Question

1. Explain what relationship must exist between shareholders and corporate managers for Friedman’s “taxation argument” against corporate social responsibility to work, and explain one reason for believing that such a relationship does not in practice exist.

Answer 1

Corporate managers are the agents of the company therefore they have a fiduciary responsibility to run the business in their interests. This is called the “agent-principal argument” and the associated “taxation argument”: The manager is the agent of the individuals who own the corporation and his primary responsibility is to them”.

according to me, there should be one relationship which makes Friedman’s “taxation argument” against corporate social responsibility to work is to be responsible for increasing the wealth of the owners of the company.The claim is that corporate executives who spend the corporation’s resources on social concerns do not maximise profits for the corporation (shareholders).

Friedman arrives at this claim by arguing that in cases where an executive spends the corporation’s resources on social concerns that do not maximise profits for the corporation,the executive “is in effect imposing taxes, on the one hand [by reducing returns to owners], and deciding how the tax proceeds shall be spent, on the other [by lowering wages or adding costs to customers]”.

the one reason such relationship or maximizing the wealth of owner does not exist because in today's world of business there are forces like customers, suppliers, government and society at large which has big effects on sustainability of the business. when business does not consider the welfare and benefits of these stakeholders and do not discharge their social responsibilities then they do not sustain their business for long term.

for example- selling products at very high prices while there is many options available at cheap price then that business is not considering the customers and would not last for long.