The social responsibility of corporate management: a classical critique

This paper defends the intellectual and ethical merits of fiduciary duties, and compares and contrasts it to the stakeholder paradigm. It argues that the fiduciary duty to firms’ owners is the bedrock of capitalism, and capitalism will wither without it.

The paper addresses critics of capitalism who, the author states, want to replace it with socialism. The author argues that instead of supplanting capitalism, the critics now propose to modify and “improve” it and that this is the rationale behind the stakeholder and corporate social responsibility movements that are put forward to attenuate managerial obligations to shareholders. The author asserts that fiduciary duty that ethical executives owe to shareholders is at the heart of Friedman’s paradigm, and is fundamental to capitalism. By producing better “mousetraps” the wealth of society increases.

The author continues that the doctrine of corporate social responsibility to stakeholders removes capitalists from centre stage and, although meant as an “improvement,” its actual effects are profoundly corrosive to the practical and ethical foundations of capitalism. The “improvements” that attenuate the duty of managers to shareholders also: (1) reduce the incentives to increase the wealth of society; (2) give ambiguous guidance to what an ethical manager should do; and (3) exacerbate the principle- agent problem between shareholders and management by creating virtually unlimited opportunities for ethically suspect situations and outright corruption.

This paper is an attempt to defend the intellectual and ethical merits of shareholder primacy, and to point out the inadequacies of the proposed alternatives. Free market capitalism has done more to alleviate human misery than all other methods of organising resources combined.