Introduction
Milton Friedman’s claim that management’s main objective should be to expand shareholder wealth is misleading. It does not fully embrace certain business dynamics such as shareholder roles, obligations to other stakeholders, the moral minimum, effectiveness of the legal system, as well as sustainability of nonfinancial interests.
The essay will discuss shareholder roles, the legal system, existence of other stakeholders, morality and plausibility of other objectives.
More than shareholder wealth
Scholars know Milton Friedman for believing in free enterprise; consequently, it is not a surprise that he advocated for the primacy of shareholder wealth (Wilcke 2004). He believed that such a goal was symptomatic of the freedoms and rights that cause voluntary exchange and economic success.
However, Milton and his supporters may have ignored certain crucial elements of business that do not relate directly to shareholder wealth. First, Milton assumed that managers and shareholders are entirely separate entities (Husted & Salazar 2006). In today’s business arena, entrepreneurs have so many business structures to choose.
Some entrepreneurs may form limited liability firms, public corporations or partnerships. Depending on the structure chosen, a manager may also double as a shareholder and thus perform duties that extend beyond Friedman’s narrow limitation of management’s duties. Friedman’s interpretation of their role was a contractual obligation that placed them at the mercy of their shareholders (Wilcke 2004).
He did not consider the fact that some managers may sometimes perform executive decisions on the basis of their equity in the firm. Some of them may decide how capital investments occur or engage in public relations. This implies that managers can be concerned with more than just shareholder’s value if they have practical ownership of an organisation.
In this light, management has another key objective that it ought to consider; social performance (Husted & Salazar 2006). As such, one can question Friedman’s assertions about the primary objective of management.
One can also criticise Milton’s ideas based on the roles and responsibilities of shareholders, as well. In Freidman’s articles, he assumed that shareholders were permanent, or at least interested in the long term interest of the firm. However, this is not always true; plenty of investors can buy and sell shares without attending shareholder meetings or weighing in managerial/ operational activities (Nesteruk 1990).
Most stock markets in the world have stockbrokers who do not consider other intricate aspects of a business before buying their stock. Theirs is to dwell on price and the immediate benefits they can get from the deal (Nesteruk 1990). As a result, company shareholders can change drastically within a short time.
Management would be confused about whose wishes to follow if they focused solely on these shareholders’ interests. The internet age has made stock trading a common practice for inexperienced and short term traders. Companies would be overwhelmed if they tried to meet the needs of people who can come and go as they wish.
Managers need to focus on more sustainable approaches to business through a shift to more long-term stakeholders (Wilcke 2004). This unpredictable behaviour of shareholders makes Friedman’s arguments difficult to practice, thus rendering them invalid.
The assumption that shareholders’ needs come first because they are the owners of the business is also not consistent with today’s practices (Ghoshal 2005). Modern firms have complicated ownership arrangements at any one time. Unlike a real property owner who purchases and uses property as he or she sees fit, business owners (shareholders) do not have a claim over certain corporate asserts.
Theoretically, one can treat shareholders as owners, but when one analyses shareholders’ duties carefully, one finds that shareholders do not fit into the ownership mould perfectly (Ghoshal 2005). First, because shareholders appoint managers to act on their behalf and make decisions for them, then managers may have significantly more discretionary power in the company than shareholders. Ownership and control are totally separate in the business environment.
This means that shareholders do not possess all the characteristics required to grant them ownership. Shareholders do not make an actual impact on corporate decisions. They are merely beneficiaries of proper decisions. Consequently, their needs should not be the only point of focus for management.
The issue of morality also neutralises this scholar’s arguments on the primary objective of business. If businesses follow Friedman’s assertions about focusing solely on profitability, then they would be reducing corporate morality to nothing more than their legal obligations. If their shareholder needs cause consequences that the law does not govern, then corporations would not be concerned about them. This perspective gives company executives too much power.
According to Freidman, an executive who acts as a bureaucratic machine may make as much money as possible so long as the person does not act deceitfully or break the law (Cosans 2008). Friedman’s views fail to encompass the complex nature of morality and thus miss out on an important aspect of business objectives.
When Freidman made his assertions about the primary objective of management, he had a lot of confidence in the legal system as well as the marketplace. His assumption was that the market had its own way of correcting imbalances in business. Furthermore, the law would ensure that business entities meet their respective obligations.
However, the marketplace and the law have numerous flaws that allow disreputable managers to go about their business; this makes Milton’s theory shaky (Post 2003). One of the flaws lies in the degree of punishment that a corporate manager is eligible to when he or she acts wrongfully. Most of the time, judges will expect companies to pay only small amounts of money for their mistakes.
Furthermore, law enforcers do not hold managers personally accountable during punishment. As if this is not enough, regulatory schemes designed to protect entities in business are sometimes inconsistent and difficult to implement. This means that management may get away with unfair conduct. Even the inherent nature of these laws impedes their effectiveness.
Sometimes laws can become so complicated that managers themselves are not sure whether they should follow the law or not. Legislators are in charge of creating these laws, and sometimes a number of them may pursue their own interests when enacting them (Post 2003). Businesses must then surrender control to these self-seeking legislators.
Since all the above flaws exist in the development of legal mechanisms, then one must question the ability of the system to protect business interests effectively. The law itself is not adequate enough to ensure that corporate managers behave responsibly. Therefore, companies must take it upon themselves to become socially responsible.
This implies that they should not merely focus on maximisation of shareholder interests as their sole objective. Friedman’s assertions rested on the premise that the marketplace and the law were enough to regulate behaviour, yet this is not true. Unless companies have their own sense of responsibility, then financial prosperity alone will not be adequate.
Management’s primary objective differs from Milton’s assertions because managers are not responsible to company owners alone. Employees and customers are other stakeholders that management owes an allegiance (Ghoshal 2005). A firm may choose to increase its wage bill or shrink its working hours purely for noneconomic reasons. This may be done in order to foster a sense of belonging with the organisation.
Firms may choose to implement environmentally friendly work policies so as to foster a sustainable business environment; these are all illustrations of CSR. Corporate responsibility, therefore, becomes a crucial part of conducting business. It implies that profit seeking may not be the primary objective (Wilcke 2004). When management merely focuses on profit maximising activities for shareholders, then it reduces itself to a short-sighted entity.
If a company chooses to increase work days for employees, it may not be serving shareholder interests, but it will work towards improvement of the business climate. Corporate social responsibility is a response to the uncertainties that companies have to deal with in this highly dynamic, interconnected and technologically advanced world (Van Beurden and Gossling 2008). A relationship exists between long term profitability and business interests.
Smith (2003) explains that companies can easily avoid legal sanctions if they embrace corporate social responsibility. They can also gain sustainable advantage if they do the same. Employees now look for firms with strong values. If a business has a strong belief in CSR, then it can gain sustainable advantage over its peers through sourcing of better employees.
Smith (2003) also adds that companies, which focus on other stakeholders other than shareholders, have the benefit of attracting exceptional talent. They can also enhance their business reputations. These are long term objectives that cannot be achieved if managers merely focus on expansion of shareholder wealth.
In line with the latter point, a company owes allegiance to more people than just the shareholders. Customers’ demands are just as critical as any other expectations from share holders (Van Beurden and Gossling 2008). Buyers now expect firms to engage in sustainable business practices (Smith 2003). In other words, they require them to be competent corporate citizens.
Since companies are crucial entities in society, then they need to embrace their responsibilities. They now know about business operations and demand more from various firms. For example, customers will research about the sourcing practices of a company, such as Mecca Espresso quite seriously. If they realise that the company gets its coffee from countries which use child labour, then they may boycott the company’s products.
Alternatively, if a clothing franchiser like Gucci employs sweatshop labour to produce its items, then customers may lobby against the use of their products. In this regard, social actions are just as significant as financial success to a corporation. In fact, rising consumer expectations have caused most companies to expand their primary objectives from financial ones to social ones (Van Beurden and Gossling 2008).
Firms can enjoy the benefit of having a loyal consumer base if they do more than maximisation of shareholder wealth. The enlightenment of consumers has caused buyers to become crucial determinants of corporate policy, thus becoming other contributors to the objectives of doing business.
Counters to Friedman’s critics believe that shareholders are different from employees and customers, so equal treatment should not be expected (Post 2003). These advocates of shareholders’ interests affirm that, unlike suppliers or workers, whose contracts commit them to the company, shareholders have no such arrangements to protect them.
They add that contracts are always subject to renewal thus allowing these stakeholders to renegotiate the terms of their agreement (Shaw 2009). Privileges accorded to other entities neutralise the benefits associated with being shareholders (Post 2003). However, what these advocates of Friedman’s theory do not realise is shareholders have privileges that other groups do not possess (Post 2003).
Shareholders can appoint directors as they see fit. Furthermore, they can sell their shares and abandon a certain company if its performance dissatisfies them. Employees cannot jump from one firm to another as easily as shareholders do because jobs are hard to get. Suppliers have minimal control over their clients’ activities.
Other stakeholders do not posses the same rights that shareholders possess; consequently, management should not try to compensate for their lack of contractual coverage by making shareholder interests their primary objective.
Failure to acknowledge other stakeholders in the business environment may cause companies to engage in business practices that have adverse consequences in society. This is because firms may focus only on finance and ignore other equally vital components of business, such as ethics. All firms have a moral minimum that they must uphold in business (Smith 2003).
For example, obsession with profit seeking among companies contributed to the global recession. Organisations were willing to perform extreme acts in order to expand shareholder wealth (Bejou 2011). Many of these companies got carried away by short terms gains and failed to think about the long term repercussions of their actions.
It was this short-sightedness that eventually led to their demise and disturbances in society, as well. Companies owe their communities some degree of allegiance (Nesteruk 1990). It is also in a firm’s best interest to take care of its community in order to enhance sustainability. Failure to acknowledge the importance of this group may eventually cause unwanted effects upon the business entity.
For instance, some companies generate immense profits and hand out generous bonuses to their executives. However, by years end, these firms have also left minimal rewards to their constituents. Some of them have had to close down their businesses owing to the frustrations of their employees or other stakeholders (Bejou 2011). Corporate social responsibility provides a much needed balance in the corporate world because it gives companies a human side.
If all organisations were to stick to Milton Friedman’s assertions about financial obligations, they would become cold and uncaring. Businesses would become nothing more than money-making machines with little concern for the humans that are the real purpose of the organisations existence.
If companies only dwelt on maximisation of shareholder wealth, they would not act with integrity or follow the principles of corporate governance. At least, companies ought to prevent social injury, and when it has occurred, they should try to correct it (Smith 2003).
Friedman’s perspective does not encompass the importance of business growth or innovation. Growth has the potential to enhance company profits, as well as society’s wellbeing in general. Therefore, it is smarter to seek growth as an objective rather than shareholder wealth alone (Ahlstrom 2010).
A company that frequently innovates will introduce the market to cutting edge products; as a result, the company will become financially successful and also provide numerous benefits to the market. Social goals such as creation of new jobs and generation of enormous profits in business are just some of the many benefits of business growth and innovation.
Essentially, communities with highly innovative firms tend to experience better standards of living over time (Ahlstrom 2010). Even economic growth can occur in a country if businesses concentrate on growth as a primary objective; a company that accurately illustrates this point is US Steel. It was the leading steel maker in the US during the early 1990s.
At the time, smaller steel mills introduced an innovation that entailed the use of mini mills. It was a revolutionary product that pressured US Steel into adopting their mini mills. Accountants who believed in Freidman’s concerns for financial gain advised the company against it. They instead told them to dwell on their respective upmarket clientele.
At the time, the stock market appeared to reward US steel through better equity rewards. However, with time, the smaller entrants began improving their mini mills and eventually altered US Steel’s dominance of the upmarket category. The company failed to embrace growth and innovation, and this led to attrition of its market share (Ahlstrom 2010).
One may assert that their failure stemmed from too much emphasis on profitability and minimal regard for innovation. More effective primary objectives like striving for business growth and innovation exist. Companies would put themselves in a greater position to succeed if they pursued this goal instead of focusing on profitability alone.
Perhaps another way one can know that Milton Freidman’s assertions are not all encompassing is through case studies. Practical cases of social responsibility and financial success prove that profitability is not the only objective for businesses. Some of the most profitable organisations are also some of the most sustainable.
This implies that they are not merely concerned about shareholders’ wealth. Firms like Coca Cola, Honda, and Adidas are among the most internationally sustainable institutions, yet they still satisfy shareholder needs by yielding substantial results (Jensen 2002).
Their success is indicative of the fact that companies no longer see shareholder needs as their only objective. These firms have embraced and practiced obligations to other entities.
Conclusion
Companies can be profitable but still engage in wrong decisions; it is not enough to dwell on financial returns exclusively. Basing one’s decision solely on profits will not guarantee social responsibility, yet the phenomenon is imperative both for the benefit of society and business.
Furthermore, a firm has several constituent groups such as suppliers, employees, communities and clients whose needs ought to be acknowledged. Companies can get a greater competitive advantage if the dwelt on more than their shareholders’ needs. A balance between a firm’s needs and others’ needs ought to be maintained in order to foster a degree of maturity in the industry.
Opponents to Milton Friedman do not disregard the importance of financial success within an organisation; however, they do not think that it is the only plausible objective. Focusing on other objectives, in addition to shareholder needs, leads to more sustainable results.
References
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