage the firm. Where Friedman sees one principal, Freeman sees several, and management becomes the work of balancing them.

Dmytriyev, Freeman and Hörisch (2021) make a useful distinction for an essay of this kind: stakeholder theory and CSR are not the same thing. Stakeholder theory is a theory of how a business is managed, while CSR is a set of obligations a business is said to owe society. Friedman rejects the second and, by implication, narrows the first to one stakeholder. Saying which of the two your argument is about will keep the rest of the essay straight.

What Is Carroll’s CSR Pyramid?

Archie Carroll’s pyramid divides corporate responsibility into four layers: economic, legal, ethical and philanthropic. A firm must be profitable, obey the law, act ethically and contribute to the community. It is wider than Friedman’s model because the shareholder is one party among several, and it can be used to assess a firm, not only to assert a duty.

Carroll (1991) puts the economic layer at the base deliberately. A firm that does not make money cannot do anything else, so profitability is the foundation of responsibility rather than its opposite. The legal layer is society’s codified ethics. The ethical layer covers what is expected but not written down. The philanthropic layer, giving to the community, is desired rather than required, which is why Carroll places it at the top and not at the centre (Carroll, 1991).

Set the two models side by side and the overlap is larger than the disagreement. Carroll’s economic and legal layers are close to Friedman’s position, and his ethical layer is close to Friedman’s “ethical custom”. The real dispute is the philanthropic layer: Friedman would say a company that funds a community project is spending its owners’ money on the executive’s preferences, and that the owners should make that choice themselves. Carroll would say the firm draws on the community and owes something back. An essay that names that single point of disagreement will read better than one that treats the two as opposites throughout.

What Is the Triple Bottom Line?

The triple bottom line is John Elkington’s proposal that a business should be judged on three accounts rather than one: financial, social and environmental, or profit, people and planet. He coined the phrase in the early 1990s and developed it in Cannibals with Forks: The Triple Bottom Line of 21st Century Business (Elkington, 1997).

The point of the framework is measurement, which is what Friedman’s model lacks. A single financial bottom line tells you whether a company made money, not what it cost anyone else to make it. Three accounts force the firm to report the second question alongside the first, and that is why the triple bottom line became the backbone of sustainability reporting.

The honest version of this section includes what happened next. In 2018 Elkington published “25 Years Ago I Coined the Phrase ‘Triple Bottom Line.’ Here’s Why It’s Time to Rethink It” in Harvard Business Review, and issued what he called a recall of his own concept, noting how rarely a management idea is recalled by the person who invented it (Elkington, 2018). His complaint was that firms had turned the triple bottom line into an accounting and reporting exercise, a way of balancing social and environmental costs against profit, when it was meant to change what companies actually did. Citing that article is the difference between a review that repeats a framework and one that reads it.

Štreimikienė and Ahmed (2021) apply both Carroll’s pyramid and the triple bottom line to brand management and find the frameworks work together: the pyramid says what a firm owes, and the triple bottom line says how to account for it (Štreimikienė and Ahmed, 2021).

What Are the Criticisms of Friedman’s Shareholder Theory?

Friedman’s model is weak on four counts. It narrows responsibility to one group when reputation and customer loyalty also drive profit. It supplies no framework for measuring social impact. It leaves managers without a method when a real ethical dilemma arrives. And in the fifty years since, practice has moved the other way, towards more social and environmental reporting.

One: the shareholder is not the only source of profit. Friedman’s own criterion is long-run profitability, but the drivers of that profitability include the reputation of the firm, the loyalty of customers and the commitment of employees. Each is held by a group Friedman excludes from consideration. A company that treats a community or a workforce as outside its responsibility can lose money by doing so, which makes the exclusion self-defeating on Friedman’s own terms.

Two: there is nothing to measure. The doctrine yields a rule but no instrument. It cannot tell a manager how much pollution a plant caused, how safe the supply chain is, or whether pay is fair, because those quantities are not expressed in profit. Carroll’s pyramid gives a structure for the question and the triple bottom line gives an account for the answer; the shareholder model gives neither.

Three: it does not resolve dilemmas. The hard cases in business ethics are not choices between profit and charity. They are cases where the law is silent or differs between countries, where a practice is legal in the host market and unacceptable at home. “Stay inside the rules of the game” has no answer when there are two sets of rules. Stakeholder analysis at least tells a manager whose interests to weigh.

Four: fifty years of practice went the other way. Writing on the essay's fiftieth anniversary, commentators at MIT Sloan noted that companies now report more on the environment, climate, pay inequality and racial justice, not less, and that investors ask for those disclosures (Hartman, 2021). Whether that vindicates CSR or simply shows the market pricing risk is arguable, and saying which you think is a good way to close an essay on this question.

Is Friedman’s Shareholder Theory Still Valid?

Not as a complete account. It remains a serious argument about who owns company money, and its warning that executives spend other people’s funds still bites. But it cannot describe or measure a firm’s effect on society, and this review concludes that Carroll’s pyramid, stakeholder theory and the triple bottom line do that work better.

The strongest reading of Friedman is narrow and defensible: managers are agents, not trustees of the public purse, and a manager who diverts company money to a cause of their own choosing has taken a decision that belongs to the owners or to an elected government. The weakest reading, that business owes society nothing, is not what the essay says and is not worth defending. A good critical review makes that distinction explicit and then argues against the strong version rather than the weak one. The same discipline, describe briefly and then judge at length, runs through our critical analysis assignment on health policy and nursing.

Carroll’s pyramid, Freeman’s stakeholder theory and Elkington’s triple bottom line each answer something Friedman leaves open: what the firm owes, to whom, and how it would be measured. Elkington’s own recall is a reminder that the third of those is still unsettled, and that reporting three bottom lines is not the same as changing the business behind them.

Related samples and pages:

• CSR in small businesses: challenges and opportunities, the same debate at SME scale.
• CSR and brand image, a research proposal sample on the link this review argues for.
• Financial analysis of Godrej Properties, if your module also asks you to measure shareholder returns.
• Work environment at KPMG, for the employee side of corporate responsibility.
• All MBA assignment samples and MBA assignment help.

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Sources

• Carroll, A.B. (1991). The pyramid of corporate social responsibility: toward the moral management of organizational stakeholders. Business Horizons, 34(4), pp. 39-48. Available at: doi.org/10.1016/0007-6813(91)90005-G
• Dmytriyev, S.D., Freeman, R.E. and Hörisch, J. (2021). The relationship between stakeholder theory and corporate social responsibility: differences, similarities, and implications for social issues in management. Journal of Management Studies, 58(6), pp. 1441-1470. Available at: doi.org/10.1111/joms.12684
• Elkington, J. (1997). Cannibals with Forks: The Triple Bottom Line of 21st Century Business. Oxford: Capstone. Available at: openlibrary.org
• Elkington, J. (2018). 25 years ago I coined the phrase “triple bottom line.” Here’s why it’s time to rethink it. Harvard Business Review, 25 June. Available at: hbr.org
• Freeman, R.E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman. Available at: openlibrary.org
• Friedman, M. (1970). A Friedman doctrine: the social responsibility of business is to increase its profits. The New York Times Magazine, 13 September. Available at: nytimes.com (PDF of the original magazine pages)
• Hartman, N. (2021). Social responsibility matters to business: a different view from Milton Friedman from 50 years ago. MIT Sloan Experts, 11 January. The original page has been removed; archived copy available at: web.archive.org
• HEC Paris (n.d.). What is corporate social responsibility (CSR)? Society and Organizations Institute. Available at: hec.edu
• Štreimikienė, D. and Ahmed, R.R. (2021). Corporate social responsibility and brand management: evidence from Carroll’s pyramid and triple bottom line approaches. Technological and Economic Development of Economy, 27(4), pp. 852-875. Available at: doi.org/10.3846/tede.2021.14520