To give you some background:
- In 1976 Jensen and Meckling wrote an article that suggested a solution to the Principle-Agent problem. Their solution was based on the premise that the singular goal for a firm is to maximise shareholder value. Denning describes their article as being academic in nature, in that they create a problem to which they then propose a solution, rather than it being based on any real-world scenario.
- In 1973 Peter Drucker, quite contrary to the position taken by Jensen and Meckling, believes that the singular role of business is “to create a customer”.
I do not believe that maximising shareholder return is the sole purpose of a corporation. If we start by looking at any company of repute, than we see that they all have certain characteristics in common, they proudly promote their vision, mission and values. The visions and mission of each company varies widely but most follow a common theme, that they all wish to contribute to their stakeholders and society, while making a profit. Profit is for them is necessary for sustainability, however is only a means to a much greater end. Corporate social responsibility pioneers would also tell us to look at the triple bottom line, or People, Planet and Profits, with profits being in this case a tertiary concern.
However, why is the case? Why should we look after the shareholders interests only? Friedman’s views states that as corporation are not natural persons, their right is only to stay within the law, and unlike natural people they do not have social responsibilities. It carries on to say that a company should not use its profits for social needs, rather social decisions should come from the shareholders, and in a case of multiple shareholders the firm should distribute profits in the form of dividends and the shareholders themselves can independently decide how to utilise their earnings. Is this argument good enough?Corporate social responsibility Peter Drucker Principal-agent problem Shareholder value Triple bottom line