Individual Assignment – 1

How companies create value for society in the process of earning profits for
their shareholders?

Corporate Governance and Business Ethics

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Submission by:

1. Why does Friedman assert so passionately that “the social responsibility of business is
to increase its profits?”

Solution: Friedman asserts the doctrine of social responsibility of business is to increase its
profits because, the individual stockholder or owners of business should be voluntarily
involved in such social causes and not the business (agents/corporate executives).
 Corporate executives running the business have the primary responsibility of
meeting the expectation of their shareholders i.e. profit maximization
 Corporate executives when performs the social responsibilities would be spending
someone else’s money in form of taxes like shareholder’s profit, customer’s money,
or employee’s salary etc. This responsibility in principle and therefore should be
performed by the Government through political mechanisms
  Individual owners or shareholders should be agents who should engage in the
activities of social responsibility through their voluntary contributions from profits
generated and thereby not spending someone else’ money in form of taxes
Hence, corporate executives or business have the prime responsibility of profit
maximization, which will potentially enable the individual shareholders to make their
voluntary contributions for social causes.

2. How would you reconcile Friedman’s view with the more recent calls for incorporation
of ESG objectives in business?

Solution: Environment, Social and Governance strategies have been on the rise in most of
the Global corporations especially large and mid-sized recently. They are partially consistent
with Friedman’s view on profit maximization as the key social responsibility of the
businesses because of the following reasons:
 Long-term Profits: Companies with robust ESG objectives have shown consistent
profits in the long-term although some of the profits in the short-term are on the
decline. ESG objectives help the companies to be more sustainable for long-term
 Globalization: Increased trade between countries with social and financial
disparities yet providing business opportunities demand for a strong ESG
strategy to help in the market and value creation for multiple stakeholders
involved in the trade
 Financial crisis: Too much emphasis focused on profit maximization for
shareholders has resulted in a global financial crisis as witnessed in 2008. The
criticism of Friedman’s view has now shifted the focus from shareholders to all
the stakeholders involved. ESG helps in making the businesses sustainable and
survive during the financial downturns