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Shareholder v. Stakeholder Theory: Milton Friedman v. Ed Freeman (Discussing the readings) 1 Simone de Colle University of Virginia

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Presentation on theme: "Shareholder v. Stakeholder Theory: Milton Friedman v. Ed Freeman (Discussing the readings) 1 Simone de Colle University of Virginia"— Presentation transcript:

1 Shareholder v. Stakeholder Theory: Milton Friedman v. Ed Freeman (Discussing the readings) 1 Simone de Colle University of Virginia Pedavena, 12 Giugno 2010

2 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

3 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!

4 Reading it carefully: Is Milton Friedman really arguing that there is no ethics in business? 4 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.

5 Ed…reading 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)

6 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)

7 Firm Financiers CommunitiesEmployees SuppliersCustomers MediaCritics NGOSGovernments Environmentalists Others Definitional and Instrumental Stakeholders

8 Ed…reading 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)

9 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)

10 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)

11 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)

12 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)

13 Chi governa limpresa ha responsabilità che si estendono dallosservanza dei doveri fiduciari nei riguardi della proprietà (azionisti) ad analoghi doveri fiduciari nei riguardi in generale di tutti gli stakeholder Una definizione di CSR come governance allargata (Sacconi 2003) La CSR è un processo volontario attraverso il quale limpresa si assume dei doveri fiduciari verso tutti gli stakeholder. Non è fare beneficienza... (non solo) È un nuovo modello di governance e gestione strategica dellimpresa La CSR come modello di gestione strategica dimpresa Q RES

14 Sacconi: CSR as a Governance model 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 è vero in un senso ma non nellaltro: il massimo interesse dello shareholder non coincide sempre con laccordo imparziale (sorry, Mr. Friedman!) SHAREHOLDER or STAKEHOLDER VALUE? Procedura decisionale : minimizza le esternalità su soggetti esterni non partecipanti alle transazioni calcola tutti gli accordi compatibili con la massimizzazione degli interessi congiunti, cioè con laccordo cooperativo degli stakeholder in senso stretto entro questo insieme, se esiste più di una decisione possibile, scegli quella che massimizza il valore degli SHAREHOLDER Q RES


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