Milton Friedman wrote in 1973 that managements “primary responsibility is to the shareholders who own and invest in the company”. What are the consequences of this philosophy for HRM ethics, and what alternative perspectives might serve the profession in the future? Friedman’s Shareholder Theory
Milton Friedman’s shareholder theory has had a broad range of consequences for HRM ethics. The main consequence being that if management are only answerable to owners and shareholders, and must do as they wish, management’s quest will almost always be to maximise profit. Organisations that are constantly trying to maximise profits are often constricted by short-termism. Short-termism refers to the excessive focus of some organisational leaders on short-term earnings which can impede the long-term value creation of a company. Short-termism can have profound effects on an organisations HRM ethics. Before examining the consequences of Friedman’s theory that managements “primary responsibility is to the shareholders that own and invest in the company”, and before outlining alternative ethical perspectives that might serve the profession in the future, I think it is important to give a brief account of the different agendas of HRM ethics and of Friedman’s reasoning behind his theory in order to relate it to HRM ethics. Fryer (2009) says that there are two contrasting agendas with regards to the relationship between HRM and ethics. He says the first agenda is welfare humanism and the second agenda is managerial performativity. The welfare humanist ethical agenda says that the ethicality of HRM practice should be measured in relation to its responsiveness to the needs and aspirations of employees. Under this perspective, self-actualisation and self-esteem of employees is considered very important and is rigorously promoted. The managerial performativity agenda is the opposite of the welfare humanist agenda. This agenda places the achievement of strategic success above all other considerations, including employee well-being. Supporters of this agenda argue that if an organisation focuses purely on maximising profit within free/liberal market conditions, it will ultimately be in everyone’s best interests. According to Fryer (2009), Friedman was a utilitarian and also followed the managerial performativity agenda. Utilitarian theory proposes that the best way to lend moral legitimacy to a decision is to promote the way forward that will generate “the greatest amount of good for the greatest number of people” (Fryer 2009, p. 77). Oslington (2012) suggested that the work of Adam Smith can be used to support the idea that if an organisation prospers, society in general will benefit from this. Therefore, as Friedman believed, if a firm tries to maximise profits, it will ultimately be in a society’s best interests as many people stand to benefit from the commercial prosperity of a business, including its shareholders, suppliers, customers, the vast majority of employees and society at large as the business generates economic activity. Friedman (1970) wrote a seminal article in the New York Times called The Social Responsibility of Business is to increase its Profits. In this article he argues that any person who believes that a business should be concerned with issues other than maximising profit, issues such as eliminating discrimination, avoiding pollution and providing employment, are just puppets of the forces that strive to undermine the basis of a free society. This article lays the foundation for Friedman to declare in 1973 that managements only responsibility is to shareholders as he places an increased emphasis on property rights. Fryer (2009) suggests that that property rights are fundamental to Western culture and that the right to own and to transfer property is of the utmost importance. Consequences of Shareholder Theory
The consequences of Friedman’s shareholder theory for HRM ethics are profound. HRM ethics is the moral...
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