Corporate Finance and Shareholders vs. Stakeholder Capitalism: A Review of Milton Friedman's "The Social Responsibility of Business Is to Increase Its Profits"

Abstract

Milton Friedman argues that the responsibility of business is to maximize profits for shareholders, and that managers should not divert company resources toward social responsibility because that role belongs to the government and individuals, not the corporation. Friedman's 1970 paper became the foundation for shareholder primacy for decades and remains the default position that stakeholder-theory and ESG advocates argue against today. Since the 1970s, the business environment has changed substantially: corporate rhetoric has shifted toward stakeholder inclusion, ESG investing has grown sharply in scale, and new disclosure rules require companies to report ESG-related information. This review evaluates what these changes actually demonstrate, distinguishing evidence of changing norms and rhetoric from evidence about financial performance, and argues that Friedman's framing is too narrow for the present day even though the empirical relationship between ESG and firm value remains genuinely unsettled.

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