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Friedman Doctrine & Social Business Responsibility Essay

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Updated: Jul 11th, 2021

Introduction

An organization that strives to function in the global market to sell a particular product or service has to pursue the goals associated with increasing its profit margins; otherwise, it will not survive in a highly competitive setting. Therefore, a company needs to design and follow the policies that are geared toward maximizing revenue and enhancing sales. However, for a company to succeed, it also has to pay due attention to the needs of its stakeholders, as well as the ethical standards that are upheld in the selected community. However, with the introduction of the Friedman Doctrine (FD), which seems to revolve around the necessity to build corporate profit rates, the question of whether the theory may undermine the notion of corporate social responsibility (CSR) has been brought into the light (Elcil 2017). Although the theoretical framework of FD may seem like a rigid focus on the promotion of financial goals while neglecting people-oriented ones, with the introduction of the principles of CSR and a set of people-oriented values, a company can utilize the FD framework without infringing upon the rights of its stakeholders.

Friedman Doctrine: Description

The concept of the FD is fairly simple, yet it requires a significant effort for companies to integrate it into their context. FD views the needs of shareholders and, thus, by extension, the idea of the continuous increase in profits, as the foundational goal that a firm has to strive to achieve (Offer 2017). Since the FD framework places an excessively strong emphasis on the needs of shareholders and the continuous increase in profit margins, it used to be positioned as an important addition to the general set of tools for managing a company (Chelladurai 2016). However, intrinsic flaws of the described perspective have made it barely possible to integrate it into a modern business setting.

When considering the problematic aspects of the FD concept, one will realize that it is often seen solely from the position of the Agency Theory (AT). Indeed, when neglecting the foundational ethical values that are expected to be upheld in the business context, the FD system is likely to lead to disastrous outcomes and even open a threat of corporate fraud (Tian & Slocum 2016). The observed change is positive when explored from the perspective of the AT framework, which suggests that any transactions in the business setting have to occur with the help of an agent, who represents the principal party when performing regulator transactions (West 2016). The theory suggests that mediators are critical in the business environment, yet their role should be restricted to the performance of respective functions, while the principal participants should have the greatest power over the rest of the corporate processes and especially decision-making (West 2016). The theory in question aligns with the FD framework, allowing shareholders to be positioned as the key element of business interactions.

However, the proposed theory does not allow taking the needs of the rest of the stakeholders into consideration. As a result, the introduction of the idea of corporate governance in the course of which shareholders will make company-related decisions may damage the organization, leading to a drop in its performance, popularity, and, eventually, its profits (West 2016). Therefore, the FD approach can be seen as a rather controversial notion. While offering the continuous focus on profit increase and economic growth, it also eliminates a range of other components of successful market performance from the perspective.

Interpreting Friedman Doctrine: Ethics, Priorities, and Money

It is very easy to read the statement made by Friedman as the idea that a company should be concerned solely with the financial aspect of its performance, casting ethics aside when complex dilemmas are to be resolved. However, in the grand scheme of corporate performance, the notion of a performance enhancement can be regarded as the positive idea of keeping every aspect of a company’s functioning in check. By reinforcing the principles of corporate well-being as a system with all of its departments functioning perfectly, an organization can integrate the principles of the FD theory without affecting how it is perceived by the public eye.

Therefore, approaching FD from the perspective of the CSR theory, one will be able to see the postulates of the FD framework as the gateway toward integrating the principles of a stakeholder-based approach into the corporate setting. Once the process of increasing profit is dissected, one will learn that it comprises a range of elements such as the necessity to cater to the changing demands of customers and the need to foster the principles of diversity in the corporate setting (Lyons 2018). Indeed, the process of increasing profit hinges directly on a company’s ability to build staff motivation, loyalty, and engagement, which is virtually impossible once the identified elements are erased from the equation. Similarly, the broader understanding of the concept of profits implies addressing different aspects of corporate growth, such as the need to invest in R&D and enhance communication techniques to create reciprocity in communication with the key stakeholders.

Advantages and Disadvantages of the Shareholder Approach

The framework that the Friedman Doctrine supports and encourages can be defined as the shareholder approach. Placing a substantial amount of value on the increase in a firm’s profit margins, FD makes company leaders pay a vast amount of attention to only one aspect of a company’s functioning, which leads to the possible deterioration of other processes. In addition, studying the issue of FD implementation through the lens of corporate relationships, one will have to admit that the redistribution of power that the framework implies may affect staff members and other stakeholders significantly. The former may experience a lack of support and fail to receive the assistance required to maintain their motivation levels at the required rate (Sewchurran et al. 2016). For example, staff members may be left without the opportunities for compensation and other benefits, including the chance to improve their competencies.

Professional development and the chances for the acquisition of new knowledge and skills in the corporate environment are particularly important aspects of keeping the levels of corporate performance consistent (Shasiharan 2016). FD, in turn, deprives managers of the opportunity to allocate corporate financial assets in the required way, thus blocking the process of talent management and hampering the promotion of new HRM strategies. Thus, the approach that involves addressing the needs of shareholders is flawed in its very inception due to the excessive focus on shareholders only. However, as soon as other players are integrated into the system of corporate decision-making, the FD theory can be redeemed.

To prove the inconsistency of FD as a standalone theoretical framework and a tool for managing relationships within an organization, one may need to revisit the Marginal Productivity Theory (MPT). According to the basic tenets of MPT, each service or product should be priced equally to its marginal productivity, or, put differently, the results that it delivers (Ellerman 2016). However, when the FD principles are integrated into the environment where the MPT standards are upheld, the conflict between the needs of employees and the goals of an organization will inevitably occur (Ellerman 2016). Due to the continuous and unceasing focus on the increase in the firm’s profit rates, the FD framework will not allow for the introduction of compensations for employees, not to mention the lack of opportunities for offering them financial incentives (Ellerman 2016). Therefore, the existing theoretical tenets do not allow implementing the ideas associated with FD as the principal guidelines for managing a company.

Other Social Responsibilities: Focusing on Equity and Fairness

Therefore, viewing the notion of FD from different perspectives, one will have to concede that it needs to be supported by the corporate philosophy that focuses on the needs of people, including employees and customers, for the approach to remain sustainable. Although the emphasis on the needs of shareholders and, thus, the key corporate financial processes provides a gateway to a stellar strategy for maintaining financial security, it is unlikely to help a firm to yield an impressive revenue unless sociocultural issues are taken into consideration. For this reason, the FD theory needs to be supported by the principles of CSR to keep staff engaged and ensure that they deliver the expected results.

Nevertheless, it would be erroneous to claim that the FD framework does not align with the principles of CSR. Quite the contrary, given the fact that economic responsibility constitutes a crucial part thereof, certain aspects of FD can be used in the corporate environment to uphold CSR-related standards. For instance, the encouragement of values and behaviors that prevent financial fraud from taking place in the context of a firm aligns perfectly with the existing definition of CSR (Shasiharan 2016). Thus, by restricting the amount of power that FD provides to shareholders and creating the environment for meeting the needs of other participants of business relationships, one can integrate FD into the organizational environment without affecting the quality of its performance and even increasing it.

In addition, the introduction of the CSR principles and the ethics based on satisfying all parties involved will allow restricting shareholder decision-making to the realm over which they have tangible control and of which they have decent awareness. While shareholders have a crucial and impressive grasp of market-related and financial issues, they are unlikely to have a proper understanding of the mechanisms deployed at an organization for it to function well. Thus, the idea of enhancing the influence of shareholders and the introduction of their governance within a corporate setting needs to be viewed with due caution.

Conclusion

Although every company that does not position itself as a charity strives to increase its profit margins and gain greater revenues, the introduction of FD principles into the corporate setting as a sole framework for managing the needs of stakeholders is unlikely to yield positive results. Although the described tool is likely to assist in handling a vast range of financial operations and reduce the threat of financial fraud in the organizational context, it will also entail a significant number of challenges toward the regular functioning of a firm.

Representing one of the extremes in handling the issue of corporate governance, it will focus mostly on shareholders, thus preventing managers from addressing the needs of employees and customers, which will inevitably cause a drop in the revenues of an organization. The introduction of CSR principles, in turn, is unlikely to conflict with the specified framework as long as a company sets a rigid ethical framework and follows people-oriented values in its decision-making. The existing theories, especially the ones associated with the analysis of the needs of stakeholders in the economic setting, point to the necessity to introduce the notion of corporate equity into the workplace environment.

Reference List

Chelladurai, P 2016, ‘Corporate social responsibility and discretionary social initiatives in sport: a position paper’, Journal of Global Sport Management, vol. 1, no. 1-2, pp. 4-18.

Elcil, Ş 2017, ‘Ethical investigation of social responsibility activities towards the environment’, Journal of Current Researches on Social Sciences, vol. 7, no. 4, pp. 161-170.

Ellerman, D 2016, ‘Reply to commentaries on ‘The labour theory of property and marginal productivity theory’, Economic Thought, vol. 5, pp. 44-61.

Lyons, D 2018, Lab rats: how Silicon Valley made work miserable for the rest of us, Hachette UK, London.

Offer, A 2017, ‘The market turn: from social democracy to market liberalism’, The Economic History Review, vol. 70, no. 4, pp. 1051-1071.

Sewchurran, K, Philipp, F, Baets, W & McDonogh, J 2016, ‘Could more thoughtful practice of complexity, design thinking and values-based organising address some of the limitations of current management and organising paradigms’, International Journal of Complexity in Leadership and Management, vol. 3, no. 3, pp. 169-181.

Shasiharan, P 2016, ‘The influence of societal structure and the impact of legal regulation on corporate social responsibility: a comparative perspective’, LSE Law Review, vol. 1, pp. 92-124.

Tian, X & Slocum, JW 2016, ‘Managing corporate social responsibility in China’, Organizational Dynamics, vol. 45, no. 1, pp. 39-46.

West, A 2016, ‘Applying metaethical and normative claims of moral relativism to (shareholder and stakeholder) models of corporate governance’, Journal of Business Ethics, vol. 135, no. 2, pp. 199-215.

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