Consequences of Friedman’s Shareholder Theory for Hrm Ethics

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 obligations of an employer towards its employee’s and shareholder theory forces management to focus on short term profit maximisation which justifies actions such as imposing stressful working conditions on employees as long as it improves the performance of the company. Many organisations that follow this shareholder theory have largely questionable ethics towards their employees as they seek to maximise profits without breaking the law.
A good example of an organisation that follows this theory is Ryanair. Ryanair’s (2012) code of ethics clearly states that “Ryanair is committed to the fair and equitable treatment of all employees and abides by employment laws in the countries in which it does business. ” Ryanair does not break any laws with regard the treatment of their employee’s. However, they do marginalise workers as they are not actually employees of Ryanair, but independent contractors. Employment law places strict responsibility on employers for their employees, whereas the conditions for independent contractors are not as strict.
This allows Ryanair to maximise profits without having to incur extra costs such as tax requirements and providing better work conditions. Short-termism can also directly affect an organisations HRM ethics in other ways. Kreymeyer et al. (2006) carried out a survey of more than four hundred executives across many of the largest U. S. corporations. Analysis of the survey found that, due to the pressures of short-termism, more than half of all respondents said they would delay or cancel new projects, even if the cancellation of those projects meant that the organisation sacrifices value creation in the future.
Such projects may include implementing a new HRM system. Implementing a new HRM system may be costly to install at first but if successful, could increase future value creation through many different ways such as reducing conflict within an organisation, improving workforce morale and productivity, reducing employee turnover which in turn could reduce recruitment and training costs. This can show how Friedman’s shareholder theory, which increases the pressures of short-termism, can affect an organisations HRM ethics as profit maximisation in seen as the number one priority of the firm.
As HRM ethics focuses on moral obligations of employers to employees, one priority of a firm should be to try to secure the long term sustainability of an organisation in order to provide job security to employees. Friedman’s shareholder theory should back this up but the overriding emphasis on short term goals and profitability can impede long term sustainability. Opportunities that could improve the long term performance of an organisation may be ignored as they might impact on short term profitability.
For example, projects may be ignored because of the cost of the initial investment is too high or because the payback period of the project is too long. In Krehmeyer et al. (2006) survey, eighty per cent of respondents said that they would reduce discretionary spending on advertising, research and development, maintenance and hiring in order to meet short term performance targets set out by the organisation. These factors can reduce competitiveness of a firm and can put its long term sustainability in jeopardy.
Alternative Ethical Perspectives Some ethical perspectives that might serve the business world in the future are Kant’s theory of ethics, Rawls theory and also the Aristotelian theory of ethics. These perspectives can be considered as alternatives to Friedman’s shareholder theory. Kant’s Theory of Ethics The Kantian theory of ethics was created by a German philosopher called Immanuel Kant (1724-1804). His theory of ethics was based on respecting people and also on the idea that a person should never use another for personal gain.
Kant did not believe that a person’s actions should be considered right or wrong by examining the consequences of their actions, rather, he believed that it is the motives behind the decision that lend moral legitimacy to it. Klikauer (2010) says that, for Kant, ethics need to be established through a series of logical arguments and without any inclinations or feelings that may cloud judgement. Kant’s ethics are guided by purely ethical laws.
Klikauer (2010) also notes that Kantian ethics does not offer business managers any room for manoeuvring with ethical decisions as one’s actions, and more importantly one’s intentions cannot be ethical and unethical at the same, there is no middle ground. There are valuable lessons that can be learned from Kantian ethics but it is also somewhat incompatible with business ethics. Kant believed that one should not use another for personal gain but the essence of management is to use people as a means to an end. The end would be an organisation’s goals.
Therefore people are treated like costs, which is the opposite of Kant’s Kingdom of Ends which says that humans should be treated as ends. Rawls’ theory of ethics John Bordley Rawls (1921-2002) was an American philosopher that based his theory on the concepts of equality and fairness from behind what he calls a veil of ignorance. Rawls (1972) says that in order to ascertain fairness with regards ethical standards, we must imaginatively project ourselves into an original position. This original position is one that is ignorant of our status in society.
He believed that the only fair way to reach a decision was if a person was behind a veil of ignorance, this means a person must revert back to a position where he or she does not know his or her class, race, sex and also what side of the social contract that that person will be on. According to Chryssides and Kaler(1993) once the decision maker has imaginatively reverted back to the original position, the social and economic inequalities of the decision are to be arranged so that the greatest benefit goes to the least advantaged.
Rawls’ theory is more sympathetic to a welfare humanist agenda as he believes that a business has a duty to less advantaged stakeholders, not just to employees. “Stakeholders are those individuals or groups who depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends” (Johnson, et al. 2008,pg 132). Rawls theory could be extremely valuable in the future as an increasing number of organisations are embracing corporate social responsibility (CSR).
It has been suggested that more organisations are moving from “laissez-faire” CSR stance, which is compatible with Friedman’s shareholder theory, to a CSR stance of “enlightened self-interest” which is now being seen as a more sustainable way for business to be carried out (Johnson, et al. 2008,pg 146). Aristotelian theory of ethics Aristotle (284-322 B. C. ) was a Greek philosopher. Fryer (2009) believed that the Aristotelian theory of ethics relates to virtue ethics as Aristotle believed that discourse can offered as a basis for moral probity.
Virtue ethics says that the morality of a person’s actions can be judged in relation to their conformity to the standards of conduct that are acceptable within that given community. Aristotle did not believe that there was an absolute right way to make a decision, he believed the human ability to engage in democratic processes was a defining characteristic that separates us from all other creatures on earth, and that democratic processes were the best way of identifying that way (Fryer, 2009).
Lessons from Aristotle’s theory of ethics could be very useful for the business world. Aristotle believed that the only way to lend moral legitimacy to a decision was to involve all those that were going to be affected in the decision making process. An organisation can involve all those that are affected by their actions through the use of employee voice mechanisms, collaborating with suppliers and customers and by involving all stakeholders in the decision making process. Conclusion
Friedman’s shareholder theory has largely negative consequences for HRM ethics, as shareholder theory forces organisations to operate under the straight jacket of short-termism in the drive to maximise profits for the shareholders who own and invest in the company. Kant’s, Rawls’ and Aristotle’s alternative ethical perspectives might not be perfectly compatible with the business world but each of them, in their own way, can offer valuable insights that could be extremely valuable and might serve the profession in the future. References Chryssides, G. D. and Kaler J. H. 1993), An Introduction to Business Ethics, 1st ed, pg. 180-185. London, UK: Chapman and Hall. Friedman, M. (1970), “The Social Responsibility of Business is to increase its Profits”, The New York Times Magazine, Available from: http://www. umich. edu/~thecore/doc/Friedman. pdf [Accessed 22nd October 2012] Fryer (2009), ‘HRM: An Ethical Perspective’, in D. Collings & G. Woods (2009), ‘Human Resource Management A Critical Approach’, (Taylor & Francis e-Library) pp. 75-90 Johnson, G. , Whittington, R. amp; Scholes, K. (2008), Exploring Strategy, Text and Cases, 8th ed, London: FT Prentice Hall. Klikauer, T. (2010) Critical Management Ethics. 1st ed. Pg 68-87. Hampshire, UK: Palgrave Macmillan (James Hardiman Library) Krehmeyer, D. Orsagh, M. Schacht, K. N. (2006) “Breaking the Short-Term Cycle: Discussion and Recommendations on How Corporate Leaders, Asset Managers, Investors and Analysts Can Refocus on Long Term Value”, CFA Centre for Financial Market Integrity/Business Roundtable Institute for Corporate Ethics, Available From: http://www. darden. virginia. edu/corporate-ethics/pdf/Short-termism_Report. df [Accessed 24th October 2012] Oslington, P. (2012) “God and the Market: Adam Smith’s Invisible Hand”, Journal of Business Ethics, vol:108 (iss:4), Pg: 429-438. Available from: http://www. springerlink. com. libgate. library. nuigalway. ie/content/e2255226763w13qp/fulltext. pdf [Accessed 23rd October 2012] Rawls, J. (1972) A Theory of Justice. Oxford, UK: Oxford University Press (James Hardiman Library) Ryanair (2012), ‘Code of Business Conduct and Ethics’, [online] Available from: http://www. ryanair. com/doc/investor/2012/code_of_ethics. pdf [Accessed 24th October 2012]