The Stockholder Vs Stakeholder Concept: What is the Purpose of a Corporation?

By
Aaron Tumy

Submitted for:
Robert Marshall Wells, Ph.D.
COMA 213
11/29/07

Abstract
This paper is based off a question posed by my Business Ethics class. The question had me compare and contrast two essays, one written by Milton Friedman and one written by Edward Freeman, concerning their views on thesocial responsibilities of corporations. After outlining the two different arguments, I then was asked to pick the side I agreed with and support my claim.

The Stockholder Vs Stakeholder Concept: What is the Purpose of a Corporation?

What is the purpose of a corporation? It seems that the answer would be simple enough, to make or sell some service or product. Yet there is actually much debateabout what exactly a corporation’s purpose is and who that corporation is beholden to. There are two prevalent concepts of the corporation; the stockholder concept and the stakeholder concept. The stockholder concept is put forth by Milton Friedman in his essay, “The Social Responsibility of Business Is to Increase Its Profit” and the stakeholder position is championed by in his essay, “AStakeholder Theory of the Modern Corporation.”
As the title suggests, the point of Milton Friedman’s essay is to convince the reader that the one and only true goal of the corporation is to increase its profits. This is to say, that any and all spending outside that goal, is a waste and letting down the investors of the company. Friedman believes that since investors own part of the company, theexecutives are employees of the stockholders and should do all they can to fulfill the trust placed with them to increase stock prices. Friedman puts down the claims that corporations have social responsibilities in two parts. First, he states that only people can have responsibilities. Corporations, being an artificial entity, can not have social responsibilities. Secondly, he points out that amanager who opts to spend company money on social causes is effectively taxing the stockholders without representation (Friedman, 1970). It is also important to point out that while Friedman is stating that corporations should be focusing only on profits, he does believe in playing by the rules of law and ethical custom.
The opposing point of view to Milton Friedman; set forth by Edward Freeman, isthat a corporation has many responsibilities beyond those of its shareholders. Freeman sets up a new model for all who a corporation is beholden to, that is, the company’s stakeholders. Stakeholders are groups that have a stake in or claim on a firm. This includes suppliers, customers, employees, stockholders, management, and the local community (Freeman, 1991). This is vastly different fromFriedman’s view by expanding and changing the core purpose of a corporation. Freeman goes on to say that satisfying all of the stakeholders needs is the new goal. He agrees that sometimes managers must be used to decide who should benefit the most at certain times when stakeholders are at odds.
In the end, I would say that Milton Friedman and his essay, “The Social Responsibility of Business Is toIncrease Its Profit,” is the superior of the two business concepts. This is because of its basic structure and its relevant truth. The Freeman concept is too bulky in its inclusion of several different stakeholders with varying levels of claim on a company. The corporation’s focus and purpose can not be all things to all people; it can only be to the betterment of the firm, which is to succeed andto make a profit. Freeman places too much on the corporation in what it owes to the community without taking a moderate side, making it seem that under Friedman’s model it would be perfectly ok to dump materials into a local community river if it would increase profits. This I believe, Friedman would find utterly ridiculous. Friedman clearly states in his essay, that the company should obey the…