IS MAXIMIZING THE SHAREHOLDER VALUE THE SOCIAL RESPONSIBILITY OF BUSINESS?

 

 

Milton Friedman, the famous economist, in his essay that appeared in The New York Times in 1970, wrote: “The Social Responsibility of a Business is to Maximize its Stakeholder Value”. He discussed a manager’s role as an ‘agent’ responsible to the individuals who own the corporation. It had such a significant impact in the corporate world that ‘The Economist’ praised the ‘Shareholder Theory’ as the biggest idea in business.

The concept was criticised vehemently by many scholars who found that the perspective was unhealthy and counterproductive, since it distracts companies from innovation, strategic renewal and investment in the future. Ronald Duska’s 1997 article in the Journal of Business Ethics, criticised the concept based on his ‘Contemporary Reflections on Business Ethics’. In his article, Duska talked about a hypothetical businessman’s belief that there is no business ethics beyond making a profit. He gives any faulty product, gets away with it, and makes a profit.

Although the so-called ‘Shock Doctrine’ is more contextual of his times and doesn’t create a continuum to the future, it laid the foundations for performance measurement, executive compensation structure, directors’ role, and corporate responsibility.

The same statement can take a different meaning when we look at it through a purpose-driven business leader’s lens.

It’s high time that the term ‘Shareholder’ is understood in a different perspective. A business is an entity, exists in an ecosystem, surrounded by the whole universe. The company not only owes to its immediate surroundings but the entire universe. In short, a business should be led by the higher notion that the whole universe holds its share in the company and it not only has to reciprocate to its stakeholders and immediate ecosystem but the entire macrocosm that it exists in.

The word profit needs to be understood beyond its monetary connotation. It’s the positive impact and outcome of a company’s responsible actions shared by all. In the process of engaging in its purposeful business, the company enriches the customer and the community too, not just the shareholders.

If we can revisit Friedman’s statement from this angle of thought, probably the ‘Shock Doctrine’ might turn out to be a ‘Humane’ doctrine.