A company's sole social responsibility is to increase profits for shareholders within the law.
Friedman's 1970 New York Times essay. Heavily contested since, and its own premise is often skipped: the obligation holds within the rules of the game, which includes law and ethical custom.
In practice
- A board declines to fund a local hospital wing on the ground that the money is the shareholders' to give, and raises the dividend instead.
- A buyer cuts a supplier to the legal minimum on payment terms, and finds out at the next shortage what the ethical-custom clause was doing.
- Possible explanations
- The explanation is agency: a manager spending shareholders' money on social causes is spending money that is not his, and without the accountability an elected official has.
- In its favour
- It gives a clear and auditable objective, and it guards against managers substituting their own preferences for those of the owners, which is a documented problem.
- Against it
- Externalities and incomplete contracts mean that obeying the law does not make a firm bear the costs it imposes, and empirical work finds no necessary conflict between stakeholder practices and returns. Friedman's own qualification, that the rules include ethical custom, is usually dropped.
- Standing
- Heavily contested; stakeholder and public-benefit models are the standing alternatives.
- Further reading
- Wikipedia
- Subject
- Organizations & Bureaucracy
- Essay
- Rules for running organisations, and for pressing them