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Jonathan Fodor
Dean Proessel
Philosophy 2074F
21 May 2024
The Nature of Corporate Social Responsibility
A pivotal topic in business ethics is corporate social responsibility, which focuses on
whether corporate executives and managers have moral obligations beyond maximizing profits
for stockholders. Through my analysis of the differing perspectives of Milton Friedman, Edward
Freeman, and Joseph Heath on corporate social responsibility, I aim to address the questions:
What are the social responsibilities of a corporation? Are corporations solely responsible for
maximizing the profits of their shareholders, or do they have more extensive social
responsibilities to stakeholders or the marketplace? My goal in this essay is to analyze and
contrast the perspectives of these three philosophers and argue that Joseph Heath’s market failure
model best represents the necessary corporate social responsibilities of organizations.
Milton Friedman’s stockholder model argues that the primary responsibility of a business
is to generate profits for its shareholders within the bounds of both the law and ethical norms. He
views corporate executives as agents who work on behalf of the shareholders and emphasizes
that their main duty is to maximize shareholder value. Friedman believes that when managers
allocate resources for social purposes, they are essentially spending the shareholders’ money,
which he equates to imposing taxes and spending the proceeds for social means—a role
Friedman believes should be reserved for government officials. As Friedman states, “the
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corporate executive would be spending someone else’s money for general social interest”
(Friedman 147).
Friedman’s model is often criticized for its narrow focus on profit maximization and its
neglect of broader ethical and moral obligations. Critics highlight that this model “ignores the
broader responsibilities corporations have for other members such as employees, customers, etc.”
(Freeman 196). By focusing exclusively on profits, Friedman’s model can lead to unethical
practices that harm both employees and the community.
Edward Freeman proposes the stakeholder model, which argues that businesses should
consider the interests of a broader range of stakeholders, including employees, customers,
suppliers, and communities. Freeman believes that businesses should create value for all
stakeholders, not just shareholders. He emphasizes the interconnected nature of stakeholders,
arguing that managers should balance their needs to avoid trade-offs that favour one group over
another. Freeman's stakeholder model is seen as a more holistic approach to corporate social
responsibility, but it also faces criticisms. One major critique is the potential for resource
mismanagement, as balancing multiple stakeholder interests can divert resources from critical
business objectives. As Freeman notes, “executives are expected to look after the health of the
overall enterprise, to keep the varied stakes moving in roughly the same direction, and to keep
them in balance” (Freeman 194). The stakeholder model may weaken the focus on shareholders’
interests, potentially hindering investment and growth, meanwhile, evaluating management
performance becomes difficult when profits are traded off against various other objectives,
making accountability challenging.
Joseph Heath offers a different perspective with his market failure model, which argues
that businesses should focus on maximizing shareholder value while also correcting market
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failures through ethical behaviour, legal compliance, and appropriate government regulations.
Heath challenges both Friedman’s narrow profit maximization focus and Freeman’s broad
stakeholder consideration by emphasizing the need to address externalities and ensure fair
competition. Heath’s model is grounded in the concept of fair competition, where businesses are
expected to compete ethically and within legal constraints. This approach recognizes the
importance of profits and market efficiency but also incorporates broader social responsibilities
by correcting market failures and addressing externalities such as pollution. Heath asserts, “firms
do have important social responsibilities, ones that extend far beyond mere conformity to the
law” (Heath 2). Heath’s model provides a structured framework for balancing shareholder and
stakeholder interests, promoting corporate social responsibility within the dynamics of market
competition.
The debate on corporate social responsibility is fundamentally a clash between different
priorities and ethical frameworks. Milton Friedman, Edward Freeman, and Joseph Heath each
offer distinct perspectives on what responsibilities corporations should uphold. A thorough
comparative analysis of their models reveals the strengths and weaknesses of each approach and
underscores why Heath’s market failure model provides a balanced and pragmatic solution to
corporate social responsibility.
Friedman’s stockholder model posits that the primary responsibility of a corporation is to
maximize profits for its shareholders. This model is grounded in classical economic theory,
which asserts that the free market, guided by the invisible hand, will lead to the most efficient
allocation of resources. Friedman argues that corporate executives, as agents of the shareholders,
have a fiduciary duty to prioritize shareholder returns above all else. He believes that engaging in
social responsibility initiatives outside of profit maximization is equivalent to imposing a tax on
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shareholders without their consent, which he deems unethical and beyond the scope of corporate
management’s role. Friedman explicitly states, “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 society” (Friedman 133).
The strengths of Friedman’s model lie in its clarity and focus. By concentrating solely on
profit maximization, corporations can achieve efficiency and drive economic growth. This model
aligns with the principles of a free market economy, where individual pursuits of profit lead to
collective benefits. However, the weaknesses of Friedman’s model are significant. Critics argue
that Friedman’s model “ignores the social and environmental externalities that a corporation’s
actions can create, such as pollution or the exploitation of workers in the pursuit of profit
maximization” (Heath 232). Its narrow focus on profit maximization often disregards the broader
social and environmental impacts of corporate actions. By ignoring negative externalities,
corporations can cause significant harm to society and the environment, undermining long-term
sustainability.
Freeman’s stakeholder model broadens the scope of corporate responsibility to include a
diverse range of stakeholders beyond shareholders. Freeman emphasizes, “managing for
stakeholders is about creating as much value as possible for stakeholders, without resorting to
trade-offs” (Freeman 195). According to Freeman, businesses should create value for all
stakeholders, including employees, customers, suppliers, and the community. This model
recognizes that businesses operate within a complex web of relationships and that the well-being
of these relationships is crucial for long-term success.
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The stakeholder model’s strength lies in its ethical inclusiveness and recognition of
interdependencies. By considering the interests of all stakeholders, businesses can foster loyalty,
enhance their reputation, and build sustainable practices that benefit society as a whole. This
approach aligns with contemporary views on ethical business practices and corporate citizenship.
However, the stakeholder model faces several criticisms. As Heath points out, “it would become
almost impossible for members of any stakeholder group to evaluate the performance of
management” (Heath 222). Balancing the interests of multiple stakeholders can lead to resource
misallocation and inefficiencies. Managers may struggle to make decisions when faced with
conflicting stakeholder interests, potentially leading to compromised business objectives.
Additionally, the lack of clear metrics for evaluating managerial performance in a stakeholderfocused model can result in decreased accountability and effectiveness.
Heath’s market failure model offers a nuanced approach that integrates elements of both
Friedman’s and Freeman’s models. Heath argues that while profit maximization is important, it
should not be the sole priority of businesses. Instead, corporations should also focus on
correcting market failures through ethical behaviour, legal compliance, and appropriate
government regulations. This model acknowledges that markets are imperfect and that
externalities must be addressed to ensure fair competition and social welfare. Heath’s model
excels in its balanced approach. It preserves the efficiency and profit-driven focus of Friedman’s
model while incorporating the ethical and social considerations emphasized by Freeman. By
addressing market failures, Heath’s model promotes a fairer and more sustainable market
environment. Heath argues that ethical business practices are akin to good sportsmanship in
competitive sports, where the goal is to win but not by any means available: “In the case of
sports, the goal is clearly to win—but not by any means available. Every sport has an official set
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of rules, which constrain the set of admissible strategies” (Heath 236). This approach recognizes
that businesses have social responsibilities that extend beyond mere legal compliance and profit
generation.
One of the key strengths of Heath’s model is its practicality. By focusing on correcting
market failures, businesses can achieve both profitability and social responsibility without
compromising one for the other. Heath’s model provides a clear framework for ethical behaviour
within competitive markets, ensuring that corporations contribute positively to society while
pursuing their profit goals. However, Heath’s model is not without its challenges. Heath
acknowledges the complexities but insists that a combination of ethical behaviour, legal
compliance, and appropriate government regulations is needed to correct these failures and
ensure fair competition (Heath 232). Implementing regulatory frameworks and ensuring legal
compliance require robust government oversight and cooperation from businesses. Additionally,
the definition and scope of market failures can be complex and context-dependent, necessitating
careful analysis and tailored solutions.
The debate on corporate social responsibility centres on whether businesses should focus
solely on maximizing profits for stockholders or extend their responsibilities to broader social
and ethical considerations. Friedman’s stockholder model emphasizes profit maximization but
overlooks broader responsibilities and potential negative externalities. Freeman’s stakeholder
model expands corporate responsibility to various stakeholders but faces criticisms regarding
resource management and managerial accountability. Heath’s market failure model offers a
balanced approach, emphasizing profit maximization and market efficiency while addressing
ethical considerations and correcting market failures. Therefore, Heath’s market failure model
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best represents the necessary corporate social responsibilities of organizations, providing a
structured and comprehensive framework for ethical business practices.
Heath’s market failure model effectively integrates the strengths of both Friedman’s and
Freeman’s models, establishing that organizations have social responsibilities to the marketplace
that go beyond mere profit maximization. Similar to Friedman’s stockholder model, Heath
acknowledges the critical importance of profits and market efficiency, reinforcing the necessity
of prioritizing shareholder value. However, Heath’s model also embraces the broader
consideration of stakeholder interests, much like Freeman’s stakeholder model. Heath offers a
more structured and pragmatic framework for balancing these interests within the competitive
market dynamics. This framework emphasizes ethical behaviour and fair competition, ensuring
that business practices benefit not only shareholders but also a wider array of stakeholders. By
addressing market failures through ethical conduct, legal compliance, and appropriate
regulations, Heath’s model promotes a fairer and more sustainable market environment. In
essence, Heath’s market failure model provides a comprehensive approach to corporate social
responsibility. It harmonizes the drive for profitability with the ethical and social responsibilities
businesses owe to society. This balanced model ensures that corporations can achieve economic
success while fostering a positive societal impact, thereby offering a robust solution to the ethical
challenges faced by modern businesses.
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Works Cited
Freeman, Edward. “Managing for Stakeholders” From Business in Ethical Focus: An
Anthology, by Fritz Alhoff, Alexander Sager, and Anand J. Vaidya, 2nd ed.,
Broadview Press, 2016
Friedman, Milton. “The Social Responsibility of Business Is to Increase Its Profit” From
Business in Ethical Focus: An Anthology, by Fritz Alhoff, Alexander Sager, and
Anand J. Vaidya, 2nd ed., Broadview Press, 2016
Heath, Joseph. “Business Ethics without Stakeholders”. From Business in Ethical Focus:
An Anthology, by Fritz Alhoff, Alexander Sager, and Anand J. Vaidya, 2nd ed.,
Broadview Press, 2016
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