SEAN MCALEER

FRIEDMAN’S STOCKHOLDER THEORY OF CORPORATE MORAL

RESPONSIBILITY

(Accepted 15 November 2002)

ABSTRACT. In this paper I critically discuss Milton Friedman’s classic article, “The
Social Responsibility of Business is to Increase its Profits.” Friedman offers several argu-
ments for his stockholder theory of corporate moral responsibility, according to which a
corporation’s only moral responsibility is to promote the financial well-being of its stock-
holders. I first consider an inconsistency in his statement of his position – namely, the
distinct and non-equivalent constraints he places on profit-maximization (“the rules of the
game” and “the rules of society”). I then turn to a consideration of six arguments Friedman
gives to support his theory, spelling them out in detail and showing that none of them is
sound. I conclude with a brief intuitive argument against his theory.

KEY WORDS: Agent-Principal Argument, Artificial Persons Argument, corporate moral

responsibility, critical thinking, Free Society Argument, Milton Friedman, Personal
Responsibility Argument, rules of society, rules of the game, stockholder theory, Taxation
Analogy Argument

INTRODUCTION

Milton Friedman’s “The Social Responsibility of Business is to Increase

its Profits” (Friedman, 1970) is a staple in most introductory business
ethics courses. Friedman articulates a position that many businesspeople
and business students are sympathetic to, that a business’s only responsi-
bility is to maximize wealth for its stockholders. Whatever the popularity
of his view, his arguments for it are far from compelling. In what follows
I consider just what his view is, noting that his statements of it are not
equivalent. I then reconstruct Friedman’s arguments and show that none
is sound – some, indeed, are quite obviously unsound. I conclude by
offering an argument against his stockholder theory of corporate moral
responsibility.

Teaching Business Ethics 7: 437–451, 2003.

© 2003 Kluwer Academic Publishers. Printed in the Netherlands.
438 SEAN MCALEER

FRIEDMAN’S POSITION

As Thomas Carson pointed out in “Friedman’s Theory of Corporate Social

Responsibility” (Carson, 1993), Friedman’s two statements of his position
are at odds with each other. Friedman’s opening statement of his view is
that
a corporate executive is an employee of the owners of the business. He has direct respon-
sibility to his employers. That responsibility is to conduct the business in accordance with
their desires, which generally will be to make as much money as possible while conforming
to the basic rules of society, both those embodied in law and those embodied in ethical
custom. (p. 51)1

He closes his article by quoting the statement of his view he gave in

Capitalism and Freedom (1962, p. 133):
there is one and only one social responsibility of business – to use its resources and engage
in activities designed to increase its profits so long as it stays within the rules of the game,
which is to say, engages in open and free competition without deception or fraud. (p. 55)

I do not wish to appear captious, but since Friedman himself complains

that his opponents’ views “are notable for their analytical looseness and
lack of rigor” (p. 51), it is only fitting that we carefully scrutinize his view:
what is sauce for the goose is sauce for the gander, after all.
It should be clear that these statements of Friedman’s view are strik-
ingly different in several ways. First, while the first formulation allows
for the corporation to seek to promote the interests of non-stockholders,
provided that this is what the stockholders wish,2 the second formulation
rules this out. That Friedman is likelier to embrace the first formulation is
suggested by his belief that management is the agent of the stockholders;
surely an agent must do her principal’s bidding, even if her principal does
not wish to maximize her own well-being. Let us suppose, though, that
Friedman is correct in his empirical claim that the stockholders want to
make as much money as possible.3
A second noteworthy difference between his formulations is the
different constraints they impose on profit-maximization. What “the basic
rules of society” call for and prohibit seems intuitively different from what
“the rules of the game” call for and prohibit – at least if we take “the rules
1 All references are to Friedman 1970 unless otherwise noted.
2 Obviously, there are technical problems to be worked out here. Must it be the unan-
imous wish of the stockholders? Would the wishes of a bare majority suffice? Or perhaps
some sort of super-majority, such as is required to override a Presidential veto?
3 For at least one counter-example to Friedman’s claim, former Clinton Labor Secretary
Robert Reich says “I don’t want Microsoft to maximize the value of my shares at the
expense of my values as a citizen” (1999).
 CORPORATE MORAL RESPONSIBILITY 439

of the game” to mean the actual practices obtaining within an industry. For
example, a restaurant owner who balks at bribing an inspector or paying
a mobster for protection may be failing to play by the rules of the game,
though she is abiding by the law in doing so. Or, consider the response
of Credit Suisse First Boston (CSFB) to charges made with respect to its
underwriting of initial public offerings:
Securities regulators and federal prosecutors have been gathering information from First
Boston and other investment banks about how they sold the shares and whether they
extracted promises from customers to buy more shares at higher prices, a practice that
would be illegal. The firm has said that it did not deviate from standard Wall Street practice.
(McGeehan, 2001)

Whether CSFB’s actions are ethically permissible depends on which of

Friedman’s two constraints on profit maximization we adopt. Suppose
CSFB’s actions are illegal but are within the rules of the game; since
the rules of the game may not be the rules of society (i.e., the laws), it
would seem that Friedman’s theory gives contradictory judgments about
the ethical permissibility of CSFB’s behavior.
It may be, though, that Friedman does not intend this everyday sense of
“the rules of the game.” Indeed, in Capitalism and Freedom he writes that
even in a truly free marketplace the government is still needed: “govern-
ment is essential both as a forum for determining ‘the rules of the game’
and as an umpire to interpret and enforce the rules decided upon” (1962,
p. 15), a view he confirms throughout the book’s second chapter, “The
Role of Government in a Free Society.” Suppose, then, that “the rules of
the game” are those set by statutory and administrative law. Thus the mere
fact that a practice is standard is not normative: one can engage in standard
practices and still violate the rules of the game.
Even so, there remains the problem that Friedman takes the basic rules
of society to be “those embodied in law and . . . ethical custom” (p. 51;
my emphasis). I think it is plausible to take these ethical rules to determine
a level of moral decency below which it is impermissible to fall. If so,
then these will be largely, if not exclusively, negative duties not to harm or
injure. Fulfilling one’s negative duties merely guarantees that one has not
acted immorally and has thus avoided blame. If one fulfills what one takes
to be one’s positive duties to actively promote the well-being of others, one
has gone well beyond what morality minimally requires – one is a good,
rather than merely a minimally decent, Samaritan.
Plainly, on Friedman’s view, a corporation does not have positive duties
to promote the well-being of non-stockholders. What is not so plain is
whether Friedman allows for extra-legal negative duties towards non-
stockholders. My sense is that, for Friedman, corporate morality reduces
440 SEAN MCALEER

to legality, and thus that extra-legal negative duties do not constrain

profit-maximization. Consider his example of “mak[ing] expenditures on
reducing pollution beyond the amount . . . that is required by law” (p. 52).
Friedman discusses this as a positive duty, the goal of which is “to
contribute to the social objective of improving the environment” (p. 52),
but one can, more accurately, view this as a negative duty not to harm
others. After all, the problem is not that pollution merely fails to benefit
others, but that it causes them harm. Since Friedman thinks that a corpora-
tion ought not seek to minimize harm below the legally acceptable level,
it follows that corporations do not have extra-legal negative duties to
non-stockholders. Thus it seems that “ethical custom” constrains profit-
maximization only to the extent that ethical custom is reflected in the
law.
Consider, for example, The Southern Company, many of whose power
plants have a grandfather-clause exemption from the provisions of the
Clean Air Act. Presumably, the company knows that its pollution is
harmful – why else would stricter limits have been established? – but
since it is legally permissible for it to pollute at unsafe levels and thus
knowingly harm others, it would appear to be morally permissible as well,
by Friedman’s lights; indeed, it would be morally obligatory, by his lights.
The company would be acting against the stockholders’ best interests if
it upgraded its plants or built newer, cleaner ones, so long as it is more
profitable to maintain its older, dirtier plants.4
Thus I take Friedman’s view to be that management’s only obligation is
to promote the interests of the stockholders, within the bounds of the law.
It has neither positive nor extra-legal negative duties to non-stockholders.

FRIEDMAN’S ARGUMENTS

The Artificial Persons Argument

Let us call the first of Friedman’s arguments “the Artificial Persons Argu-
ment.” It is not explicitly stated by Friedman, but it seems to be lurking
beneath the surface of the following passage:
What does it mean to say that “business” has responsibilities? Only people can have
responsibilities. A corporation is an artificial person and in this sense may have artificial
responsibilities, but “business” as a whole cannot be said to have responsibilities, even in
this vague sense. (p. 51)

4 The Southern Environmental Law Center (http://www.selcga.org) is a helpful source

of information on this issue.
 CORPORATE MORAL RESPONSIBILITY 441

While Friedman seems to be arguing against the idea that business as a

whole has moral responsibilities, one can without too much distortion take
him to argue that individual businesses do not have moral (i.e., extra-legal)
obligations. Spelled out rigorously, the argument goes:
P1 Corporations are artificial persons.
P2 Artificial persons can have only artificial responsibilities.
C1 So, corporations can have only artificial responsibilities.
P3 But moral responsibilities are not artificial responsibilities.
C2 So, corporations cannot have moral responsibilities.
The argument appears to be valid, but in fact it suffers from a crucial
equivocation on ‘artificial’. In P1 (and thus P2 and C1), ‘artificial’ is
opposed to ‘natural’, so P1 asserts that corporations are the result of arti-
fice: they are constructed entities. “A corporation,” Justice John Marshal
wrote in Trustees of Dartmouth College v. Woodward (17 US 518 (1819)),
“is an artificial being, invisible, intangible, and existing only in contem-
plation of law.” This is plainly the sense of ‘artificial’ in P1, P2, and C1.
But in P3, ‘artificial’ seems to mean not “non-natural” but “non-genuine.”
To deny that moral responsibilities are artificial is to assert that they are
genuine and binding on us. They are not, in short, imaginary. Since ‘artifi-
cial’ means different things in C1 and P3, the argument commits the fallacy
of equivocation and thus is invalid.
In addition, the Artificial Persons Argument begs the question. P2
asserts that the only responsibilities an artificial person, such as a corpora-
tion, has are those spelled out in the document by which it comes into
being. But why would anyone except a committed stockholder theorist
accept such a premise? No one who subscribes to the stakeholder theory
of corporate moral responsibility – according to which the interests of all
stakeholders, not just the stockholding stakeholders, are to be considered –
would accept P2, for a stakeholder theorist holds that corporations do have
extra-legal duties to non-stockholders. While it is true that Marshall holds
that “[b]eing the mere creature of law, [a corporation] possesses only those
properties which the charter of its creation confers upon it . . .” he fills in
the ellipsis with “either expressly or as incidental to its very existence.”
Thus if we take the corporation’s moral personhood seriously, then its
having extra-legal duties would be part and parcel of its very existence.
Though the argument doesn’t formally beg the question, its conclusion
does rest on a premise that is as doubtful as the conclusion, and is as
doubtful for the same reasons, so the Artificial Persons Argument begs
the question materially.
Again, it may be that Friedman did not intend the argument I have
attributed to him. If so, then my objections are moot. But it is not implau-
442 SEAN MCALEER

sible that Friedman has some such argument in mind, and to the extent that
he does, my criticisms are germane.

The Agent-Principal Argument

Friedman’s second argument is the Agent-Principal Argument, which is
perhaps the most important argument in the article. There can be no
doubt that Friedman makes this argument, for he asserts it quite straight-
forwardly: “in his capacity as a corporate executive, the manager is the
agent of the individuals who own the corporation . . . and his primary
responsibility is to them” (p. 51). Fully reconstructed, the argument
goes:
P1 Management is the agent for the stockholders, who are the
principals.
P2 An agent’s primary responsibility is to protect and promote the
interests of her principal.
C So, management’s primary responsibility is to protect and
promote the interests of the stockholders.
P2, of course, is implicit, but there is no problem with attributing it to
Friedman, not least because it is necessary for the deductive validity of his
argument.
Though the argument is valid, there may be doubts about its sound-
ness. John Boatright, for one, argues that management is not the agent for
the stockholders, because the conditions necessary for agency – mutual
consent to the agent-principal relation, the agent’s power to act on the
principal’s behalf, and the principal’s power to control the agent – are
not met (Boatright, 1994, pp. 80–81). There seems to be some tension
between Boatright’s second and third points: he argues that management
is not the stockholders’ agent because management cannot, for example,
merge the corporation without stockholder approval; but then the prin-
cipal is able to control the agent (in certain matters, anyway). It’s hard
to see how Boatright can make both claims simultaneously. Moreover, it
may be that Friedman intends the agency relation in not quite so literal a
sense. I suggest that even if we waive Boatright’s objections and grant the
truth of Friedman’s premises, the argument still fails to adequately support
Friedman’s view.
That is, even if the Agent-Principal Argument is sound, it is too weak
to support Friedman’s theory of corporate moral responsibility; indeed, it
is guilty of an ignoratio. Friedman’s position is that management’s only
responsibility is to protect and promote the interests of the stockholders:
“there is one and only one social responsibility of business – to use its
 CORPORATE MORAL RESPONSIBILITY 443

resources and engage in activities designed to increase its profits so long

as it stays within the rules of the game” (p. 55). But the conclusion of the
Agent-Principal Argument is that this is management’s primary respon-
sibility. Not only are ‘primary’ and ‘only’ not synonymous, but ‘primary’
leaves open and indeed suggests the possibility that there are other interests
to be considered, albeit not primarily.
Consider a non-egalitarian stakeholder theory in which the interests of
all stakeholders are given genuine, but unequal, consideration: the interests
of the non-stockholding stakeholders are considered independently of how
their satisfaction promotes the interests of the stockholders, though the
interests of the stockholders are given more weight than the interests
of the non-stockholding stakeholders. Something like this seems to be
Kenneth Goodpaster’s view, in which management has fiduciary duties
to the stockholders, and morally significant, non-fiduciary duties to the
other stakeholders. Unsurprisingly, these are extra-legal, negative duties
that include “the duty not to harm or coerce and duties not to lie, cheat, or
steal” (Goodpaster, 1991, pp. 72–73).
Consider also a view in which management has positive duties to
promote the interests of the non-stockholding stakeholders (and not merely
negative duties not to harm them), but in which the to-be-promoted stake-
holder interests have less weight than the interests of the stockholders.
Suppose a company can further maximize an already healthy profit by
relocating a plant. On Friedman’s view, of course, it must do so (provided
that the negative publicity, etc., is factored in). But on the view I am
suggesting, if the corporation is already making a healthy profit – perhaps
well above the industry norm – management could reason that increasing
the annual return from 15% to 16% isn’t worth the harm moving the
plant would cause the employees and community. The stockholders are
already being well served, management reasons, so the interests of the
other stakeholders can be promoted without harming the stockholders.
The interests of the stockholders, while not being promoted maximally,
are being promoted to a satisfactory degree – indeed, to a very high
degree.
The problem with the Agent-Principal Argument is that, far from
supporting the stockholder theory, its conclusion is consistent with the
non-egalitarian, satisficing version of stakeholder theory sketched above.
Moreover, if we attempt to modify P2 (and C) be replacing ‘primary’
with ‘only’, the argument is either unsound or question-begging. It may
be unsound for the reasons Boatright gives, but even if we grant that the
management-stockholder relation is an agent-principal relation, the argu-
ment is still unsound because it is false that an agent’s only duty is to
444 SEAN MCALEER

her principal. A stockbroker, for example, often acts as the agent for her
client, but she also has duties to her employer: though it would maximally
promote the client’s well-being for the broker to execute a trade without
any commission, it is not in the firm’s interest that the broker do so. On
the other hand, the argument begs the question, because no stakeholder
theorist would accept the reformulated version of P2.
Thus Friedman argues for the wrong conclusion, since the issue is
not whether management’s primary obligation is to the stockholders, but
whether management’s only obligation is to the stockholders. So even if
we grant that the Agent-Principal Argument is sound, it is too weak to
support Friedman’s view.

The Taxation Analogy Arguments

The next argument is related to the Agent-Principal Argument, but it is
independent of it. Here Friedman argues that
if [the executive] spends the money in a different way than [the stockholders] would have
spent it . . . he is in effect imposing taxes, on the one hand, and deciding how the tax
proceeds shall be spent, on the other. This process raises political questions on two levels:
principle and consequences. (p. 52)

The argument, then, is that since management is in effect imposing taxes

on the stockholders if it acts to promote or protect the interests of the other
stakeholders, and since it is wrong – both in principle and because of the
consequences – for management to do so, it follows that management
should not act to protect and promote the interests of the other stake-
holders. So Friedman here argues for his stockholder theory by arguing
against the stakeholder theory.
There are really two different arguments here, so let us consider them
separately. The first argument goes:
P1 If management seeks to promote or protect the interests of non-
stockholding stakeholders at the expense of the interests of the
stockholders then it is in effect “taxing” the stockholders.
P2 But it is wrong in principle for management to “tax” on the
stockholders.
C Therefore, management should not seek to promote or protect
the interests of non-stockholding stakeholders at the expense of
the interests of the stockholders.
Straightaway we can see that the argument is valid; the issue is whether
it is sound. The taxation analogy expressed in P1 is plausible enough. As
for P2, Friedman gives two reasons for thinking that it is in principle wrong
for management to “tax” the stockholders by practicing the stakeholder
 CORPORATE MORAL RESPONSIBILITY 445

theory. The first is that doing so violates the separation-of-powers prin-

ciple on which our government is founded: “the businessman . . . is to be
simultaneously legislator, executive and jurist. He is to decide whom to
tax by how much and for what purpose, and he is to spend the proceeds”
(p. 52). The second is that in so acting management violates the principle
of “ ‘[no] taxation without representation’ [which] was one of the battle
cries of the American revolution” (p. 52).
Neither reason adequately supports P2. As for management’s violating
the doctrine of the separation of powers principle, surely there is in prin-
ciple nothing objectionable in not separating the legislative and executive
functions – unless we think there is in principle something wrong with
parliamentary systems such as Britain’s and Canada’s. Friedman’s objec-
tion must be to the usurpation of “the judicial function of mediating
disputes and interpreting the law” (p. 52), but even here we might bear in
mind that England’s highest court comprises certain members of the House
of Lords. Moreover, the board of directors can mediate disputes between
competing stakeholders or institute procedures to guarantee due process,
so there is a check on management’s power.
As for the claim that management’s “taxing” the stockholders violates
the principle of “no taxation without representation,” Friedman seems
to have forgotten that the stockholders elect the board of directors, to
whom the executives running the company are immediately answerable,
so they are represented (even if they are “taxed”). Though the stockholders
do not directly elect management, we should remember that American
voters do not directly elect the president, and senators were not directly
elected until the passage of the 17th Amendment. Since stockholders do
choose management, albeit indirectly, it is simply false that they suffer
under the tyranny of taxation without representation. Moreover, Friedman
himself acknowledges that the tax collector-allocator-adjudicator may be
“appointed directly or indirectly by stockholders” (p. 52), so it is puzzling
that he makes the no-representation claim.
Since neither of his reasons adequately supports P2, Friedman has given
us no reason to think his argument is sound; indeed, it seems plainly
unsound.
Let us then turn to the other version of the Taxation Analogy Argument,
which asserts that management should not promote the interests of the
other stakeholders because of the baleful consequences of doing so. This
version of the argument differs from the in principle version only by its
different second premise.

P1 If management seeks to promote or protect the interests of non-

stockholding stakeholders at the expense of the interests of the
stockholders then it is in effect “taxing” the stockholders.
446 SEAN MCALEER

P2* But it is wrong because of the consequences for management to

“tax” the stockholders.
C Therefore, management should not seek to promote or protect
the interests of non-stockholding stakeholders at the expense of
the interests of the stockholders.
Again, the argument is valid; the question is whether it is sound, so let
us see whether Friedman has given us good reason to think it so. Friedman
argues that while “the corporate executive . . . is presumably an expert in
running his company . . . nothing about his [position] makes him an expert
on inflation” (p. 53) or on any other morally worthy objective. If she tries
to hold down prices (to benefit her customers), she may simply divert their
spending power elsewhere, thereby failing to solve the problem, or she may
make the problem even worse: her actions “simply contribute to shortages”
(p. 53). The Argument from Expertise that Friedman gives for P2* can be
reconstructed thus:
(1) Management can effectively promote the interests of the non-
stockholding stakeholders only if it has expertise in this area.
(2) Management lacks expertise in this area.
(3) Therefore, management cannot effectively promote the interests
of the non-stockholding stakeholders.
(4) If management cannot effectively promote the interests of
the non-stockholding stakeholders, it is likely that its efforts
will actually demote their interests – the consequences of its
attempting to promote their interests will be baleful.
(5) Therefore, management’s attempt to promote the interests of the
non-stockholding stakeholders will have baleful consequences.
Though Friedman does not state the argument in such detail, I trust that the
reader will agree that this is a fair reconstruction of Friedman’s thinking.
The Argument from Expertise is certainly valid, but even a cursory
examination of its premises, especially (1), reveals that it is unsound.
It might be thought that (1) would be more plausible if management’s
expertise were made a sufficient, rather than a necessary condition, for
its effectively promoting the interests of the other stakeholders – that is, if
‘if’ were substituted for ‘only if’. This would render the argument invalid,
of course, but there are other reasons for preferring the only if- to the if-
formulation of (1), not least of which is the implausibility of supposing that
expertise in an area is sufficient for practical effectiveness; that experts
might be practically ineffective is proverbial. Is (1) true or plausible in
the only if-formulation? I think not. First off, while technical expertise
may be required to promote certain goods – Friedman’s inflation example
 CORPORATE MORAL RESPONSIBILITY 447

is one – is it really plausible that CEOs of major corporations lack the

requisite economic knowledge? It’s doubtful that one must possess a Ph.D.
in economics, as does former Enron CEO Ken Lay, to have the requisite
knowledge. Moreover, it is implausible that such technical expertise is
required for persons, be they corporate or natural, to adhere to or even
rise above the minimal level of moral decency we expect from each other.
What sort of expertise is required for an executive to know that relocating
a profitable plant on which a community depends will hurt the community,
or that reducing the output of toxic chemicals will benefit the community?
On the other hand, suppose that such expertise is required. Why should
we suppose that the CEO herself must possess it? One need not be an
expert in baggage-handling systems or know how to fly, for example,
to effectively run an airline; instead, one finds someone who is such an
expert, and relies on her for guidance. Similarly, one need not be an
expert in employee relations to effectively promote the well-being of one’s
employees: one can hire someone who is.
So even if we grant the truth of (2), the claim embedded in (1), that
such expertise is necessary, seems plainly false. Thus Friedman’s argument
in support of P2* is unsound, which gives us no reason to think that the
Taxation Analogy Argument is sound.

The Personal Responsibility Argument

Friedman’s next argument turns on the claim that “the great virtue of
private competitive enterprise [is that] it forces people to be responsible
for their own actions” (p. 53). Without straining the limits of charity, we
can, I think, attribute the following argument to Friedman:
P1 If stockholder theory promotes individual responsibility then
ceteris paribus we should endorse it.
P2 Stockholder theory promotes individual responsibility.
C Therefore, ceteris paribus we should endorse stockholder
theory.
The argument is again valid but again unsound. P1 makes sense given
Friedman’s view that the economic freedom guaranteed by the stockholder
theory is necessary for political freedom, and the plausible connection
between individual responsibility and political freedom. Friedman asserts
P2 when he says that the stockholder theory “forces people to be respon-
sible for their own actions and makes it difficult for them to ‘exploit’ other
people for either selfish or unselfish purposes” (p. 53). It is hard to imagine
that Friedman reflected very long on P2, for not only is it false, it is obvi-
ously false, since the stockholder theory encourages the exploitation of
448 SEAN MCALEER

employees, suppliers, customers, etc., for the benefit of the stockholders.

It may be best for them not to feel exploited, but there can be no doubt that
they are treated as mere means: their interests require no direct considera-
tion; they are merely to be manipulated for the benefit of the stockholders.
If an executive can legally externalize her costs – say, pass on the costs
of cleaning up the pollution that is a by-product of making her product –
then Friedman’s theory clearly requires her to do so. It would not be in
the interest of the stockholders for her to seek to internalize such costs,
since doing so would reduce corporate profit and put the company at a
disadvantage if its competitors continued to externalize. And if all agreed
to internalize their costs, the CEO now has an incentive to free-ride, since
doing so would maximize profit. It is simply implausible to suppose that
stockholder theory encourages the sort of personal responsibility Friedman
claims for it.

The Free Society Argument

The last of Friedman’s arguments is his argument that “the cloak of
corporate social responsibility . . . does clearly harm the foundations of
a free society” (p. 55). Here he defends stockholder theory by pointing to
the baleful consequences of the stakeholder theory (which he calls “the
doctrine of social responsibility” (p. 53)). I reconstruct the argument thus:
P1 Whatever reduces economic freedom harms the foundations of
a free society.
P2 The practice of stakeholder theory reduces economic freedom.
C1 Therefore, stakeholder theory harms the foundations of a free
society.
P3 We should reject whatever harms the foundations of a free
society.
C2 Therefore, we should reject stakeholder theory.
As usual, the argument is valid but unsound.
I think we can safely grant P3, and P2 is not implausible, even though
Friedman regularly overstates his point – for example, he says that stake-
holder theory is essentially a “socialist view” (p. 53) and that those who
advocate it are “preaching pure and unadulterated socialism” (p. 51). But
the stakeholder theory does not advocate public ownership of the means of
production; it merely requires that corporate persons do what we think
all decent natural persons ought to do, which is to consider how their
actions affect the well-being of those around them. Thus it is hard to see
how stakeholder theory is socialistic. Perhaps Friedman is helped along
to this mistaken view by the assumption that any non-market constraints
 CORPORATE MORAL RESPONSIBILITY 449

on corporate behavior will not be “the social consciences, however highly

developed, of the pontificating executives . . . [but] the iron fist of Govern-
ment bureaucrats” (p. 55). Friedman never explains why the constraining
forces must be “external forces” (p. 55). We regularly expect natural
persons to constrain their conduct within bounds set internally; why should
we assume artificial persons such as corporations are incapable of the same
sort of self-regulation?
This point aside, it is true that following stakeholder theory rules out
certain forms of economic behavior and limits the acceptable options. Let
us, at any rate, grant that P2 is plausible. That leaves P1, which rests on a
claim for which Friedman argues at length in Capitalism and Freedom, that
“capitalism is a necessary condition for political freedom” (1962, p. 10).
Querying this provocative thesis would take us well outside the ambit of
this little essay, so I shall not consider it in depth. Still, I think we can see
that P1 is false.
One reason for thinking P1 false is that any tenable account of morality
will rule out certain forms of economic behavior. Even egoism rules out the
form of economic freedom known as prodigality, since egoism holds that I
ought not spend well beyond my means, because prodigality is imprudent:
I am economically, but not morally, free to waste my money. Utilitarianism
tells me that I ought not to hoard money or spend it on a new DVD player if
doing so does not maximize (total or average) well-being. Kant thinks that
both the avaricious and prodigal persons fail in their duties to others and
self, respectively, and Aristotle thinks prodigality, while not as vicious as
avarice, is still a vice. It is hard to see how restricting a company’s freedom
to externalize its costs (by imposing a duty not to pollute, as Australia
does) harms the foundations of a free society.
Moreover, far from harming the foundations of a free society,
moral constraints on voluntary economic arrangements can be seen to
promote these foundations. A good case can be made that the doctrine
of employment-at-will militates against self-respect by systematically
treating persons as mere means: in denying that good reasons or even
any reasons need to be given to terminate employment, rational agents
are treated as though they are not the sort of beings that need or respond
to reasons. If this is true, and if self-respect is necessary for the full
exercise of political liberty, then the economic freedom embodied in
employment-at-will will harm the foundations of a free society by assuring
that citizen-employees will lack the full self-respect necessary for the exer-
cise of political liberty. Obviously, I can do no more than merely to gesture
at this argument here, and I recognize that reasonable people can disagree
about this. Nonetheless, I do think it is clear that P1 is false, since any
450 SEAN MCALEER

tenable moral theory will limit economic freedom, though it is obviously

false that any tenable moral theory will harm the foundations of a free
society. Thus another of Friedman’s arguments is, while valid, unsound.

CONCLUSION

Perhaps Friedman is correct that “discussions of the ‘social responsibilities

of business’ are notable for their analytical looseness and lack of rigor”
(p. 51). The problem is that his discussion of the issue is no different: not
only is it unclear just what his view is, none of the arguments he offers
in support of that view are persuasive. We considered six arguments and
found none sound: one is invalid by equivocation, another commits an
ignoratio elenchi, and the rest are not merely unsound but rather obviously
unsound.
Now Friedman’s theory of corporate moral responsibility may well
be correct, though his arguments do not show that it is, and insofar as
his job was to rationally persuade us of his view, he has failed. In light
of Friedman’s failure to provide rationally persuasive arguments for his
view, we might consider how Friedman’s view coheres with other moral
convictions. Imagine a person who considers only her own interests when
deliberating about what to do. This person recognizes that her actions
affect others – indeed, may often harm or injure others – but she considers
the effects of her actions on others only when they can affect her interests.
I think most of us would think that such a person falls well below the
minimal level of moral decency we expect from each other. Why then
would we think it is permissible for a corporation to ignore the effects
of its actions on others, or to consider those effects only from its own
point of view? Presumably the fact that the corporation is an artificial
person and not a natural person cannot exempt it from the demands of
morality.

REFERENCES

Beauchamp, T. L. and N. E. Bowie (eds.): 2001, Ethical Theory and Business (6th edn.),
Prentice Hall, Upper Saddle River, NJ.
Boatright, J.: 1994, ‘Fiduciary Duties and the Shareholder-Management Relation: Or,
What’s So Special About Stockholders?’, Business Ethics Quarterly 4, 393–407.
Carson, T.: 1993, ‘Friedman’s Theory of Corporate Social Responsibility’, Business and
Professional Ethics Journal 12, 3–32.
Friedman, M.: 1962, Capitalism and Freedom, University of Chicago Press.
 CORPORATE MORAL RESPONSIBILITY 451

Friedman, M.: 1970, ‘The Social Responsibility of Business is to Increase its Profits’, New
York Times Magazine, 13 September. Reprinted in Beauchamp and Bowie 2001; page
references are to the reprint.
Goodpaster, K.: 1991, ‘Business Ethics and Stakeholder Analysis’, Business Ethics
Quarterly 1, 53–73. Reprinted in Beauchamp and Bowie 2001; page references are to
the reprint.
McGeehan, P.: 2001, ‘Credit Suisse Trims Compensation of More Top Bankers’, New York
Times, 13 November.
Reich, R.: 1999, ‘A Shareholder, and a Citizen’, New York Times, 5 November.

Central Michigan University

Mt. Pleasant MI 48859
E-mail: sean.mcaleer@cmich.edu