Comments on Friedman
Prof. Bronner
Although Friedman's article has been extremely influential, much of its influence has taken
the form of inspiring criticisms of shareholder theory, or of the specific arguments for
shareholder theory offered by Friedman. Even those who agree with Friedman' s conclusion
often reject his reasoning. Below is a brief summary I've written of Friedman's argument
and some of the problems it faces.
Friedman begins by framing his argument around the concept of ownership and the
relationship between employer and employee. He writes:
In a free-enterprise, private-property system, a corporate executive is an employee of
the owners of the business. He has direct responsibility to his employers. That
responsibility is to conduct the business in accordance with their desires, which
generally will be to make as much money as possible while conforming to the basic
rules of the society, both those embodied in law and those embodied in ethical
custom.
That paragraph encapsulates Friedman’s basic argument, or at least the basic argument in
the part of the article that I’ve assigned as a reading. (The rest of that reading is mostly
explanation and defense of the claims made in the paragraph just quoted.)
The argument can be presented in premise-conclusion form as follows:
P1 A corporate executive is obligated to further the aims of the corporation’s
owners.
P2 The aim of a corporation’s owners is to make as much money as possible.
C
Hence, a corporate executive is obligated to make as much money for the
corporation’s owners as possible.
That captures the basic idea. But P 1 and P2 leave out some details that are worth discussing.
So, we’ll next add some of those details back in.
Here is a slightly more faithful, but also slightly more complicated, way of presenting the
argument:
P1 A corporate executive is an employee of the corporation’s owners.
1
P2 An employee is obligated to further the aims of their employer. 1
P3 Hence, a corporate executive is obligated to further the aims of the corporation’s
owners. (From P1 and P 2)
P4 The aim of a corporation’s owners is to make as much money as possible.
C
Hence, a corporate executive is obligated to make as much money for the
corporation’s owners as possible. (From P 3 and P4)
This still leaves out some complications that may be important, such as the caveats that
owners “generally” want to maximize their financial return, and that they want to do so
“while conforming to the basic rules of the society.” But the most important th ing missing
from P1–P4 is any reference to shareholders. After all, Friedman is the most famous
advocate of the so-called shareholder theory (or stockholder theory) — the central claim of
which is that the corporation should be managed in the interests of its shareholders.
Here is one way of getting shareholders into the argument:
P1 A corporate executive is an employee of the corporation’s owners.
P2 An employee is obligated to further the aims of their employer.
P3 Hence, a corporate executive is obligated to further the aims of the corporation’s
owners. (From P 1 and P 2)
P4 A corporation’s owners are its shareholders. 2
P5 Hence, a corporate executive is obligated to further the aims of the corporation’s
shareholders. (From P 3 and P4)
P6 The aim of shareholders is to make as much money as possible.
C
Hence, a corporate executive is obligated to make as much money for their
shareholders as possible. (From P 5 and P6)
That’s as complicated as we’re going to make Friedman’s argument, at least for now. So,
let’s turn to evaluating the argument.
1
This premise is not explicit in the passage from Friedman quoted above. But it is implicit, insofar
as it must be assumed in order for the first sentence of that passage to entail the second sentence of
the passage.
2
This premise is not explicit in the passage from Friedman quoted above. But it can be inferred
from what Friedman says elsewhere in the article. E.g., Friedman equates owners with stockholders
when he speaks of “owners of closely held corporations or stockholders of more broadly held
corporations.”
2
If you disagree with Friedman’s conclusion, then you should be able to say which premises
you think are false, and explain why you think they’re false. 3 So, we’ll consider a few ways
that you might try to do that (i.e., consider a few objections that could be made to
Friedman’s argument).
First, it may be that corporations have no owners. (In that case, no one would be an
employee of the corporation’s owners, contrary to P 1.) There are problems with saying that
shareholders, in particular, are the corporation’s owners (contrary to P 4). When we say that
someone owns something, we usually mean that they have a bundle of rights with respect to
the thing that’s owned. The rights usually include the right to use the thing, the right to
possess the thing, and the right to exclude others from using or possessing the thing. And
shareholders don’t really have those rights with respect to the corporation. Even if you were
a majority shareholder of Apple, for example, that wouldn’t give you the right to use or
possess any of the corporation’s property — e.g., it wouldn’t give you the right to walk into
an Apple store and take some of the merchandise without paying. (Nor would owning x% of
Apple’s stock give you the right to use or possess x% of Apple’s merchandise, or the right
to an x% discount at the register, etc.) So, it’s not clear that shareholders literally own the
corporation, at least not in any straightforward or familiar sense of ownership.
Even if corporations do have owners — and even if shareholders are the owners — it doesn’t
follow that a corporation’s executives are employees of the corporation’s owners. (Again
contrary to P 1.) At least legally speaking, a corporation’s executives are employees of th e
corporation itself, not employees of the shareholders. A corporation is a legal person.
(That’s the main thing that distinguishes the corporation from other types of businesses.) To
be a legal person is, basically, to have legal rights and duties. The rights and duties of the
corporation are not identical to the rights and duties of the shareholders. So, the fact that the
corporation employs an executive doesn’t mean that the shareholders employ the executive.
Finally, Friedman’s claim about the motivation of shareholders is doubly qualified —
shareholders “generally” want to maximize their financial return “while conforming to the
basic rules of the society” — but even that restricted claim may be mistaken. As evidenced
by the rise of sustainable, responsible, and impact investing, many shareholders have goals
in addition to profit, or at least recognize constraints on the pursuit of profit beyond “the
basic rules of society.” (This fact calls into question P 6.)
In principle, you could instead explain why you think that Friedman’s premises don’t entail (or
justify, support, etc.) his conclusion. But, given the way that I’ve summarized Friedman’s argument,
the premises pretty clearly do entail the conclusion.
3
3