Stockholder vs Stakeholder

Stockholder vs Stakeholder

Two different Views about the purpose and aims of business

Stockholder Theory

• Milton Friedman : The Purpose of Business is to make money for the owner or stockholders.

Argument 1

• “The Social Responsibility of Business is to increase its profits”

• The Underlying Ethical principle: Manager has Fiduciary Responsibility to Owners…

Purpose of business is NOT to :

• provide employment• eliminate discrimination• avoid pollution• help the community• make life better for workers

Business is not Charity

• To think business should do anything other than make a profit is to preach socialism and undermine free society.

Argument 2

• Businesses cannot have responsibility, because only people can have responsibilities.

Argument 3

• Executive has obligation to stockholders• “a corporate executive is an employee of the

owners of the business. He has a direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible…”

Ethical Caveat:

“…while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

Manager has obligation to • Law• Ethical Custom

Business Responsibilities vs Personal Social Responsibilities

• social responsibilities of the executive:Family, conscience, feelings of charity, church, clubs, city, country

• Fiduciary responsibility: To make money for stockholders

Agent to Stockholders

• He must act as an agent of the stockholders, not society in general.

“But if he does this, he is in effect imposing taxes on the one hand, and deciding how the tax proceeds shall be spent, on the other.”

Argument 4

• No way for Executive to know how to solve social ills—that’s not his expertise!

Argument 5

• Majority speaks through the law. Don’t undermine or circumvent democracy by imposing one’s views on other people’s money-use via subversive private ‘tax’

PR or Charity?

• If Companies give money to good causes because it gives them good Public Relations, then count it as advertising and don’t pretend it is done for the sake of charity. The Windowdressing/cloak of social-responsibility is a lie and a sham which undermines free society.

Kenneth Arrow Response

“Social Responsibility and Economic Efficiency”

• Arrow responds to the case against social responsibility, which is based on the assumption that the firms should aim simply to maximize their profits.

Friedman’s Assumption #1

• Freidman thinks firms ought to maximize their profits (they have social obligation to do so) Because “profit really represents the net contribution that the firm makes to the social good and the profits should therefore be made as large as possible.”

Friedman’s Assumption #2

• Freidman also assumes natural constraints of the market will help keep companies in check. I.E., if a company is known to be dishonest or terrible to their employees, then consumers will not buy from that company!

Problem #1 with Friedman’s Position

• It assumes that forces of competition are sufficiently vigorous—but they aren’t.

• Federal regulations are essential to force companies to act in an ethical manner. Such regulations direct the market towards ethical behavior.

Problem #2 with Friedman

• Distribution of income that results from unrestrained profit maximization is very unequal.

Problem #3 with Friedman

• Maximizing profits is socially inefficient when costs are not paid

• Examples:– pollution– traffic congestion– No taxes– poorly educated workforce

Problem #4 with Friedman

• Maximizing profits is socially inefficient when seller has great knowledge advantage over buyer

Stakeholder Theory:Ed Freeman

Managing for Stakeholders

• “Managing for stakeholders is about creating as much value as possible for stakeholders, without resorting to tradeoffs.”

• “The basic idea is that businesses, and the executives who manage them, actually do and should create value for customers, suppliers, employees, communities, and financiers (or shareholders). And, that we need to pay careful attention to how these relationships are managed and how value gets created for these stakeholders.”

Problems with Traditional Stockholder Model:

• Resistant to change: dangerous to rely simply on stockholder satisfaction

• Not consistent with the law: law does not simply uphold stockholder’s rights

• Usually ignores ethics: the Separation Fallacy: business decision vs ethical decision

Three reasons that the separation of business and ethics is a fallacy:

• 1. Open Questions• 2. Integration Thesis• 3. Responsibility Principle

1. These Questions Make sense

• If this decision is made, for whom is value created and destroyed?

• Who is harmed and/or benefited by this decision?

• Whose rights are enabled and whose values are realized by this decision (and whose are not)

• What kind of person will I become if I make this decision?

2. Integration Thesis

• Most business decisions, or sentences about business have some ethical content, or implicit ethical view. Most ethical decisions, or sentences about ethics have some business content or implicit view about business.

3. Responsibility Principle

• Most people, most of the time, want to, actually do, and should accept responsibility for the effects of their actions on others.

Executives must Realize:

• “To create value for stakeholders, executives must understand that business is fully situated in the realm of humanity. Businesses are human institutions populated by real live complex human beings. Stakeholders have names and faces and children.”