[Opinion] Marking the 50th Anniversary of the Friedman Declaration

Fifty years ago, Milton Friedman, an economics professor at the University of Chicago, contributed an article to The New York Times titled "The Friedman Doctrine: The Social Responsibility of Business is to Increase its Profits." As the founding figure of the Chicago School that led neoliberalism and later a Nobel laureate in economics, his article established the core logic of shareholder capitalism, profoundly influencing corporate management, government policies, and academia over the past five decades up to the present day.

The joint-stock company system, which began to be institutionalized in 17th-century England and the Netherlands, can be regarded as a great institutional invention that contributed more revolutionarily to current economic growth and development than other material inventions. So, why has the joint-stock company system driven economic growth and development so effectively?

Stakeholders of a joint-stock company, such as executives, partner companies, and creditors, have the right to receive a predetermined amount from the company based on contracts, whereas shareholders hold claims on the residual assets, meaning the amount remaining after the company pays all these stakeholders the agreed sums. Meanwhile, when a joint-stock company goes bankrupt, shareholders lose their entire investment but bear limited liability, meaning they are not obligated to pay the debts. These characteristics enabled the mobilization of large-scale venture capital and played a key role as the driving force behind the Age of Exploration and the Industrial Revolution, contributing centrally to the growth of the global economy.

Since shareholders are the owners of a corporation with legal personality, naturally, the goal of management is to promote shareholder interests. Since the inception of the joint-stock company system, there has been much debate on how to reconcile conflicts between shareholder interests and corporate social responsibility and contributions. For example, when the "car king" Ford significantly raised wages and lowered car prices, his partners, the Dodge brothers, sued, claiming this decision infringed on shareholder interests. In 1919, the court ruled in favor of the Dodge brothers, and this ruling has been cited as an important legal precedent supporting the maximization of shareholder value as the corporate objective even before the Friedman Doctrine.

The Friedman Doctrine firmly provided a logical basis to settle such debates. It argued that shareholders, receiving returns on their investments, would themselves decide how to contribute socially, so corporate executives should focus solely on maximizing shareholder profits. In the profit-generating process, the company pays stakeholders the agreed amounts, and social issues are to be addressed by the government through corporate taxes, so the social impact of corporations is not a consideration in corporate decision-making.

Of course, the Friedman Doctrine has faced numerous criticisms proportional to its influence. Whenever neoliberalism has been criticized as the root cause of socio-economic problems over the past 50 years?such as environmental destruction, income inequality and social class conflicts, and periodic financial crises?the Friedman Doctrine has been pointed to as the origin of these issues. After the 2008 financial crisis, awareness grew that the irresponsible management of large financial firms caused widespread suffering, prompting corporations to begin recognizing these problems themselves. The recent spread of ESG management and investment can also be seen as stemming from this shift in awareness.

The 50th anniversary of the Friedman Doctrine comes at a time when awareness of corporate social responsibility is strengthening due to the COVID-19 crisis, giving it special significance. The University of Chicago published an e-book titled "Reexamining the 50th Anniversary of the Friedman Doctrine," discussing its meaning in the current context. More than 20 authors, including Nobel laureates in economics, generally agree that the unrestricted maximization of shareholder value proclaimed in the doctrine can no longer be sustained.

About 100 years ago, Ford lost the lawsuit, but his decision led to highly productive, loyal employees, and the mass-produced "Model T" at low prices spurred rapid growth in the automobile industry, driving the U.S. economy. Ultimately, from today's perspective on corporate social responsibility, Ford's decision resulted in both the company's success and the leap forward of the U.S. economy. Ford's case invites us to reconsider the possibility of harmoniously achieving corporate social responsibility and sustainable management on the 50th anniversary of the Friedman Doctrine.

Jinyoung Shin, President of the Korea Corporate Governance Service and Professor at Yonsei University Business School

This content was produced with the assistance of AI translation services.