Home › Resources › Equities › Friedman Doctrine

Friedman Doctrine
"An entity’s greatest responsibility lies in the satisfaction of the shareholders"

Written by CFI Team

Published February 4, 2020
Updated December 5, 2022

What is the 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. Pro"ts maximization requires the entity
:
 to "nd 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.

Summary

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.

Background of the Friedman Doctrine

The Friedman Doctrine "rst appeared in the New York Times in 1970 as an essay by
Milton Friedman. In the essay, the economist explained that an entity does not have
any social responsibility to the society around it whatsoever. Instead, he stated that
the only responsibility that an entity should abide by is its shareholders.

Friedman justi"ed his claim by explaining that any executives in business are
employees of the owners, and they are, therefore, required to deliver quality service
to the employer "rst before any other party. Individuals employed in corporate
entities are required to conduct their roles in the business according to the
:
 expectations of the employer.

What is Social Responsibility?

The Friedman Doctrine holds that decisions concerning social responsibility rest on
the shoulders of the shareholders, not the executives of the company. He argues
that an entity is not obligated to any social responsibilities unless the shareholders
decide to such an e#ect.

Any social responsibilities to the society require resources and should, therefore, be
arranged before they are executed. The use of a company’s resources is subject to
approval by the shareholders, who are the "nal decision-makers on important
decisions such as the use of "nancial resources.

Social responsibility activities such as the development of social amenities for the
community are capital-intensive and will a#ect the "nancial resources of the entity.
Friedman insisted that such responsibilities should not be forced on the company,
and the "nal decision on whether or not to carry them out depends on the
shareholders.

Friedman Doctrine In!uence

As an indication of the Friedman Doctrine’s in$uence in the business arena, many

business owners believe that companies should focus on maximizing shareholder
value rather than focusing on other activities such as corporate social responsibility.

The primary goal for any entity should be to increase the pro"tability of the business
since that is what the shareholders are interested in. Other activities that are not
central to maximization of shareholder value should not be given priority when
allocating "nancial resources.

The in$uence of the Friedman doctrine has been con"rmed by various researchers
:
 and academicians. Joseph Bower and Lynn Paine, both long-time professors at
Harvard University, con"rmed that the doctrine has had an in$uence on the "nancial
community, and business owners have been seen to practice the Friedman Doctrine
and its principles. The doctrine also elaborates on a number of topics, including
shareholder rights compensation, performance appraisal and measurement,
corporate responsibility, and the role of directors in the business world.

Criticism of the Friedman Doctrine

Despite its success, the doctrine faces its own fair share of criticism from the
surrounding society. The doctrine is seen, to a large extent, as individualistic,
especially from the societal perspective. Critics consider the doctrine as defective
from many fronts, including legally, morally, economically, socially, and "nancially.

Most critics hold that the doctrine gives shareholders an upper hand while neglecting
the society surrounding the entity. In as much as the shareholders are the "nancial
CFI and our partners use cookies to provide you with a ×
engine for the business, the entity also needs the community for it to be successful.
better service and to support our business. You can
The business
consent sells its
by the clicking products
"Accept and services
all cookies" to the community. Its success depends
button or
by
onclosing this notice.
the goodwill from the community to purchase the products and services.
Therefore, both parties have a mutual relationship, and the business has a
Acceptthe
responsibility towards all cookies
community.

Learn
In her book “The Shock more
Doctrine,” Canadian social activist Naomi Klein states that the
Friedman Doctrine impoverishes the community while enriching the few corporate
elites. Paine and Bower, who partly support the Friedman Doctrine, acknowledge
that the doctrine comes with negative e#ects, which may include organizational
attacks from shareholder activists and management burnout due to pressure to
maximize shareholder returns.

Additional Resources
:
 Thank you for reading CFI’s explanation of the Friedman Doctrine. In order to help
you become a world-class "nancial analyst and advance your career to your fullest
potential, these additional resources will be very helpful:

Keynesian Economic Theory

Negative Externalities

Shareholder Primacy

Stakeholder vs Shareholder

See all equities resources

Share this article

Get In-Demand Finance Certi"cations

Learn More

We're hiring!
:
 Company

Certi"cations

Courses

Support

Resources

   

© 2015 to 2023 CFI Education Inc.

Privacy Policy Terms of Use Terms of Service Legal

:
: