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The Friedman doctrine, also called shareholder theory, is a
normative Normativity is the phenomenon in human societies of designating some actions or outcomes as good, desirable, or permissible, and others as bad, undesirable, or impermissible. A Norm (philosophy), norm in this sense means a standard for evaluatin ...
theory of
business ethics Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics, that examines ethical principles and moral or ethical problems that can arise in a business environment. It applies to all aspects of business c ...
advanced by economist
Milton Friedman Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and ...
that holds that the social responsibility of business is to increase its profits. This
shareholder primacy Shareholder primacy is a theory in corporate governance holding that shareholder interests should be assigned first priority relative to all other stakeholders. A shareholder primacy approach often gives shareholders power to intercede directly a ...
approach views shareholders as the economic engine of the organization and the only group to which the firm is socially responsible. As such, the goal of the firm is to increase its profits and maximize returns to shareholders. Friedman argued that the shareholders can then decide for themselves what social initiatives to take part in rather than have an
executive Executive ( exe., exec., execu.) may refer to: Role or title * Executive, a senior management role in an organization ** Chief executive officer (CEO), one of the highest-ranking corporate officers (executives) or administrators ** Executive dir ...
whom the shareholders appointed explicitly for business purposes decide such matters for them. The Friedman doctrine has been very influential in the corporate world from the 1980s to the 2000s. It has also attracted criticism, particularly since the
2008 financial crisis The 2008 financial crisis, also known as the global financial crisis (GFC), was a major worldwide financial crisis centered in the United States. The causes of the 2008 crisis included excessive speculation on housing values by both homeowners ...
, caused by various
financial institutions A financial institution, sometimes called a banking institution, is a business entity that provides service as an intermediary for different types of financial monetary transactions. Broadly speaking, there are three major types of financial ins ...
which engaged in excessive risk for profit maximization, causing the bubble and collapse of the American real estate market that triggered the crisis throughout the wider global economy.


Overview

Friedman introduced the theory in a 1970 essay for ''
The New York Times ''The New York Times'' (''NYT'') is an American daily newspaper based in New York City. ''The New York Times'' covers domestic, national, and international news, and publishes opinion pieces, investigative reports, and reviews. As one of ...
'' titled "A Friedman Doctrine: The Social Responsibility of Business is to Increase Its Profits". In it, he argued that a company has no
social responsibility Social responsibility is an ethical concept in which a person works and cooperates with other people and organizations for the benefit of the community. An organization can demonstrate social responsibility in several ways, for instance, by do ...
to the public or society; its only responsibility is to its
shareholder A shareholder (in the United States often referred to as stockholder) of corporate stock refers to an individual or legal entity (such as another corporation, a body politic, a trust or partnership) that is registered by the corporation as the ...
s. He justified this view by considering to whom a company and its executives are beholden: Friedman argued that an executive spending company money on
social issue A social issue is a problem that affects many people within a society. It is a group of common problems in present-day society that many people strive to solve. It is often the consequence of factors extending beyond an individual's control. Soc ...
s is in effect spending somebody else's money for their own purposes: Friedman argued that the appropriate agents of social causes are individuals—"The stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so." He concluded by quoting from his 1962 book ''
Capitalism and Freedom ''Capitalism and Freedom'' is a book by Milton Friedman originally published in 1962 by the University of Chicago Press which discusses the role of economic capitalism in liberal society. It has sold more than half a million copies since 1962 an ...
'' that "there is one and only one social responsibility of business—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." In ''Capitalism and Freedom'', Friedman had argued that when companies concern themselves with the community rather than profit it leads to
corporatism Corporatism is an ideology and political system of interest representation and policymaking whereby Corporate group (sociology), corporate groups, such as agricultural, labour, military, business, scientific, or guild associations, come toget ...
, consistent with his statement in the first paragraph of the 1970 essay that "businessmen" with a social conscience "are unwitting puppets of the intellectual forces that have been undermining the basis of a free society". The Friedman doctrine was amplified after the publication of an influential 1976 business paper by finance professors William Meckling and
Michael C. Jensen Michael Cole Jensen (November 30, 1939 – April 2, 2024) was an American economist who worked in the field of financial economics. From 1967 to 1988, he was on the University of Rochester's faculty. Between 2000 and 2009 he worked for the Moni ...
, "Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure", which provided a quantitative economic rationale for maximizing shareholder value.


Influence

Shareholder theory has had a significant impact in the corporate world. In 2016, ''
The Economist ''The Economist'' is a British newspaper published weekly in printed magazine format and daily on Electronic publishing, digital platforms. It publishes stories on topics that include economics, business, geopolitics, technology and culture. M ...
'' called shareholder theory "the biggest idea in business", stating "today shareholder value rules business". In 2017,
Harvard Business School Harvard Business School (HBS) is the graduate school, graduate business school of Harvard University, a Private university, private Ivy League research university. Located in Allston, Massachusetts, HBS owns Harvard Business Publishing, which p ...
professors Joseph L. Bower and Lynn S. Paine stated that maximizing shareholder value "is now pervasive in the financial community and much of the business world. It has led to a set of behaviors by many actors on a wide range of topics, from performance measurement and executive compensation to shareholder rights, the role of directors, and corporate responsibility." Shareholder theory has led to a marked rise in stock-based compensation, particularly to
CEO A chief executive officer (CEO), also known as a chief executive or managing director, is the top-ranking corporate officer charged with the management of an organization, usually a company or a nonprofit organization. CEOs find roles in variou ...
s, in an attempt to align the financial interests of employees with those of shareholders. In September 2020, 50 years after publishing "A Friedman Doctrine", ''The New York Times'' published 22 short responses to Friedman's essay written by 25 prominent people. In November 2020, the Stigler Center of the
University of Chicago Booth School of Business The University of Chicago Booth School of Business (branded as Chicago Booth) is the graduate business school of the University of Chicago, a private research university in Chicago, Illinois. Founded in 1898, Chicago Booth is the second-oldest ...
published a compendium of 28 articles on the legacy of Friedman. Finance professor Alex Edmans compared Friedman's article to the
Modigliani–Miller theorem The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy cost ...
, arguing that Friedman's conclusion is incorrect but that the article is instructive because it highlights the assumptions required for it to be true. Accordingly, Stigler Center director
Luigi Zingales Luigi Zingales (; born 8 February 1963) is an Italian academic who is a finance professor at the University of Chicago Booth School of Business. His book '' Saving Capitalism from the Capitalists'' (2003) is a study of "relationship capitalism" ...
argued that the Friedman doctrine should be considered a theorem, not a doctrine.


Criticism

The Friedman doctrine is controversial, with critics variously saying it is wrong on financial, economic, legal, social, or moral grounds. It has been criticized by proponents of the
stakeholder theory The stakeholder theory is a theory of organizational management and business ethics that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others. It addresses morals ...
, who believe the Friedman doctrine is inconsistent with the idea of
corporate social responsibility Corporate social responsibility (CSR) or corporate social impact is a form of international private business industry self-regulation, self-regulation which aims to contribute to societal goals of a philanthropy, philanthropic, activist, or chari ...
to a variety of stakeholders. They argue it is morally imperative that a business takes into account all of the people who are affected by its decisions. They also argue that taking into account the interests of stakeholders can benefit the company and its shareholders; for example, a company donating services or goods to help those hurt in a natural disaster is not acting in the direct interest of its shareholders, but in doing so builds community allegiance to the company, ultimately benefitting the company and its shareholders. In 2019, influential business groups such as the
World Economic Forum The World Economic Forum (WEF) is an international non-governmental organization, international advocacy non-governmental organization and think tank, based in Cologny, Canton of Geneva, Switzerland. It was founded on 24 January 1971 by German ...
and the Business Roundtable updated their
mission statement A mission statement is a short statement of why an organization exists, what its overall goal is, the goal of its operations: what kind of product or service it provides, its primary customers or market, and its geographical region of operation ...
, leaving behind the Friedman doctrine in favor of "stakeholder capitalism", at least on paper if not in widespread practice. Friedman's characterization of moral responsibility has been questioned. Ronald Duska, in a 1997 article in the ''
Journal of Business Ethics The ''Journal of Business Ethics'' is a peer-reviewed academic journal published by Springer. The Journal of Business Ethics is one of the journals used by the Financial Times for in compiling the Business Schools research rank. The Journal of Bus ...
'', as well as in his 2007 book ''Contemporary Reflections on Business Ethics'', argued that Friedman failed to differentiate two very different aspects of business: (1) the ''motive'' of individuals, who are often motivated by profit to participate in business, and (2) the socially sanctioned ''purpose'' of business, or the reason why people allow businesses to exist, which is to provide goods and services to people. Duska said of a hypothetical businessperson's belief that there is no
business ethics Business ethics (also known as corporate ethics) is a form of applied ethics or professional ethics, that examines ethical principles and moral or ethical problems that can arise in a business environment. It applies to all aspects of business c ...
beyond making a profit: "Does that mean he businesspersonis likely to give you a faulty product if he can get away with it and make more profit? If he really believes what he says, aren't you a fool to do business with him?" John Friedman (no relation to Milton Friedman), writing in the ''
Huffington Post ''HuffPost'' (''The Huffington Post'' until 2017, itself often abbreviated as ''HPo'') is an American progressive news website, with localized and international editions. The site offers news, satire, blogs, and original content, and covers ...
'' in 2013, said: "Mr. Friedman argues that a corporation, unlike a person, cannot have responsibility. No one would engage in a business contract with a corporation if they thought for one minute that a corporation was not responsible to pay its bills, for example. So clearly, therefore, a corporation can have legal, but also moral responsibilities." In contrast to such criticism of Friedman's business ethics, some scholars have pointed out that Friedman emphasized respect for the liberty of other people, respect for the law, and various duties of companies, so the Friedman doctrine does not advocate unconstrained pursuit of profit, and that the Friedman doctrine overlaps with, or even entails, corporate social responsibility. Left-wing social activist
Naomi Klein Naomi Klein (born May 8, 1970) is a Canadian author, social activist, and filmmaker known for her political analyses; support of ecofeminism, organized labour, and criticism of corporate globalization, fascism and Criticism of capitalism, ca ...
argued in her 2007 book '' The Shock Doctrine'' that adherence to the Friedman doctrine has impoverished most citizens while enriching corporate elites. Other scholars argue that it is unhealthy and counterproductive to the companies that practice it.
Harvard Business School Harvard Business School (HBS) is the graduate school, graduate business school of Harvard University, a Private university, private Ivy League research university. Located in Allston, Massachusetts, HBS owns Harvard Business Publishing, which p ...
professors Joseph L. Bower and Lynn S. Paine said in 2017 that the Friedman doctrine is "distracting companies and their leaders from the innovation, strategic renewal, and investment in the future that require their attention", puts companies at risk of "activist shareholder attack", and puts "managers ... under increasing pressure to deliver ever faster and more predictable returns and to curtail riskier investments aimed at meeting future needs." ''
The Economist ''The Economist'' is a British newspaper published weekly in printed magazine format and daily on Electronic publishing, digital platforms. It publishes stories on topics that include economics, business, geopolitics, technology and culture. M ...
'' said in 2016 that a focus on short-term shareholder value has become "a license for bad conduct, including skimping on investment, exorbitant pay, high leverage, silly takeovers, accounting shenanigans and a craze for share buy-backs, which are running at $600 billion a year in America". In 2019, Jerry Useem writing in ''
The Atlantic ''The Atlantic'' is an American magazine and multi-platform publisher based in Washington, D.C. It features articles on politics, foreign affairs, business and the economy, culture and the arts, technology, and science. It was founded in 185 ...
'', and prominent Democratic Senators
Chuck Schumer Charles Ellis Schumer ( ; born November 23, 1950) is an American politician serving as the Seniority in the United States Senate, senior United States Senate, United States senator from New York (state), New York, a seat he has held since 1999. ...
and
Bernie Sanders Bernard Sanders (born September8, 1941) is an American politician and activist who is the Seniority in the United States Senate, senior United States Senate, United States senator from the state of Vermont. He is the longest-serving independ ...
writing in ''
The New York Times ''The New York Times'' (''NYT'') is an American daily newspaper based in New York City. ''The New York Times'' covers domestic, national, and international news, and publishes opinion pieces, investigative reports, and reviews. As one of ...
'', argued that shareholder theory, which promoted a rise in stock-based compensation, has led executives to enrich themselves by implementing stock buybacks—often to the detriment of the companies they work for.But for a somewhat different view see: The critics argued this diverts company funds away from potentially more profitable or socially valuable avenues, like research and design, reduces productivity, and increases inequality by delivering money to higher-paid employees who receive stock-based compensation and not to lower-paid employees who do not. Lawrence Mishel, distinguished fellow of the
Economic Policy Institute The Economic Policy Institute (EPI) is a 501(c)(3) organization, 501(c)(3) non-profit think tank based in Washington, D.C., that carries out economic research and analyzes the economic impact of policies and proposals. Affiliated with the Labor un ...
, argued in 2020 that wages have been kept low in the United States because of the Friedman doctrine, namely the adoption of corporate practices and
economic policies ''Economic Policy'' is a quarterly peer-reviewed academic journal published by Oxford Academic on behalf of the Centre for Economic Policy Research, the Center for Economic Studies (University of Munich), and the Paris School of Economics. The jo ...
(or the blocking of
reforms Reform refers to the improvement or amendment of what is wrong, corrupt, unsatisfactory, etc. The modern usage of the word emerged in the late 18th century and is believed to have originated from Christopher Wyvill's Association movement, which ...
) at the behest of
business Business is the practice of making one's living or making money by producing or Trade, buying and selling Product (business), products (such as goods and Service (economics), services). It is also "any activity or enterprise entered into for ...
and the wealthy elite, which resulted in the systematic disempowerment of workers. He argued that the lack of worker power caused wage suppression, increased wage inequality, and exacerbated racial disparities. Notably, mechanisms such as excessive
unemployment Unemployment, according to the OECD (Organisation for Economic Co-operation and Development), is the proportion of people above a specified age (usually 15) not being in paid employment or self-employment but currently available for work du ...
,
globalization Globalization is the process of increasing interdependence and integration among the economies, markets, societies, and cultures of different countries worldwide. This is made possible by the reduction of barriers to international trade, th ...
, eroded
labor standards International labour law is the body of rules spanning public and private international law which concern the rights and duties of employees, employers, trade unions and governments in regulating work and the workplace. The International Labour Or ...
(and their lack of enforcement), weakened
collective bargaining Collective bargaining is a process of negotiation between employers and a group of employees aimed at agreements to regulate working salaries, working conditions, benefits, and other aspects of workers' compensation and labour rights, rights for ...
, and corporate structure changes that disadvantage workers, all collectively functioned to keep wages low. From 1979 to 2019, while economy-wide productivity rose 61.8 percent, hourly compensation for production and non-supervisory workers increased only 17.5 percent, whilst the earnings of the top 1 percent and 0.1 percent increased 158 percent and 341 percent, respectively. In January 2022, billionaire hedge fund manager and investor Paul Tudor Jones attributed the
opioid epidemic in the United States There is an ongoing opioid epidemic (also known as the opioid crisis) in the United States, originating out of both medical prescriptions and illegal sources. It has been described as "one of the most devastating public health catastrophes ...
as a product of the Friedman doctrine. Notably, the theory of corporations having the only objective of
profit maximization In economics, profit maximization is the short run or long run process by which a firm may determine the price, input and output levels that will lead to the highest possible total profit (or just profit in short). In neoclassical economics, ...
(without any consideration of other stakeholders), led
Purdue Pharma Purdue Pharma L.P., formerly the Purdue Frederick Company (1892–2019), was an American privately held pharmaceutical company founded by John Purdue Gray. It was sold to Arthur Sackler, Arthur, Mortimer Sackler, Mortimer, and Raymond Sackler in 1 ...
and the
Sackler family The Sackler family is an American family who owned the pharmaceutical company Purdue Pharma and later founded Mundipharma. Purdue Pharma, and some members of the family, have faced lawsuits regarding overprescription of addictive pharmaceutical dr ...
to engage in unethical corporate practices of increasing revenue, by abetting doctors to dispense prescription
opioids Opioids are a class of Drug, drugs that derive from, or mimic, natural substances found in the Papaver somniferum, opium poppy plant. Opioids work on opioid receptors in the brain and other organs to produce a variety of morphine-like effects, ...
, without any legitimate medical purpose. The opioid epidemic resulted in at least 400,000 adult deaths by prescription
drug overdose A drug overdose (overdose or OD) is the ingestion or application of a drug or other substance in quantities much greater than are recommended. Retrieved on September 20, 2014.
within the United States, most of which would have been part of the
workforce In macroeconomics, the workforce or labour force is the sum of people either working (i.e., the employed) or looking for work (i.e., the unemployed): \text = \text + \text Those neither working in the marketplace nor looking for work are out ...
within the
economy of the United States The United States has a highly developed mixed economy. It is the world's largest economy by nominal GDP and second largest by purchasing power parity (PPP). As of 2025, it has the world's seventh highest nominal GDP per capita and ninth ...
.


See also

*
Neoliberalism Neoliberalism is a political and economic ideology that advocates for free-market capitalism, which became dominant in policy-making from the late 20th century onward. The term has multiple, competing definitions, and is most often used pe ...


Contrary ideas

* Community capitalism * Corporate social entrepreneurship *
Environmental, social, and governance Environmental, social, and governance (ESG) is shorthand for an investing principle that prioritizes environmental issues, social issues, and corporate governance. Investing with ESG considerations is sometimes referred to as ''responsible inv ...
*
Social enterprise A social enterprise is an organization that applies commercial strategies to maximize improvements in financial, social and environmental well-being. This may include maximizing social impact alongside profits for co-owners. Social enterprises ha ...
*
Social venture capital Social venture capital is a form of investment funding that is usually funded by a group of social venture capitalists or an impact investor to provide seed-funding investment, usually in a for-profit social enterprise, in return to achieve an outs ...
*
Stakeholder theory The stakeholder theory is a theory of organizational management and business ethics that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others. It addresses morals ...
* Sustainable capitalism


References

{{Milton Friedman Business ethics Shareholders Works originally published in The New York Times 1970 essays