Stockholder theory, also known as shareholder theory, is a principle in
corporate governance that posits the primary responsibility of a
corporation's management is to maximize shareholder value. This concept
is closely associated with the views of economist Milton Friedman, who
articulated this theory in his 1970 essay published in the New York Times.
According to Friedman, the only social responsibility of business is to use
its resources to engage in activities designed to increase its profits, as long
as it operates within the rules of the game, which includes engaging in
open and free competition without deception or fraud
EXPLANATION FOR FRIEDMAN DOCTRINE
The Friedman Doctrine is also referred to as the Shareholder
Theory. American economist Milton Friedman developed the
doctrine as a theory of business ethics that states that “an entity’s
greatest responsibility lies in the satisfaction of the shareholders.”
Therefore, the business should always endeavor to maximize its
revenues to increase returns for the shareholders. Friedman
believes that the shareholders form the backbone of the entity,
and they should be treated with the utmost respect. Profits
maximization requires the entity to find ways of generating
additional revenues through value addition and creating
more products and services while minimizing costs. Friedman
also stated that shareholders should be in charge of key decisions
such as social initiatives rather than getting an outsider to make
the decision on their behalf.
The Friedman Doctrine, also known as the Shareholder
Theory, provides insights on how to increase shareholder
value.
According to the doctrine, shareholder satisfaction is an
entity’s greatest responsibility.
However, the doctrine also faces expansive criticism since it
turns a blind eye to social responsibility activities.
Key Aspects of Stockholder Theory
Maximizing Shareholder Value: The central tenet of stockholder
theory is that corporate executives are obligated to prioritize the
financial interests of shareholders above all else. This means that
decisions made by management should aim to enhance the
company’s profitability and, consequently, the stock price
The
existence of this fiduciary
relationship implies that
managers cannot have an
obligation to expend
business resources in ways
that have not been
authorized
by the stockholders
regardless of any societal
benefits that could be
accrued by
doing so. Of course, both
stockholders and managers
are free to spend their
personal funds on any
charitable or socially
beneficial project they wish,
but
The
existence of this fiduciary
relationship implies that
managers cannot have an
obligation to expend
business resources in ways
that have not been
authorized
by the stockholders
regardless of any societal
benefits that could be
accrued by
doing so. Of course, both
stockholders and managers
are free to spend their
personal funds on any
charitable or socially
beneficial project they wish,
but
The
existence of this fiduciary
relationship implies that
managers cannot have an
obligation to expend
business resources in ways
that have not been
authorized
by the stockholders
regardless of any societal
benefits that could be
accrued by
doing so. Of course, both
stockholders and managers
are free to spend their
personal funds on any
charitable or socially
beneficial project they wish,
but
The
existence of this fiduciary
relationship implies that
managers cannot have an
obligation to expend
business resources in ways
that have not been
authorized
by the stockholders
regardless of any societal
benefits that could be
accrued by
doing so. Of course, both
stockholders and managers
are free to spend their
personal funds on any
charitable or socially
beneficial project they wish,
but
The existence of this fiduciary relationship implies that managers
cannot have an obligation to expend business resources in ways that
have not been authorized by the stockholders regardless of any
societal benefits that could be accrued by doing so. Of course, both
stockholders and managers are free to spend their personal funds on
any charitable or socially beneficial project they wish, but when
functioning in their capacity as officers of the business, managers
have a duty not to divert business resources away from the purposes
expressly authorized by the stockholders. This implies that a
business can have no social responsibilities.
Management's Role: Under this theory, managers are seen as
agents of the shareholders. Their duty is to act in the best interests of
those who own shares in the company, which includes making
strategic decisions that will lead to increased revenues and profits45.
Legal and Ethical Boundaries: While stockholder theory
emphasizes profit maximization, it also stipulates that this should be
done ethically—specifically, without engaging in fraud or deception.
This creates a boundary within which management must operate5.
Criticism and Alternatives: Stockholder theory has faced criticism
for its narrow focus on profit at the expense of other stakeholders,
such as employees, customers, and the community. Critics argue that
this approach can lead to negative social outcomes and advocate for
stakeholder theory, which suggests that companies should consider
the interests of all parties affected by their operations, not just
shareholders
