The Social Responsibility of Business Is to Increase Its Profits - Milton Friedman

His theory asserts a corporation's primary and perhaps sole purpose is to maximize profits for the stockholder. Two main supporting arguments: Stockholders are the owners of the corporation, and hence corporate profits belong to them. Corporate executives are the stockholder's agents and must operate in the interests of their principle (stockholders). This does not allow donations to charity by the corporation (corporate executives) because the income belongs to the stockholders, not the corporate executives. Individual proprietors are different in that if they choose to spend the income generated by their business they are spending their own money, not the money of other people.

Stockholders are entitled to their profits as a result of a contract among the corporate stakeholders. A stakeholder in this context refers to employees, managers, customers, suppliers, the local community, and the stockholders. Each stakeholder group has a contractual relationship with the firm, since they receive the remuneration they freely agreed to in a pre-established agreement (contract).

(Milton) Friedman says to maximize profit a) within the law and b) without violating social standards. So, in looking at a business decision (or analyzing a case), identify relevant laws and regulations and also identify current social standards and opinions. Maximize profit without breaking laws/regulations AND without disturbing society so much that it decreases profits. Creates cognitive problems/ conflict within managers personal value system (agency problem)

A Stakeholder Theory of the Modern Corporation - R. Edward Freeman

His theory views that both the stockholders and stakeholders have a right to demand certain actions from management because all have a vested stake in the corporation. Two types of stakeholder: Narrow definition - A stakeholder includes those groups who are vital to the survival and success of the organization. Wide definition - A stakeholder includes any group or individual who can affect of is affected by the corporation.

Stakeholder Roles Owners have a financial stake in the corporation and expect a return on their investment. Employees have their jobs and usually their livelihood at stake. Suppliers provide raw materials to the corporation, thus the corporation is vital to the supplier's success. Customers exchange resources for the products or services of the firm and in return receive the benefits of the products or services. Local community grants the corporation the right to build facilities in their area; in turn, the community benefits from the tax base and economic contributions of the corporation. Managers must look after the health of the corporation and carefully balance the conflicting claims of all stakeholders The Normative Core Each stakeholder theory has a normative core that is comprised of a set of sentences like: o Corporations ought to be governed o Managers ought to act to These sentences contain further narratives which include business and moral terms to complete the sentence. EX: Doctrine of Fair Contracts Corporations ought to be governed in accordance with the six principles. Example Normative Core Doctrine of Fair Contracts Corporations ought to be governed in accordance with the six principles o The Principle of Entry and Exit o The Principle of Governance o The Principle of Externalities o The Principle of Contracting Costs o The Agency Principle o The Principle of Limited Immortality Corporation law reform principles o The Stakeholder Enabling Principle

o The Principle of Director Responsibility o The Principle of Stakeholder Recourse (Edward) Freeman says to a) identify stakeholder groups and b) make a decision that takes them into account. o So, in looking at a business decision (or analyzing a case), identify all stakeholder groups. o Identify available options and determine the effect they will have on the stakeholders. o Select and apply an ethical theory to these options to determine the best one.