Pedavena, 12 Giugno 2010

Shareholder v. Stakeholder
Theory: Milton Friedman v. Ed
Freeman (Discussing the readings)

Simone de Colle
University of Virginia
sd7ua@virginia.edu

1
Different views on ethics and business
are they really incompatible?

The only Social responsibility of business is

to increase its profits
Milton Friedman, economist

Managers shoud balance the multiple-and sometimes

conflicting-claims of their stakeholders
Ed Freeman, stakeholder theorist
 Milton Friedman (1970)
The only Social responsibility of business
is to increase its profits
What is Friedmans argument, in a nutshell (or 4 steps)?

1. business cannot have responsibilities

(only individuals/managers do)
2. The managers of the corporation are
the Agents of a Principal (the shareholders)
3. The shareholders want Max profit
4. CSR is taxation without representation

Therefore, the only social responsibility

of managers is to maximize profits!
Reading it carefully: Is Milton Friedman really
arguing that there is no ethics in business?

Milton Friedman (1970):

The only social responsibility of

business is 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.

4
 Edreading Milton
(Freeman) (Friedman)
The Friedman Problem:
Business as Maximizing Shareholder Value

Milton Friedmans New York Times Magazine

article, The Social Responsibility of Business is to
increase its profits has been long juxtaposed
against stakeholder theory and the ensuing debates
have revealed few new or useful insights. In an attempt to move
beyond the narrow supposed stakeholder/stockholder dichotomy,
we spell out our reading of Friedmans controversial article which
we believe to be compatible with Stakeholder
theoryin fact we see Friedman as an early
stakeholder theorist.

(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
Ed Freeman & Stakeholder Theory

Definition of stakeholder
In a narrow sense, the stakeholders are all those
identifiable groups or individuals on which the
organisation depends for its survival, sometimes
referred to as primary stakeholders: stockholders,
employees, customers, suppliers and key government
agencies.
On a broader level, however, a stakeholder is any
identifiable groups or individual who can affect or
is affected by organisational performance in terms
of its products, policies and work processes. In this
sense, public interests groups, protest groups, local
communities, government agencies, trade associations,
competitors, unions, and the press are organisational
stakeholders.
(R.E. Freeman,1984)
Definitional and Instrumental Stakeholders

Environmentalists
NGOS Governments

Financiers

Suppliers Firm Customers

Employees Communities

Critics Others Media

 Edreading Milton
(Freeman) (Friedman)
The Friedman Problem: Business as Maximizing Shareholder Value

Friedman writes, It may be in the long-run interest of a corporation that is a major employer in
a small community to devote resources to providing amenities to that community or to improving
its government, he goes on to say that it is wrong to call this social responsibility because, they
[the actions] are entirely justified in its [the corporations] self interest.
For Friedman supporting stakeholder interests is not about social responsibility; its
about capitalism. According to Friedman the purpose of business is 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.
All this sounds well and good to us. A key difference between our view and Friedmans is
what makes business successful. Friedman believes that it is maximizing profits. We believe
that in order to maximize profits in the long-run, companies need great products and services
that customers want, solid relations with suppliers that keep operations on the cutting edge,
inspired employees who stand for the company mission and push the company to become better,
supportive communities that allow businesses to flourish.
So in our view Friedman could have written the above quotation as: Business is about making
sure that products and services actually do what you say they are going to do, doing business
with suppliers who want to make you better, having employees who are engaged in their work,
and being good citizens in the community may well be in the long-run (or even possibly the short
run) interest of a corporation.
Stakeholder management is just good management and will lead to maximizing
profits.

(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
 Freeman reading Friedman (cont.)
Under this reading Friedman is at least an instrumental
stakeholder theorist...
There is a difference in the theories about the way the world
works. Friedman may actually believe that if you try to maximize
profits you will. We believe that trying to maximize profits
is counterproductive because it takes attention away
from the fundamental drivers of value stakeholder
relationships. There has been considerable research that
shows that profitable firms have a purpose and values beyond
profit maximization (Collins & Porras, Waddock et al.)
Both we and Friedman agree that business and capitalism
is not about social responsibility.
Despite the differences we believe the Friedmans
maximizing shareholder value view is compatible with
stakeholder theory after all the only way to maximize value
sustainably is to satisfy stakeholder interests.

(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
 Freeman on mainstream management
theory:
The Separation Fallacy
The Separation Fallacy:
It is useful to believe that sentences like, x is a business decision have
no ethical content or any implicit ethical point of view. And, it is
useful to believe that sentences like x is an ethical decision, the best
thing to do all things considered have no content or implicit view about
value creation and trade (business).

This fallacy underlies much of the dominant story about business, as well as in other
areas in society. There are two implications of rejecting the Separation Fallacy. The
first is that almost any business decision has some ethical content. To see that this
true one need only ask whether the following questions make sense for virtually any
business decision

The Open Question Argument

(1) If this decision is made for whom in value created and destroyed?
(2) Who is harmed and/or benefited by this decision?
(3) Whose rights are enabled and whose values are realized by this decision
(and whose are not)?
(4) What kind of person will I (we) become if we make this decision?
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
 The Reality: We Have a Better Way

Business is about the creation of value for

stakeholders. Value has economic, social, political,
technological, and other aspects to it.

Separating business from social is a mistake.

It marginalizes social and gives business and
capitalism a bad name, as anything goes.

(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
 CONCLUSION: Freeman suggests that we
replace Corporate Social Responsibility
with Corporate Stakeholder Responsibility

Corporate Stakeholder Responsibility is practical,

and leads to a more robust idea of value creation.
CStakeholderR is the essence of capitalism as a
system of social cooperation and value creation

In other words, Managing for stakeholders is

about creating as much value as possible for
stakeholders, without resorting to tradeoffs.

(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
 Q Una definizione di CSR come
RES governance allargata (Sacconi 2003)

Chi governa limpresa ha responsabilit

che si estendono dallosservanza dei
doveri fiduciari nei riguardi della
propriet (azionisti) ad analoghi doveri
fiduciari nei riguardi in generale di
La CSR tutti gli stakeholder
come
modello di
La CSR un processo
gestione volontario attraverso il quale
strategica limpresa si assume dei doveri
dimpresa
fiduciari verso tutti gli
stakeholder.
Non fare beneficienza... (non
solo)
un nuovo modello di
 SHAREHOLDER or
Q STAKEHOLDER VALUE?
RES
Gestire limpresa secondo il contratto sociale
significa:
Cercare un equilibrio equo che implica la soddisfazione
degli interessi di ciascuno STAKEHOLDER, quindi anche
dello SHAREHOLDER
N.B. Questo vero in un senso ma non nellaltro:
il massimo interesse dello shareholder non coincide
Sacconi: sempre con laccordo imparziale (sorry, Mr. Friedman!)
CSR as a
Governance Procedura decisionale:
model
minimizza le esternalit su soggetti esterni non
partecipanti alle transazioni
calcola tutti gli accordi compatibili con la
massimizzazione degli interessi congiunti, cio con
laccordo cooperativo degli stakeholder in senso stretto
entro questo insieme, se esiste pi di una decisione
possibile, scegli quella che massimizza il valore degli
SHAREHOLDER