CORPORATE DESPOTS AND CONSTITUTIONAL

THE SOCIAL RESPONSIBILITY OF BUSINESS IS TO INCREASE ITS PROFITS. PALTI MT SITORUS Source by Milton Friedman Concept

FRIEDMAN’S CENTRAL POINT. Business does not have a “social responsibility” in the sense of having an obligation to promote desirable “social” ends, for example, clean environment, fulfilling jobs, prejudice-free society, etc.

FRIEDMAN’S 1 ST SUPPORTING POINT. Business (as a general type of enterprise) is not the kind of thing that can have responsibilities – social or otherwise.  The internet does not have responsibilities.  The weather does not have responsibilities.  Business is the same type of general system.

FRIEDMAN’S 2 ND SUPPORTING POINT. Sometimes businesses are treated by the law as (artificial) individuals (or agents) and assigned a set of responsibilities.  However, this is always done for a specific legal purpose, such as establishing a source of funds for product liability cases.  No one thinks the business has really become a person and started having responsibilities of the type that persons have.

FRIEDMAN’S 3 RD SUPPORTING POINT. On the other hand, corporate managers certainly are individuals, and they definitely have responsibilities. However, these responsibilities are to the people who own the equity of the corporation, and they can be summarized as: Make the most profit (that is, the largest return in investment) possible.  This is sometimes referred to a Friedman’s “shareholder theory,” since in modern corporations profits ultimately accrue to the shareholders of the corporation’s stock.  NOTE: “shareholder” = “owns shares of stock”

WHAT IF A MANAGER DECIDES TO PURSUE A SOCIAL END RATHER THAN MAXIMUM PROFIT? This is spending other people’s money on his or her personal political goals.  That is, it converts market mechanisms into a political process, but this is socialism rather than capitalism. Managers would have no idea what to do anyway.  They have only their private beliefs, which is not at all the same thing as genuine social purpose.  Moreover, each manager would have too small a view to expect his or her beliefs to be correct.

FRIEDMAN’S CONCLUSION. Friedman says the only responsibility of businesses, and the managers who run them, is to make as much profit as possible.

HOWEVER, FRIEDMAN ALSO SAYS THIS DOES NOT MEAN ANYTHING GOES. Friedman says that businesses are obliged to follow laws, rules, and regulations.  Note: Some of these may incorporate social ends. Friedman also says that businesses should adhere to generally accepted social standards and expectations.  He points out that if a corporation operates in violation of the moral standards and expectations that are generally accepted in its society, it runs the risk of losing business, which, of course, would decrease profit.

SO, FRIEDMAN’S FINAL WORD? He says that businesses should legally and prudently pursue profit – NOT that business should pursue it with reckless abandon. This is a more subtle and complex position than people mistakenly attribute to him.

A ROUGH AND READY SUMMARY OF FRIEDMAN. Maximize profits,  but never forget that short-term focus can undermine long-term gains,  and never forget that breaking the rules of society – both formal rules like laws and informal rules like generally accepted norms of business behavior – will put you out of business. This comes close to Utilitarian ethical theory, which requires you to weigh ALL of the outcomes -- NOT just short term economic benefit to you.

The Topics Link  Business and Management  Business Leadership  Corporate Governance  Economic and Finance  Financial Economic  Regulation  Politic and Public Policy  Leadership

12/26/2015 HOW WE OPERATE: BOEING MANAGEMENT MODEL Driving performance through growth and productivity and leadership development

Enlightened Despots Frederick II of Prussia ( )  Rebelled against father  Later developed finest army  Built Sans Souci (Potsdam)  Invited Voltaire to the court

Enlightened Despots Catherine the Great of Russia ( )  German born wife of Czar Peter III  Controlled government after Peter III’s accidental(?) death  Increased European culture in Russia  Peasant Reforms  Territorial Expansion  Corresponded with Diderot

Enlightened Despots Gustav III of Sweden (r )  Forced Parliament to accept new constitution  Stimulated literature Charles III of Spain (r )  Bourbon family  Improved life for Spanish  Suppressed Jesuits

Maria Theresa And Joseph II Of Austria (R ) 16 children Built Schönbrunn Economic reforms Limited power of the Pope Reduced power of the lords Joseph abolished serfdom Poland divided

Relevant Themes Form of Business entity: Proportional regulation Role and Responsibility of Actors: Promoters; Directors and Shareholders Corporate Governance: Normative framework to Enforcement mechanisms Process and Procedure of Corporate Restructuring: Transparency requirements

Role Of Directors Board of Directors – Principal Body  Remuneration – generally not >11% of net profits One Director – chosen for management – need not be a shareholder  Fiduciary Duty to take care – and statutory duties Difference between ownership and control – elected and voting powers – except for nominees; government; debenture trustee

ENFORCEMENT OF CORPORATE GOVERNANCE

Review Of Managerial Decisions Concept of Fiduciary duty – different from “best practices”; norms; aspirations Due care and good faith to be demonstrated in all actions  Interest of the company and law as an objective Compliance requires fiduciary discharge of functions  Document actions/decisions extensively

Legal Duty of Care Director VS An Agent Fiduciary in nature Has to only benefit Company’s interest Has to make up Losses caused + Profits made Unequal position with shareholders Responsible to minority shareholders and Society as well Contractual nature Self-interest may also be served Has to compensate only for the losses Equal negotiating capacity of parties Responsible only to the other Party

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CASE : NIKE INCORPORATION