Essay on Philosophy Friedman

Submitted By YaYaYato
Words: 2205
Pages: 9

"A Corporation social responsibility is a hard-edged decision,”1 a sentiment by Niall Fitzerald that many decision makers can relate to. This decision is represented by the motives of shareholders and determined by the actions of stakeholders. Over the past two weeks of learning business ethics from Friedman, Freeman and Heath, it could be said that a corporation’s responsibility drives not only the incentive of maximizing profit but also the motives of benefiting the society eventually. Freeman’s stakeholder theory brings in the humanity argument that “to create value for stakeholder, executives must understand that business is fully situated in the realm of humanity.”2 He concludes that we become ends in ourselves if stakes can be equally valued among all stakeholders. Insofar, the model will lead us to a better management, help us reduce moral hazard, and in the end gain us social utility. Though the theory sounds promising but it lacks a certain reality. Freeman wishes to achieve an absolute balance between stakes which is not at all practical. In the end, I can only think of Stakeholder as a great ideal model. Next, Heath suggests market failure model where he determines that the market is efficient when corporation uses a preferred strategy to gain profit. He explains that by doing so we are making justified profit without failing the market. What is problematic is that instead of preferred strategy, non-preferred strategy is what actually goes on in the real world since there are no hard constraints to force people into using the former method. Therefore, Heath’s market failure theory sounds just as impractical as Freeman’s stakeholder theory. Frankly the corporation itself does not, and should not, represent any social responsibility. Relative to the other models, shareholder theory is by far the most conducive market model, due to the fact of its evident relationship and obligation between owners and agents, efficient value gain for both parties and the benefits society enjoys in the long run.
Shareholder model is more practical because it demonstrations a straightforward connection between employer and employee. The model reduces moral hazard by precisely stating the shareholder and manager’s responsibility and their constraints. The shareholder model is established by a contract where managers entered voluntarily to perform a fiduciary duty for the shareholders. The shareholders are assumed to be driven by pure self-interest, where their primary desire is to maximize profit. Therefore, manager has the obligation to maximize shareholder’s equity. It is their only goal in the model and their performances are evaluated strictly on how much income they can make out of the investment shareholders put in. Managers do not need to consider other stakeholders, or worry about whether if their management is ethnical. This simplicity makes the model easy to practice in real life. However, this is where it becomes problematic to most people. Heath in his paper argues “the fact that shareholders are residual claimants in a standard business corporation means that their interests are not protected by an explicit contract.”3 In other words, by only thinking about self-interest, the shareholder model underestimates the potential moral hazard due to the fact that shareholders might have unethical desires. On the contrary, this concern can be mitigated and largely avoidable because corporation decisions and actions are constraint by the law and public norms. Property law constraints the actions of managers, reduces moral hazard of unethical behaviors such as, mismanaging investment, misusage of resources or bankruptcy. The property law argument, provided by Friedman, states that owners have the right to claim maximize return on investment since they are technically the true owners of a corporation, and managers have no right to use their “property” any other way. As well, shareholder’s decisions are constraint by regulations, where