Ethics

Justification of the Shareholder Theory of Business Management

The corporate sector is asking the very question that Cain posed to God after murdering his brother Am I my brothers keeper Like the typical Pharisees of times yonder, they cant help but wonder, indignantly, why and how it came about that they have to shoulder the worlds misery on grounds of social responsibility. It is like when the developed nations wince inwardly every time a famine hits Africa, and the leaders make a long queue to the west with their begging bowels. Nevertheless, being the generous diplomats that they are, these Western Gentlemen, they, like their corporate friends, grudgingly part with a few goodies to help a starving continent. Now, that is what we call good corporate manners, eh

Two approaches to corporate social responsibility have been formulated, each favoring either side of the argument. It is in their attempts to define and spell the principles of corporate responsibility, that differences emerge between the two schools of corporate management. Nonetheless, Cains question ought to be answered with the objectivity it deserves, if any. In the following discussion, the paper examines the two theories of corporate management as advocated by Milton Friedman and Edward Freeman. In the end, it is this papers objective to argue that the shareholder centered theory is the best approach to business management, and that corporations do not have any social responsibilities beyond the requirements of law and ethics

The stockholder management approach by Milton Friedman advocates for the pursuit of the stockholder (investor) interests on account of being the owner of the business. As such, the firms management ought to direct its efforts towards the total realization of shareholder goals maximization of profits. Nonetheless, Friedman agrees that the pursuit of economic gain should be within the legal and moral boundaries. This is the businesss sole purpose, and any responsibility beyond owner interests is uncalled for, and an unnecessary burden to the risk-taking entrepreneur.

The emerging opposition is presented by the views of stakeholder management theorists, led by Edward Freeman. In his argument, he posits that the corporate world, by the nature of its working, touches on the lives of other parties within the circles of its operations (consumers, suppliers, employees and the local community). Collectively, together with the firms owners and managers, they are referred to as the stakeholders. In this consideration, the management is in an obligation to ensure that each partys interests are sufficiently met. The corporations purpose, then, is to resolve the conflicting interests of the stakeholders for the greatest common good.

As a result of the incompatibility of the two approaches to corporate management, the bone of contention is centered on who ought to benefit the most from an investment venture, and whether the corporation (shareholder) is bound by any obligation to society beyond the requirements of the law and ethical dictates.

Do corporations have social responsibilities
The misunderstanding arising from this question is not connected to its implications any less than to its interpretation. What precisely is meant by social responsibility Exactly by who and specifically to whom is this responsibility owed The proponents of the stakeholder management theory fail in giving a realistic interpretation of the issue. Their shortcoming lies not in their motive-it is noble and well intended, but in the arbitrariness of their definition and generalization of their so called social responsibility. In what sense is donating to a charity a responsibility Shouldnt it be informed by ones generosity rather than societal pressure and dictates, just like you toss a coin into a beggars bowel
People venture into business to make profits. Is it a social responsibility to restrict income generation capacity to favor some other minions hanging on the outskirts of their businesses They pay taxes to the government to finance projects, pay employees for their otherwise useless labor, and provide market for raw materials as well as allowing product suppliers generous profit margins. At the end of the chain, the consumer derives utility from the finished product. Finally, the general community benefit from improved infrastructure and related developments. Whatever remains after the chopping of the gross sales, is the shareholders profit, legitimately earned and equally deserved.

So, how then does it become a display of social irresponsibility if one intends to increase profits in this manner Where is the flaw if it be the sole objective Back to the question Do corporations have social responsibilities Yes they do, BUT, these responsibilities are fulfilled in the observance of business regulations and ethics. Beyond this, not a shred of any responsibility is reasonably liable upon a business enterprise, either by way of legislation or societal norms.

The attacks against the shareholder model are based around business and ethical conduct. First, Freeman charges that the model is resistant to change. However, he is sketchy of the assumed changes supposedly incompatible with the shareholder model. Regardless, it is inferred from his apparent dislike of changes favoring the shareholder that the only desirable changes should work in the opposite disadvantage the shareholder and favor the others.

By others, Freeman means to refer to the multitude of employees, suppliers, customers and the community, whom Freeman has the collectivist tendency to regard as stakeholders in the business enterprise together with the shareholder. This paper does not intend to question the rationality of their assumed stakeholder-ship. After all, they never provide capital, make decisions or worry their heads over legal suits it will be futile now that it is certain Freeman arbitrarily (irrationally is too far an overstatement, though reasonably appropriate) arrived upon their entitlement to the claim of ownership since business activities affect them in many indirect ways. Accordingly, he figured out that they too deserve a claim stake, just like you deserve one in Hollywood if the Da Vinci Code dilutes your Christian beliefs. Within reason, claimholder should be your appropriate title but cheer up Freeman says you are a stakeholder

So the opponents claim shareholder management does not adjust to changes. In the business world, only one change makes sense innovation. And every innovation is designed to favor the corporation, rather than the customer. Isnt the quest for profit what drives people to make new innovations Why do businesses strive for quality to satisfy buyers, collaborate with suppliers for efficient product distribution, brand and repackage their products and integrate technology into their operations Public Relations is a new development in the corporate world, and most business enterprises use it as a portfolio to meet customer needs and project a positive public image. If your car suddenly starts spewing out smoke like a coal kiln, I believe General Motors have somebody to whom you can take your complain. Starbucks and MacDonalds will stumble to your doorstep with new deliveries and due corporate apologies if you so much as grumbled that you spotted something wriggling in the take-away they sold you.

Now here sobriety and rationality of mind are called for why do you suppose they pay somebody just to listen to your mouth wagging, or go into the inconvenient trouble of appeasing your appetite Is it because they consider you a stakeholder and thus compelled by obligation to attend to your ranting Your stakeholdership goes as far as getting that dollar of yours is concerned. Accordingly, it makes business sense for Starbucks to invest in helping you continue flashing out your credit card every time your mood gets candy. So far, I hope I have responded to Freemans allegation of rigidity in shareholder management. In a mouthsome word profits and nothing more, inspire businesses to adapt to changing market trends and strife to meet customer demands. However, a punch will be in order the Freemanite theorists obsession with meeting stakeholders interests as the best thing to do is veiled under economical motives it is the best thing to do to make a profit, in the best way possible. They put the customer first But how best would they put their interests first if not to protect the one with the money Brother, they are not your keeper. Be afraid next time they assail JP Morgan not to extend loans to some investors whose social responsibility is wanting, for the simple reason of not taking global warming seriously.

 Regarding his charges of hierarchical and bureaucratic leadership styles against shareholder management, I seek to dismiss him summarily the investor risks money to provide capital hence owns the business and effectively, dictates the rules. The investor deserves returns from his input if bureaucracy gives him just that, where is the harm Why does Freeman think private companies thrive as democracy runs state corporations into the gutter

At this point, I think there is sufficient ammunition to shatter part of Freemans defense of the stakeholder theory. One is the argument from consequences. Stakeholder management, he boasts, considers the effects of business decisions across the social spectrum they are tailored to meet the interests of all parties. But that is exactly what shareholder management does the pursuit of profits affords the employee a good salary, the suppliers a generous profit margin, the government lump-some taxes, the customer high quality products and general economic development for the local community. Companies collapse because they make what you make if you dont make profit- losses. How is that good for the stakeholders, when thousands suddenly find themselves unemployed Seek profits with all your heart, and Adam Smiths hidden hand in the open market will distribute the tidbits to each according to his input. Dont bubble in objection within the law and ethics.

Which brings us to Freemans second bragging pretext character. He poses What kind of company do you aspire to build He then spells out the theorized attributes of stakeholder management, the supposedly ideal approach one that is characterized by efficiency, fairness, integrity, respect and lastly, creates value for stakeholders (alias claimholders). Either Freeman is subjective in his assessment of the shareholder approach, or totally ignorant in its working. Regardless, now that everybody else is a  stakeholder on the issue of corporate management, I consider it a corporate social responsibility on my part to explain what his subjective view didnt reveal about the shareholder model, and how in practice, it embodies his blessed virtues of a good management style.

 Unless he holds a very weird understanding of the term, he should expect any investor to espouse efficiency in the business. Even conmen and charlatans require a good chunk of it in their trade. It will be the height of absurdity if Freeman presupposed that it takes an ounce less in shareholder management, to run a corporate entity of such a proportion as to make it liable to some sort of social responsibility. The aspect of fairness is apparent from the mutual agreement expressed in the signing of contracts with employees and suppliers. Customers get value for their money and the government its share of taxes. It is fair game all through. Integrity is paramount for a companys good image. If transparency is not upheld, then scandals get in and the business is ruined. Who wants that for his business Certainly it is not the shareholder. By way of fairness in the manner explained above, respect is definitely accorded to all parties. But if it amounts to allowing public opinion decide how best to mismanage your business, then Freeman, and in connection the stakeholder model he advocates for, should never get into the corridors of the corporate world. But Freeman disregards one particular aspect of a good management approach which makes his model undesirable profitability A good management style must aim to realize good returns on input. And this is the core aspect of the shareholder model, which seeks to maximize profits. Wait within the boundaries of law and ethics.

Freeman accuses the shareholder approach of being not consistent with business ethics and the law. He frames the first around the separation fallacy, which tends to favor making business decisions in isolation of ethical considerations. If I were to give an illustration on behalf of my fellow stakeholder in this argument, an example is cutting costs by way of jumping some processing stages necessary to extract cholesterol traces from cooking oil. But I dont see how that touches on ethical matters. It is purely a matter of quality considerations, in which case the manufacturer will indicate, as required by law, the percentage of cholesterol on the package. It is upon the buyers judgment to decide if the price is worth the offer. It is the social responsibility of government agencies to regulate standards, and so it is assumed any product in the free market is fit for consumption. The hidden hand in the form of competition will resolve the matter of quality without any blabbering about ethics. If ethics was so central to business, then the likes of Deschutes Breweries, Sprecher Breweries and Boston Beer Company shouldnt have been established for obvious reasons. However, I will tell Freeman what is unethical making decisions that plunge the business into bankruptcy just as it was unethical for Congressman Barney Frank to lead Congress in 2003 in pushing Fannie Mae and Freddie Mac into financial crises in the name of providing affordable housing. A social responsibility indeed
The question of the law need not be an issue. The government regulates business practices and registers new businesses. If a businesss operations are likely to cause environmental problems, it is not upon ethics but the government to issue appropriate guidelines via which the business will prevent any harm. If all possible collateral damages upon the stakeholders were subject to ethical screening, we will still be stuck in the Stone Age period. Some profit seeker ignorant of the existence of stakeholders took the risk and jumpstarted the industrial revolution.  
           
So then, maximization of profits should be the driving force in the business world. John Boatright argues that profits should be sought in moderation, giving surplus chunks for communal ventures. However, losses when they come, or economical crises when they hit, do not respect the principle of moderation. It is just good business manners to make hay while it is shining. Needless to say, Boatright does not give a comprehensive alternative, but merely takes a neutral ground in assessing the two approaches. All his criticism of the shareholder model is informed by Freemans reasoning, and so similarly dismissible.

In conclusion, social responsibilities on the part of corporations should not be generalized to bind investors into literally sharing their profits. A private school or hospital is in itself a show of social responsibility by the investor. Donating for a charitable cause is an individuals generous gesture, not a formal requirement. The ethical theory recognizes the principle of autonomy, and therefore investors should not be bullied by public opinion as far as managing their businesses is concerned. Freemans model stands against all these by tying shareholders to demands that hinders free competition in a free capitalist economy. His approach is only fit for a socialist economy. What we need is a model that can practically work in a capitalist setting. Shareholder management is the best model in such a context as ours, for reasons that I will not hesitate to repeat.

The stockholder is the owner of a corporation. All other subsidiary elements are means of production, who nonetheless gain from the stockholders investment in their various capacities. As an investor, profit generation is the chief purpose of the shareholder. Their managers, in accordance, should work towards maximizing profits. Any obligation outside the dictates of the law and business ethics should be at an individual level and not linked to the corporation. Effectively, corporations are not liable to social responsibilities. These are the tenets of the shareholder model. By recognizing the absolute right of the shareholder, it protects capital and encourages investment. By recognizing profit as the major aim of corporations, it is more realistic to the business world. For these considerations, any capitalist investor and corporate manager would agree that the shareholder model provides the only approach that makes success possible.