Should the primary objective of management be to increase the wealth of shareholders and owners - Essay Example

?Wealth Creation: Primary Responsibility of Managers Introduction Milton Friedman (1970) categorically claimed that the primary responsibility ofmanagers is to protect the fiduciary gain of the shareholders/owners of the company that they are servicing. The moment managers veer away from this ethos, they commit an immoral act. They have failed to fulfill their duty and have wasted the money and confidence of the people they are supposed to be protecting - the shareholders. In this regard, Friedman (1970) suggested that if managers want to fulfill their acts of charity, it should be done within their own personal capacities and not within the purview of their functions as managers of corporations. Friedman’s view has been highly cited and criticized (Wilcke 2004). In effect, this position has been reaffirmed, denied and valued as incomplete. Jensen (2002) asserts the notion that managers cannot fulfill the interest of various groups claiming to be affected by the actions of the organizations. The multifarious nature of the many stakeholders of the organization highlights the impossibility of responding to it. As such, Jensen (2002) maintains that the primary obligation of managers is to strengthen the fiduciary interest of shareholders. On the other hand, Tencati and Zolsnai (2009) ascertain that the responsibility of managers is not only towards the shareholders, but also to other identified stakeholders. This is because organizations are social actors. Their actions affect and influence the dynamics and life of people, communities and the whole society. As such, they cannot renege from their responsibility towards others (Tencati and Zolsnai 2009). Meanwhile, there are scholars who are also claiming that the responsibility of managers is striking the balance among competing interests in the corporation (Hemingway 2002). In the face of the contradicting positions pertinent to the primary obligations of the manager, this study will look into the question should the primary objective of managers be to increase the wealth of shareholders and owners? The complexity of the issue and the importance of the question are affirmed by the continuing debate relevant to the primary objective of managers. In this regard, this paper intends to show that there is no dichotomy between pursuing the fiduciary gains of the shareholders and fulfilling stakeholders’ interests. In addition, selecting one over the other is a misappropriation of the current business environment. Moreover, the paper intends to identify the factors that contribute to the apparent ambiguity of the issue. Finally, this paper aims to provide possible ways wherein the ambiguity of the issue may be resolved. 2. The Position In this paper, the researcher will argue that the primary objective of managers is to increase the wealth of shareholders and owners and at the same time fulfill the interests of the identified stakeholders of the company. This claim denies the validity of the idea that there is a dichotomy between shareholders’ interests and stakeholders’ interests. Thus, the manager is in a dilemma and is constrained in choosing one over the other. In other words, profit and corporate social responsibility, which connotes the idea that organization, are responsible to the economic, physical and human resources that they employ as they steer the organization towards success (Lantos 2002), should be jointly pursued as primary objectives of management. It reaffirms the notion that (1) in view of the good of the company, both shareholders’ interests and stakeholders’ interests are coeval in importance. (2) It holds that limiting the objective of managers to increasing the wealth of shareholders and owners is a false dilemma. (3) Current business environment demands that both shareholders and stakeholders interest be fulfilled. When Friedman (1970) affirms the primacy of shareholders’ interests as the primary objective of the manager. It simply reaffirmed what has been long been integrated in business – pursuit of profit. Profit has been associated with the pursuit of self-interest of the owner or shareholders of the company (Hemingway 2002). Theoretically, profit has an economic value because it pertains to the return of investments of the investor. As such, its economic value can be quantified and easily classify as lost, gain or no change. As the economic value of profit is accepted, how does it start to have an ethical value? The idea of the wrongness of profit stem from the historical experience of the struggle of people against businesspersons who have pursued profit at the expense of the workers. This has become marked during the industrialization period wherein due to unregulated labor market, devastating, and degrading workers condition were perpetuated as capitalists pursued profit (Flanders 1975). The dehumanization of the workers was systematically practice in order to ensure a profit for the owners (Bravermann 1998). This dehumanize condition of workers, their unrelenting oppression, continues until the twenty-first century. Concrete instances of abuses of different firms have been recorded. Nike’s sweatshop is a clear illustration on how workers have been abused. Locke, Qin and Brause (2007) have found out in the study that Nike’s contractor in Vietnam had workers worked for 12 hours and that they were sometimes even drugged so that they can complete their work. Wal-Mart is known for paying its workers low wages and even sometimes asking them to work for overtime without pay (Smith 2003). These stories and experiences of abuses, deceit and other similar underhanded approaches used by management in order to guarantee high profit have connected the concept of profit and its pursuit to greed and wrong. In this regard, it can be deduced that the notion of the pursuit of profit has gain negative perception, not because of profit per se, but because of the degrading and dehumanizing ways used by the management against people, workers and the community just to ensure their profit. This highlights one crucial element in the seeming gulf between shareholders and stakeholders – the gap is misleading. Since, it has always been presented that shareholders and owners are not concern about any other thing except profit while the stakeholders are concern about anything except profit. Thus, there is a ’ deceptive’ conflict between the two; when in fact, the dichotomy between the pursuit of profit and the pursuit of stakeholders concern can be strategically aligned in order to obtain the good of all interested parties. Strategic alignment is the ‘fit’ between the shareholders and stakeholders interests as the good of the company is pursued (Kotler et al. 2008). The strategic alignment between the shareholders interest and stakeholders’ interest is possible. The following elements may provide the reality wherein the alignment between shareholder and stakeholders’ interests is actualized. First, management should be able to identify their stakeholders (Porter and Kramer 2002). This is necessary so that management can appropriately respond to the needs and demands of people who are directly affected by the company’s activities. This is an invaluable gradient in determining corporate social responsibility to stakeholders since there is always the possibility of using CSR for media mileage and reputation. This clouds the value of CSR (Karnani 2010), since company actions can be masked as socially responsible but in reality it does not meet authentically the demands of the direct stakeholders of the company. The initiative in identifying the stakeholders of the company assists the company in meeting real demands and needs of stakeholders (Porter and Kramer 2002). It also helps in easing the uncertainty regarding the motive of corporations in adopting CSR (Porter and Kramer 2002). Likewise, through identification of stakeholders, companies’ CSR do not become the escape goat, hiding government inefficiency as charge by some scholars (see Karnani 2010). Second, profit is secured in CSR because of the reputation and image that is developed by companies that are known to be socially responsible (Orlitzsky et al 2003). Reputation is considered as an intangible asset of the company, and it has been observed that companies who are known to be socially responsible enjoys stability during times of crisis (Eisengerich et al 2011), retains loyal customers (Doh et al. 2009) and attracts new clients (Banerjee 2008). Third, profit is attained by encouraging the support of ethical buyers. Memery et al (2005) have conducted a study regarding the presence and behavior of ethical buyers. They have found out that there are several categories of ethical buyers. However, despite the differences in advocacies, which resulted into different types of ethical buyers, what is common among the ethical buyers is the fact that they are willing to pay an additional amount or a premium on products that support their cause. One telling example of a company who is known for its advocacies is the Body Shop (Bastin 2003; Karnani 2007; Livesey and Kearins 2002). Fourth, by responding to the interests of stakeholders, company attracts socially responsible investors (SRInvestors). SR Investors are people who are not just interested in gaining profit for their investments, but they also see to it that their investments can help and promote the common good of the society (Robins 2010). It has been observed that, in the past decade, there is a continued increase in the number of SRInvestors. This is considered as an indication of an increasing number of investors who are not just interested in making money, but are also concerned in creating a better world for the majority. Fifth, by gaining the image of being socially responsible, companies attract the best possible employees and retain the best employees (Armstrong 2006). Studies have shown that companies who are known for supporting and empowering their employees have high employee retention, which means less cost in training new employees. For example, Starbucks has gained considerable savings due high retention of employees. They offer competitive benefits for all their employees, full time and part time. Thus, employees give the company their best. Sixth, by being responsive to the demands of the stakeholders, the company establishes its niche in the market. The global market posits a tougher and stiffer competition among products and its producers. As such, there is a need for organizations to be in constant search for approaches that will help them establish their position in the market. One way wherein market niche is secured is through innovation. Innovation, not only recognizes human ingenuity and creativity (Armstrong 2006), but it also serves as the catalyst for economic growth and development, concretely manifested through employment and an increased quality of life (Ahlstrom 2010). For example in Brazil, they have developed low priced – generic medicines for HIV/AIDS (Reis, Betton and Pena 2004). The affordable medicines have helped Brazilian patients afflicted with AIDS to acquire the medications that they need without paying the high costs of treatment. Although this innovation has been loaded with legal battles between Brazil and the US, the low priced HIV/AIDS medicines have given HIV patients the opportunity to be treated with affordable medicines, while, the generation of jobs in connection with the production of the medicines result into an increased quality of life to many people. These conditions demonstrate that it is possible for managers to pursue profit while at the same time pursuing socially responsible actions that benefit the identified stakeholders of the organization. This is possible because shareholders’ interest and stakeholders’ interests are equivalent in value and significance as the good of the company is pursued. By coining the problem in such a way that managers seem to be constrained in choosing only between increasing profits or satisfying stakeholders’ interests, the fallacy of the false dilemma is created. This is a fallacy because it limits the viable options for the managers as if there are no other likely scenarios that can be conjured in order to address the issue. In the question ‘should the primary objective of management be to increase the wealth of shareholders and owners?’ there is an embedded assumption. The assumption is that there are other (implied and not mentioned) objectives. However, the question only deals with profit or the other interests. Looking at the thesis of Friedman (1970) wherein the primacy of profit over all other interests is to be pursued within the ‘limits’ of the law and the ethical norms of the society (Cosans 2009; Shaw 2004), the false dilemma has been addressed. The limits implicitly open the idea that profit can be pursued within the legal and business social norms of society. This implies that any underhanded way to profit is not encouraged, but it also does not support the hypothesis that companies directly respond to social issues (Ahlstrom 2010). Friedman’s thesis offers the legalistic and minimal responsibility for corporations, aside from pursuing profit (Bejou 2009). It espouses fair play and freedom within the law but denies social responsibility for companies other than profit. This highlights the false dilemma in the dichotomy between shareholders and stakeholders. Their opposing interests seem to be the only choice in the issue when, in fact, other likely alternatives can be conjured. For instance, the response of this paper is the pursuit of both profit and stakeholders interests together. However, there is a need to identify the stakeholders of the company in order for the company to be truly responsive to stakeholders’ needs (Porter and Kramer 2002). The other approach is the holistic approach. It intends to address all concerns between shareholder and stakeholders’ interest and other viable options that are not only limited in choosing between profit and other objectives. In other words, by creating other viable options regarding the issue of ‘primary objective’ of management, the choices are widened, the false dilemma is removed, and more realistic and responsive alternatives are laid down. Current global business environment has been affected by globalization, rapid developments technology, especially in information and computer technology and an increasing awareness of people pertaining to social responsibilities (Smith 2003). Globalization enhances the economic interdependence of countries across the globe, and it created a more demanding global competition in the market (Handfield and Nichols 1999). In this sense, as globalization opens the global market economy, it has allowed the influx of products from other countries to penetrate the market of other countries. This creates the phenomenon of a flat world wherein products from China can be found anywhere in the world; McDonalds is global, KFC is found everywhere (Friedman 2005). This gives consumers more options and a tougher market for producers. Rapid developments in technology have created a more connected world where easier access and exchange of information has become part of the norm (Von Hipphel 2005). This means that people now have the opportunity to know what is happening in other parts of the world in real time. For instance, the recently conducted 2012 Olympics were watched by hundreds of millions of people around the world in real time. This means people in Asia, Africa and the other continents were able to view the Olympic events while it was actually taking place. There are many other examples like mobile phones, Internet, VOIP and other similar technologies that allow people to stay connected anytime, anywhere. Finally, the raised consciousness of people regarding the many problems that confound the world and their share of responsibility in finding solutions to the problems have become more pronounced since the 1960’s (Smith 2003). People have started to see that as they are part of the problem, they too are part of the solution. Analogous to it, corporations are social actors (Tencati and Zolsnai 2009). They undertake business activities, not in a vacuum, but in the physical and virtual reality afforded by society. In this sense, companies cannot deny the claim that they responsible for the consequences of their actions since it affects and influences the lives of the people, community, and environment where they are situated (Smith 2003). For instance, various cities in South East Asia are flooded due to heavy rains. Floods have taken lives, destroyed properties and hampers development. Flooding is caused both by natural phenomenon and by human negligence. As there is no control over the monsoon rains or typhoons, but human negligence can be corrected. Proper waste disposal is one-step. Another measure that is now being taken is the reduction in the use of plastic bag that normally clogs waterways. The program begins by encouraging people to use recyclable bags. Retailers and shopping malls are spear heading this program as they start reducing their consumption of plastic bags. In effect, the current global condition and circumstances of the global economic market, with the developments of technology and the raised consciousness of people, corporations can no longer just pursue profit while disregarding other factors affecting the operations and existence of the firm (Shaw 2009). They may be able to do it in the short term, but it is not sustainable since people will demand that firms be socially responsible for their actions. There are many ways wherein people can force a company like lobbying, boycott and other similar activities that can hurt business seriously (Shaw 2009). 3. Conclusion The primary responsibility of management is to increase the wealth of shareholders and owners, while fulfilling the interest of the identified stakeholders of the company. The company has to determine its stakeholders from the various constituencies for it to be genuinely responsive to the needs of identified stakeholders. It is vital that they undertake the steps that will enable them to know who the ‘real’ stakeholders of the company are so that the company will be genuinely responsive to it (Porter and Kramer 2002). The pursuit of both profit and social responsibility is supported by the following notions. (1) Shareholder interest and stakeholders’ interests are equally significant for the good of the company. (2) Limiting the primary objective of management to increasing the wealth of the owners and shareholders is a false dilemma (3) Current business environment and conditions require that management satisfy both shareholders’ interest and identified stakeholders’ interests. In the end, both the shareholders and stakeholders interests are equally essential and significant for the continued existence of the corporation. Shareholders’ experience in Enron should never happen again. , Stakeholders’ horrendous experience of ecological destruction because of Niko’s blowout of gas field in Bangladesh should never occur again. (3010 words) References Ahlstrom, D August 2010, ‘Innovation and growth: How business contributes to society’, Academy of Management, pp 11-24. Banarjee, SB 2008, ‘Corporate Social Responsibility: the good, the bad and the ugly’, Critical Sociology, vol. 34 no 1, pp. 51 – 79. Bastin, R 2003, ‘Surrender to the market: thoughts on anthropology, The Body Shop, and intellectuals’, The Australian Journal of Anthropology, vol. 14 no 1, pp 19 – 38. Bejou, D 2011, ‘Compassion as the new Philosophy of Business’, Journal of Relationship Marketing, iss 10, pp 1-6. Bravermann, H 1998, ‘Labor and labor power’, In H Bravermann, Labor and monopoly capital: degradation of work in the twentieth century, Monthly Review Press, New York. Cosans, C 2009, ‘Does Milton Friedman support a vigorous Business Ethics?’ Journal of Business Ethics, iss 87, pp 391-399. Flanders, A 1975, ‘Extract from industrial relations: what is wrong with the system?’, In A Flanders, Management and unions: theory and reform of industrial relations, Faber, London. Friedman, M September 13, 1970, ‘The social responsibility of business is to in- crease its pro?ts’, The New York Times Magazine, 72. Friedman, TL 2005, The world is flat: A brief history of the twenty-first century, Farrar, Straus, and Giroux, New York. Hand?eld, RB & Nichols, EL 1999, Introduction to Supply Chain Management, Prentice-Hall, Englewood Cliffs, NJ. Husted, BW & de Jesus Salazar, J 2006, ‘Taking Friedman seriously: maximising profits and social performance’, Journal of Management Studies, vol. 43 no 1, pp 76-91. Jensen, M 2002, ‘Value maximization, stakeholder theory, and the corporate objective function,’ Business Ethics Quarterly, vol. 12, pp 235–256. Karnani, AN 2007, ‘Doing well by doing good case study: fair & lovely? whitening cream’, Retrieved at http://ssrn.com/abstract=958087 Accessed on 18 August 2009 Kaarnani, A 2010, ‘The case against Corporate Social Responsibility’, Retrieved at www.wsj.com. Accessed on 18 August 2012. Kotler, P, Armstrong, G, Wong, V & Saunders, JA 2008, Principles of Marketing 5th edition, Pearson Education, Prentice Hall, New Jersey. Lantos 2002, ‘The ethicality of altruistic CSR’, Journal of Consumer Marketing, vol. 19 no 3, pp. 205 -330. Locke, RM, Qin, F, & Brause, A 2007, ‘Does monitoring improve labour standards?’, Industrial and Labor relations Review, vol. 61 no 1, pp 3 – 31. Memery, J, Megicks, P, & Williams, J 2005, ‘Ethical and social responsibility issues in grocery shopping: a preliminary typology’, Qualitative Market Research: An International Journal, vol. 8 no 4, pp 399 – 412. Orlitzky, M, Schmidt, FL, & Rynes, SL 2003, ‘Corporate social and ?nancial performance: a meta-analysis’, Organisation Studies, vol. 24 no. 3, pp 403-41. Porter, ME & Kramer, MR 2002, ‘Strategy & society: the link between competitive advantage and CSR’, Harvard Business Review, pp. 1 – 16. Retrieved from www.hbr.org. Accessed on 16 August 2012 Reis, D., Betton, J., & Pena, L 2004, ‘Corporate Social Responsibility: is it high noon for a new paradigm?’, Journal of Human Values, vol. 10, pp 1- 11. Robins, R. 2010. Ethical investors successfully engaged corporations and governments. Retrieved at www.triplepundit.com. Accessed on 19 August 2012. Shaw, W 2009, ‘Marxism, Business Ethics, and Corporate Social Responsibility’, Journal of Business Ethics, iss. 86, pp 565-576. Smith, C N Summer 2003, ‘Corporate Social Responsibility: Whether or how?’ California Management Review, vol. 45 no. 4, pp 52-76. Tencati, A., & Zolsnai, L. 2009, ‘The collaborative enterprise’, Journal of Business Ethics, iss. 85, pp 367 – 376. Von Hippel, E. 2005. Democratizing Innovation, MIT Press, Cambridge, MA. Wilcke, RW Fall 2004, ‘An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis’, The Independent Review, vol IX, no. 2, , pp 187-209. Read More