Management, Ethics of

Managing for Shareholder Wealth

The starting point for ethical management should be role morality. Role morality is the morality of one's station and its duties. The duties of one's station are determined by the purpose of the organization. Suppose we take the traditional starting point for the purpose of a corporation. Milton Friedman's position is the standard: that business has only one responsibility, which is to use its resources to increase its profits, engaging in free and open competition without deception or fraud. Under this view the manager is the agent of the stockholders who are the owners of the firm. As an agent of the stockholders the ethical obligation of the manager is to do the bidding of the stockholders, which normally is to make as much money as possible while following the basic rules of society, according to both the law and ethical custom. Many people do not see making money for stockholders as a moral obligation, and professors of finance seldom teach it as a moral obligation, but Friedman's position is a moral position nonetheless.

It should also be pointed out that violation of this simple moral requirement is behind many of the scandals that have afflicted business and behind many of the criticisms of business with respect to corporate governance. Excessive executive compensation and lavish executive perks are a violation of the ethical obligation of managers to increase the profits of stockholders. Many of the accounting scandals of the 1990s and 2000s were the result of managers manipulating earnings so that they could get their stock options or bonuses. These managers were not working for the stockholders and violating the law and ethics on behalf of the stockholders. Rather they were violating the law and ethical custom for their own selfish gain.

The qualifications that Friedman makes to the obligation of managers to increase shareholder wealth are significant, however. Even if the manager is the agent of the stockholders, he or she cannot be asked to make profits in a way that the law deems illegal or that violates ethical custom. The term ethical custom can have narrow or a broad application. Friedman specifically rules out anticompetitive practices and deception and fraud. However, some in Friedman's camp do allow bluffing. Albert Carr pointed out that the ethics of business is more like the ethics of poker than the [Page 1315]ethics of ordinary morality. There is still no consensus as to what should be included under Friedman's term ethical custom.

One item that is not included in ethical custom for Friedman is philanthropic giving from profits or the use of profits to help solve social problems: that is, using profits for social responsibility. If a manager uses the profits for philanthropy or social responsibility, he or she is taking the money that belongs to the stockholders and using it for other purposes without their permission. Friedman characterizes this as a kind of taxation without representation. However, Friedman is assuming that the stockholders do not want corporations to engage in philanthropy or help solve social problems. However, the stance of individual corporations with respect to philanthropy and social responsibility is well known. For example, the stockholders of the Target Corporation are well aware or reasonably should be aware of the fact that Target is one of the more generous companies with respect to corporate giving. Target stockholders either are willing to sacrifice some of their profits for the public good or, more likely, believe that Target's record of charitable giving will result in a competitive advantage that yields even more profit in the long run.

...