Milton Friedman

Definition

Milton Friedman was a renowned American economist and a key proponent of free-market capitalism, whose ideas significantly shaped the discourse on corporate governance and ethical decision-making. He is best known for his assertion that the primary responsibility of a corporation is to maximize shareholder value, a concept that has had lasting implications on corporate governance practices and ethical standards in business decision-making.

5 Must Know Facts For Your Next Test

1. Friedman argued that corporate executives are employees of the owners (shareholders) and must act in their interest, thereby establishing a clear link between profit maximization and corporate governance.
2. He believed that businesses should focus solely on profit maximization within the bounds of the law, advocating against the notion of corporations having broader social responsibilities.
3. Friedman's views gained prominence during the 1970s, influencing corporate governance policies that prioritized shareholder value over other stakeholder interests.
4. His ideas contributed to the rise of the neoliberal economic policies that emphasized deregulation and reduced government intervention in business.
5. Friedman’s 1970 article 'The Social Responsibility of Business is to Increase Its Profits' sparked significant debate on the role of ethics in corporate decision-making.

Review Questions

• How did Milton Friedman's perspective on shareholder value influence modern corporate governance practices?
  • Milton Friedman’s emphasis on shareholder value as the primary goal of corporations revolutionized modern corporate governance by establishing a framework where corporate executives are expected to prioritize profit maximization for shareholders. This shift influenced policies and practices that often sidelined other stakeholders' interests, emphasizing financial performance as the key measure of success. As a result, many companies adopted strategies focused heavily on short-term profits, which has sparked ongoing debates about the implications for long-term sustainability and ethical practices.
• Evaluate the criticisms of Friedman's viewpoint on corporate social responsibility and how these criticisms have shaped current discussions in corporate ethics.
  • Critics argue that Friedman's strict focus on profit maximization overlooks the ethical obligations businesses have towards society, employees, and the environment. This perspective has led to growing calls for Corporate Social Responsibility (CSR), suggesting that businesses should consider their impact on all stakeholders rather than solely prioritizing shareholders. The tensions between Friedman's doctrine and CSR highlight an evolving dialogue around corporate ethics, challenging companies to balance profitability with social accountability.
• Synthesize how Milton Friedman's economic theories can be reconciled with contemporary views on ethical decision-making in business.
  • Reconciling Milton Friedman’s economic theories with contemporary views on ethical decision-making requires a nuanced approach that respects the importance of profit while also acknowledging broader societal impacts. While Friedman's assertion emphasizes shareholder primacy, modern thinkers advocate for an integrated model where businesses can pursue profits alongside ethical considerations. This synthesis suggests that companies can enhance long-term value by investing in sustainable practices and engaging with stakeholders, thereby fostering a business environment that upholds both profitability and social responsibility.

Related terms

Shareholder Primacy:

The principle that a corporation's primary obligation is to its shareholders, focusing on maximizing profits and shareholder value above all else.

Corporate Social Responsibility (CSR): A business model in which companies integrate social and environmental concerns into their operations and stakeholder interactions, often contrasted with Friedman’s view.

Economic Freedom: The fundamental principle that individuals should have the freedom to engage in economic activities without undue government intervention, a concept strongly advocated by Friedman.