Must Milton Friedman Embrace Stakeholder Theory?

• Published date: 01 March 2014
• Author: W. Michael Hoffman,Ignacio Ferrero,Robert E. McNulty
• Date: 01 March 2014
• DOI: http://doi.org/10.1111/basr.12024

Must Milton Friedman

Embrace Stakeholder Theory?

IGNACIO FERRERO, W. MICHAEL HOFFMAN, AND

ROBERT E. MCNULTY

ABSTRACT

Milton Friedman famously stated that the only social

responsibility of business is to increase its profits, a

position now known as the shareholder model of busi-

ness. Subsequently, the stakeholder model, associated

with Edward Freeman, has been widely seen as a heu-

ristically stronger theory of the responsibilities of the

firm to the society in which it is situated. Friedman’s

position, nevertheless, has retained currency among

many business thinkers. In this article, we argue that

Friedman’s economic writings assume an economy in

which businesses operate under the protections of

limited liability, which allows corporations to privatize

their gains while externalizing their losses. By accepting

limited liability, Friedman must also accept a view of

business as embedded in social interdependency, which

serves as the logical and moral foundation for corporate

social responsibility (CSR). To achieve consistency with

his economic principles, Friedman must either abandon

limited liability or modify his doctrine on CSR and his

related shareholder model of business.

Ignacio Ferrero is a Professor of Business Ethics, Department of Business, University

of Navarra, Campus Universitario, Pamplona, Navarra, Spain. E-mail: jiferrero@unav.es.

W. Michael Hoffman is an Executive Director, Center for Business Ethics, and Hieken Professor

of Business and Professional Ethics, Bentley University, Waltham, MA. E-mail: mhoffman

@bentley.edu. Robert E. McNulty is a Director of Programs, Center for Business Ethics, Bentley

University, Waltham, MA. E-mail: rmcnulty@bentley.edu.

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Business and Society Review 119:1 37–59

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INTRODUCTION

There have been attempts by various scholars to interpret

Milton Friedman’s shareholder model in a way that brings

it closer to the idea of corporate social responsibility and

the stakeholder model most widely associated with Edward

Freeman. Indeed, in one article, Freeman “welcomed Friedman to

the big tent of stakeholder theorists” because, as Freeman sees it,

creating value for stakeholders is the way to maximize profits

(2008, p. 166). However, as we see it, rather than bringing Fried-

man into the stakeholder theory tent, Freeman’s argument pre-

serves the core of Friedman’s shareholder model by putting

emphasis on profit maximization for shareholders while allowing

for concern for other stakeholders’ interests only insofar as they

serve the instrumental purpose of supporting shareholder inter-

ests. This view falls far afield of stakeholder theory. However, we

think there is another way to move Friedman’s shareholder model

to Freeman’s stakeholder model and that is to recognize in Fried-

man’s position an internal contradiction, which in resolving

necessitates that Friedman himself must embrace stakeholder

theory. The key is to recognize the place of limited liability within

Friedman’s own interpretation of modern economics.

Simply put, limited liability allows corporations to privatize

their gains while externalizing or “socializing” their losses, and in

so doing companies are authorized to, as it were, impose taxes or

costs on other people without their direct consent. This “taxation

without representation” seems to threaten two concepts that are

crucial to Friedman’s shareholder model that he draws on in

articulating his reason for rejecting corporate social responsibility:

private property and voluntary exchange. Therefore, Friedman

should either reject limited liability or he should reconsider these

assumptions, accepting the consequences that would follow. We

argue that Friedman’s commitment to a functional model of free

market economics is based on the acceptance of the necessity of

limited liability, and in so doing, businesses must be seen as

participating in an economic ecology of shared risks and benefits

that is at the heart of the stakeholder model.

Let us begin by first explaining why private property and vol-

untary exchange are so important for Friedman’s shareholder

model and his doctrine on corporate social responsibility. We will

38 BUSINESS AND SOCIETY REVIEW