Should the Primary Objective of Management Be to Increase the Wealth of Shareholders and Owners - Example

Should the Primary Objective of Management Be to Increase the Wealth of Shareholders and Owners? Name: Course: Tutor: Date: Should the Primary Objective of Management Be to Increase the Wealth of Shareholders and Owners? Introduction The debate over the role of business enterprises in the world today has changed course lately. The new theory seeks to change the notion that the role of enterprise is only to cater for the interests of the shareholders only. Many business leaders are currently putting the aspect of corporate social responsibility into considerations. This paper covers a number of arguments on the primary objective of the management of a business. The essay progressively compares this argument with Milton Friedman thesis. The objective of this study is to provide a comprehensive insight in the obligations of business enterprises. Most importantly at the end of the study, there is a conclusion that justifies the primary roles of the management of any company. Thesis statement The primary objective of management incorporates increasing the wealth of shareholders as well as meeting the expectations of the society. Business in a new perspective It is pertinent to note that a misinterpretation of the more than four decades old theory concerning the purpose of business has led to several things. The theory suggested by Milton (1970) insisted on the sole purpose of business being to make profits for the organization. However, this theory has been used to justify organizational managements to engage in many unethical activities. These activities are geared towards achieving the interest of the shareholders at the detriment of the society. However, compassion should help business leaders to strike a balance between the society needs and making profits for the organization. Compassion is considered the theory of basing organizations profits to the impact it has to the community (Van Beurden & Gossling, 2008). Some organizations around the world considered compassionate include the ford motor company, PepsiCo, Aeropostale inclusive as well as Target. This is a cording to an article authored by bijou (2011). This concept of compassion has been in existence for as long as humanity. However, its adoption into the business world has been noticeable in the past few decades. The companies, which are compassionate in the operations, adhere to some set of principles. These principles form a core aspect of the organizational culture where freedom of expression is highly acknowledged. The operations of the organizations are also based on the principle of integrity and responsible management of the human resources (Wilcke, 2004). Moreover, these organizations are active in matters that prevent social ills as well as human rights violation. It is pertinent to note that organizations, which are compassionate, excel in social performance and corporate governance. In fact, it is pertinent to acknowledge that organizations have a responsibility to serve humanity. This implies that compassion should be at the core of their operations, and profits are the reward for service to humanity. Moreover, ethics should be the conscience and form a foundation for any enterprise (Bejou, 2011). Growth is a multidimensional aspect in the society. However, economic growth is considered a direct indicator of the increasing wellbeing of the society as well as standards of living. In order to enhance the living standards of the society, enterprises play a significant role in areas of microeconomics. Research shows that the current generation is enjoying a better living standard that their predecessors. Corporations and private enterprises are at the centre of economic growth. For a significant growth to be realised, innovation has to play a role. Disruptive innovations that lead to economic growth are considered a new way of doing things in the creation of wealth and utilization of resources (Van Beurden & Gossling, 2008). Moreover, such innovations lead to growth in different industries as users of these products expanding in numbers as things change. Another effect of disruptive innovations is overhauling the production process resulting to better and cheaper goods. Consumers end up as prime beneficiaries of these changes. On the other hand, organization receives profits as rewards. Economic growth has contributed in the improvement of the standard of living as well as the per capital income across the world. This implies that enterprises serve the role of innovations in the economy, which lead to economic growth (Ahlstrom, 2010). Meeting societal demands by corporations has been a debate that has a significant influence on management of organizations. Corporate social responsibility has existed for many decades. The effect of adoption of the corporate social responsibility in organization affects not only the people within the organization but also others. The question on whether organizations should always aim at meeting the needs of the society is a core issue in this debate. The proponents argue that the uncertainties in the society can be mitigated through CSR. This helps peoples to survive in a dynamic world (Cosans, 2009). Accountability in the moral and financial side of business is also a significant responsibility of businesses around the world. With the advent of investors who are keen on organizations fulfilment of the obligation towards the society, business leaders are commissioning more CSR programs than before. Organizations have lately shifted their focus to a broader perspective to ensure accountability to all stakeholders (May, Cheney & Roper, 2007). However, corporate and financial performance remains to be pertinent indicators in measuring the wellbeing of organization. Enhancing the quality of life for all stakeholders is a clear indication that an organization is committed toward fulfilling its obligation in the society and financial excellence. Responsible behaviour amongst business leaders in order to ethically mange and contribute in advance the excellence of life in the society has been on the rise. This commitment is justified since it helps enhance the corporate image of an organization (Smith, 2003). The implications of the adoption of corporate social responsibility programs depend on several things. Every program incepted by a business leader has its objectives and justification. However, the inconsistencies within the business world on measuring corporate social responsibility limit the provision of statistical analysis on the impact of CSR programs. The relationship between the choice of the program and the form of business an organization is involved is eminent. Corporate actions are considered to be observable activities and process aimed at making a difference in the society. This includes social programs as well as philanthropic programs (Kotler & Lee, 2005). Issues of public concern are also central to the measurements of the effectiveness of a CSR programs. These issues define the extent of effect of the social problems such as pollution and poverty. It is pertinent to note that regardless of the CSR program, benefits to both the organization and society have to be realized. As for the organization, the perceived image in the society is enhanced. This is directly linked to the corporate and financial performance of the organization. Enhancement of a company’s brand image translates to attractive financial performance. This implies that a positive relationship between the corporate social responsibility and the corporate-financial performance of any organization exists. This is a clear indicator why organizations should engage in finding solutions for the problems facing humanity. The relationship between the two aspects varies from one corporation to the other based on the effectiveness of a CSR program. Moreover, business leaders should seek to support those programs that are aligned to their line of business (Van Beurden & Gossling, 2008). Milton (1970) called for a controversial debate when he stated that yielding profits is the sole responsibility of a business. There are arguments that this obligation does not call for justification of the approach used in the creation of wealth. Compliance with the law is not mentioned in the logical explanation of the author. However, Milton is categorical on the values of freedom without infringing the right of others (May, Cheney & Roper, 2007). The incompleteness of the argument is evident when some key questions that define the way business is done are not clearly handled. The role of ethics and service in business is not well articulated. According to Milton, organizations can only define their interests by way of profits. The practicability of applying the theory where business leaders are expected to do anything within the law to maximize the profits of the organization. Any business leader or executive is obligated to the owner of the organization to expansion of their investments. According to law, the obligation is delivery of service to the organization to meet the desires of the owners. Their desires are to maximize profit making within premise of the laws guiding the business (Bejou, 2011). The theoretical bar set by Milton is exceptionally high on the ethical aspect. However, it lacks to put into considerations the moral desires of the shareholders of an organization. Moral desires of shareholders include social problems that are within the reach of an organization. The management is accorded a stringent role in ensuring that organizations operations are within rules of a society. The problem in this role is the determination of the fundamental set of laws of the people. In most instances, a decision has both negative and positive implications. This limits the management in conforming to the expectation because they would have to institute the pros and cons of a decision reached (Smith, 2003). The Milton’s theory is also in support of the concern of clients and employees of an organization. The challenge is in the determination of the ethical custom. Valuation of liberty in the management of organization can be achieved through various approaches. A comparative approach where an organizations framework is put against a dictum. This creates some tension between organizational, ethical motives and the pursuit of profits. It also creates an atmosphere where ethics is an imposition from external forces of industry. However, it is probable to mull over the aspects of profitability, morality, as well as ethics to be a holistic structure of business (Ahlstrom, 2010). In business, ethics is a multifaceted aspect where there is a demand for cooperation from external forces. Customers should be fully understood so that organizations can satisfy their needs entirely. Organizations must be able to accommodate diversity of employees and train them to work toward establishing a charitable organizational culture. Business transactions are based on respect as well as interests. For transactions to be successfully implemented with strangers a business relationship has to be established. It is through this relationship that the interactions between different parties can be smooth (Husted & de Jesus 2006). Whenever cooperation between different parties is through private enterprises, profits are a significant aspect of agreements. Profits enable an organization to compensate employees. Moreover, they reward the shareholders on their investment. This does not the only reason for establishing business transaction. The interpretations of the expectations of an organization by business leaders should be clearly reflected in its organizational culture (Van & Gossling, 2008). Societal obligations of businesses have been the subject of discussion after the industrial revolution. Business developed a concept where social amenities were developed to serve the society and the employees. This concept was adopted in many developed countries. The Pullman company town is an example of the concept in United States of America. This town was built in the outskirts of Chicago on a sixteen square kilometre area. This was near Lake Calumet. The town was complete with the churches, hotels, schools, and housing for employees. The town was considered ideal with the living standards in the town known as one of the best globally (Bejou, 2011). The Manufacturing plant was adjacent to the town where the employees lived. This became a world attraction and George Pullman was acknowledged for his benevolence. Another success story of the concept was the Saltier, which was developed by the Daniel salt and sons company. The town was near the city of Bradford, which was the world’s textile capital (Wilcke, 2004). Implementation of CSR programs has to be in a systematic manner where the vision of the leaders has to be justifiable before organizations shareholders. This creates unfavourable atmospheres where organizations cannot adopt a normative concept of CSR. CSR is based on the moral platform of an organization. A balance has to be attained where suppliers, investors, as well as customers’ claims are put into perspective (Smith, 2003). However, there is a challenge of ensuring the fiduciary interest of shareholders by the management. Many business leaders opt to implement programs consistent with social expectations. Many organizations have engaged in corporate social responsibility because of the risks accompanying the loss of reputation. Moreover, the pressure in the business environment is a direct reason for the engagement. To others, CSR becomes part of the strategy development (Husted & de Jesus 2006). Maximizing profits The role of organizations as profit maximization was Friedman key argument. Microeconomics can be used trod justify this claim as many decisions in organizations are made in order to ensure optimal operations. Resource utilization is a key indicator that business leaders are keen on the profits that a certain strategy will yield and not the service to society. However, these claims tend to limit the negative effects of business activities in the society focusing on the social responsibility of organizations to maximize profits (Friedman, 1970). Creation of value and wealth should be the only obligation of management in an organization. The application of microeconomic analysis it is possible to show a significant linked between corporate social performance and maximization of the profits. This justifies the statement that the sole responsibility of a business is to create value by means of maximization of profits to the shareholders (Ahlstrom, 2010). There are two perspectives to view social investment in an individual. Using economic theory where rationality and logical organization of facts is indispensable the motivation behind social investments can be either egoistic or altruistic. The altruistic perspective explains that there is some utility attached to such an investment in others and themselves. Conversely, the egoistic perspective explains that utility is only derived when it for personal use. Managers should seek to maximize the value without engaging in unlawful activities. The engagement of corporate organizations in solving social problems would water down democracy. This would give business firms the support of the masses instead of the government (Cosans, 2009). The mandate of solving social problems lies on the freely elected public office holders. They should initiate programs that solve these problems. The society would shift the governance role to the business enterprises by letting them play a central role in solving all problems. CSR investment can be classified as one of the corporate strategies of increasing profits and not an obligation to the society by business enterprises. When organization invests in research and development as well as employee, training their aim is to enhance skill base available to them for optimal performance (Kotler & Lee, 2005). It is pertinent to note that strategic planning incorporates the prediction of business performance in response to the established strategies. The altruistic behaviour because of social investment may collide with other corporate strategy resulting to a summed up effect of the two. Organization s should be keen during the implementation of CSR programs as part of corporate strategy. The market structure and the innovations existing in the subject are must be put into consideration. When CSR programs are used as corporate strategies, they can easily fail if limited efforts are adopted. The firm will have failed in achieving the core responsibility, which is to enhance the shareholder’s value (Bryan & Salazar, 2006). There exists some form of tension between the tradition beliefs of Marxist philosophers and business ethics. Capitalism is a structure of the economy where the driving force is the private enterprises. Every economic activity is aimed at yielding some form of profit in this economic system. The characteristics of capitalism are highly associated with greed. However, the proponents of capitalism argue that accumulation of wealth and competitive markets is beneficial to the society in various ways. Various forms of capitalism are highly dependent on the regulations that exist in the market. According to the proponents of Marxism, capitalism cannot seek to follow ethical means since it is wholly founded on greed (May, Cheney & Roper, 2007). Another argument from the proponents of Marxism is that by trying to focus on ethics of capitalism justifies its existence. This justifies the ills of capitalism and coats them with moral obligations to the society. Contrary to the belief of the Marxists business ethics is an achievable objective of the corporate world. Many sections of the populations believe that there is no way to link business and ethics. Others claim that this is a contradiction. This justifies that fact that the sole function of a business is to create wealth. However, the recent trends in management show that the adoption of broad responsibility to the society can be acknowledged the key role of organization remain the interests of the owner (Husted & de Jesus 2006). The social and moral obligations of management are secondary aspects used in pursuit of image enhancement. The success of a business is measured in terms of profitability and meeting the fiduciary duty of the management. The obligations of business managers to other stakeholders such as employees as well as consumers are also secondary to ensure that the optimal operation when everyone feels appreciated by the organization (Shaw, 2009). Critique Based on the critique of Milton’s thesis by Richard (2004) it is evident that Milton (1970) was ignorant of the practical environment in which business exist. He rather chooses to dwell on a hypothetical environment. The position offered counterproductive analogies on business ethics. In the business community, the major indicators of success in management are the existence of a free market model where business ethics and obligations to the society are considered appropriately. Significance must be placed on both the economic welfare of the organization and all stakeholders (Wilcke, 2004). Conclusion From the reviews drawn from different articles, it is clear from Milton’s thesis that maximizing profits as the sole social responsibility of a business was ignorant of the practical environment in which businesses exist. The primary objective of management is to meet a number of obligations to the society. These are achieved through implementation of corporate social responsibility programs. Moreover, business leaders should ensure that the highest level of ethics and morals are maintained in the functions of the enterprise. It is pertinent to note that the Marxist argument of a business enterprise is ignorant of the benefits of capitalism to the society. Business leaders should be motivated to engage in holistic activities. This implies apart from earning the organization a profit the activities should serve the interests of employees, customers and societies (Wilcke, 2004). References: Ahlstrom, D (2010). Innovation and Growth: How Business Contributes to Society. Academy of Management, August, pp 11-24. Bejou, D. (2011). Compassion as the New Philosophy of Business. Journal of Relationship Marketing, issue 10, pp 1-6 Cosans, C (2009). Does Milton Friedman Support a Vigorous Business Ethics? Journal of Business Ethics, issue 87, pp 391-399 Friedman, M. (1970). Capitalism and freedom. Chicago: University of Chicago Press. Husted, BW & de Jesus Salazar, J (2006). Taking Friedman Seriously: Maximising Profits and Social Performance. Journal of Management Studies, vol. 43(1): 76-91. Kotler, P., & Lee, N. (2005). Corporate Social Responsibility: Doing the Most Good for Your Company and Your Cause. Hoboken, NJ: Wiley May, S., Cheney, G., & Roper, J. (2007). The debate over corporate social responsibility. Oxford: Oxford University Press Shaw, W (2009). Marxism, Business Ethics, and Corporate Social Responsibility. Journal of Business Ethics, vol. 86: 565-576 Smith, C. N (2003). Corporate Social Responsibility: Whether or How? California Management Review, vol. 45(4): 52-76 Van Beurden, P & Gossling, T (2008). The Worth of Values – A Literature Review on the Relation between Corporate Social and Financial Performance. Journal of Business Ethics, vol. 82: 407-424 Wilcke, RW (2004). An Appropriate Ethical Model for Business and a Critique of Milton Friedman’s Thesis. The Independent Review, volume IX (2): 187-209 Read More