The Purpose of the Corporation and Stakeholder Theory - Essay Example

Order No. 185819 The Purpose of the Corporation Prepared By Dr. Zulfiquar Ahmed ID: 10131 16-10-2007 Order No. 185819 The Purpose of the Corporation and Stakeholder Theory Introduction The development of stakeholder theory has marked an important turning point in increasing an analytical framework to assess the effects of a firm's activities on a variety of corporation. However, the articles on stakeholder theory, is a very useful concept in describing the firm outward perspective, of Friedman, Freeman, Hasnas and Boatright point to the importance of philosophic underpinnings in rethinking the nature of the corporation. All the articles eloquently expressed the far-ranging significance of rethinking of the nature the corporation. The articles of Freeman, Hasnas and Boatright point to the importance of philosophic underpinnings in rethinking the nature of the corporation. The authors assert that although the diverse assumptions of each of the two groups tend to be "logically or intuitively connected to represent it coherent world view, favoring one [group] does not require that we exclude the other." A major purpose of stakeholder theory is to help corporate managers understand their stakeholder environments and manage more effectively within the nexus of relationships that exists for their companies. However, a larger purpose of stakeholder theory is to help corporate managers improve the value of the outcomes of their actions, and minimize the harms to stake-holders. The whole point of stakeholder theory, in fact, lies in what happens when corporations and stakeholders act out their relationships. To this end, we conclude this volume with our view of contributions that stakeholder theory can make to redefine the corporation through a focus on performance measurement. Critical Analyses of the Purpose of the Corporation and Stakeholder Theory The criticism of stakeholder theory that it cannot define what or who is or is not a stakeholder, as well as the attempts to delimit stakeholders, is perhaps misplaced. In spite of the atomistic nature of early definitions, stakeholder theory embodies in its very nature it relational view of the firm which incorporates the reciprocal dynamics of community, and the theory's power lies in focusing management decision making on the multiplicity and diversity of the relationships within which the corporation has its being and the multipurpose nature of the corporation as a vehicle for enhancing these relationships in their various dimensions. Freeman holds that nothing less than a redefinition of the corporation is needed and, as seen earlier, he recognizes that a redefinition of the corporation requires a redefinition of the self. And, ultimately, such a reconstructed self requires a reconstructed philosophic context within which conceptually to locate its relational nature. Critical Analyses on Milton Friedman's Arguments on "The Social Responsibility of Business Is to Increase Its Profits" Friedman is therefore dismissive of any notion of corporate social responsibility: 'The doctrine of social responsibility is fundamentally subversive......there is one andonly one social responsibility of business- to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition without deception and fraud" (Friedman, 1970). Milton Friedman1, back in the early 1960s, argued that the one and only social responsibility of a company is to increase its profits He moreover equaled corporate donations with hypocritical window-dressing and tactics approaching fraud. According to his logic, social engineering is doomed to failure for several reasons: corporate managers do not have the necessary skills or expertise to arbitrate between competing claims of different sections of society - such competence is only given to an elected government; corporate managers are not elected and have therefore no political mandate to decide between competing claims for resources - again, such competence is only given to an elected government; and, finally, corporate managers do not have the means and resources of elected governments to make things happen once society has decided what the appropriate trade-off must be (Johannes, 2003: 27:). Friedman concludes that social engineering of manager's leads to money politics, undermining the legitimacy of both business practices and politics. "The Social Responsibility of Business Is to Increase Its Profits" is the most effective statement of economic freedoms and free enterprise. A stakeholder in this context refers to employees, managers, customers, suppliers, the local community, and the stockholders. Each stakeholder group has a contractual relationship with the firm, since they receive the remuneration they freely agreed to in a pre-established agreement (contract). Some praise Friedman's view and others condemn his theory. More simply misunderstand Dr. Friedman's 1970 aphorism or quote it out of context, often to serve anti-business ideologies or misguided legislative initiatives. Milton Friedman's essay entitled "The Social Responsibility of Business Is to Increase Its Profits" in 1970 is evaluated critically on the Social Responsibility of a business and his theory, which is called the "Efficiency Perspective". Friedman's "Efficiency Perspective is placed centrally in his theory. Friedman believes that manager's foremost objective or even moral obligation to the firm should be to maximise profits always. According to Friedman, the managers obligations should be carried out:2 "while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom". There are four kinds of social responsibility is explained by the Friedman: economic, legal, ethical, and philanthropic. The execution of corporate strategy is influenced by the value systems of the corporation and its stakeholders. Common business criticism says the role of ethics in business strategy has been time and again ignored.3 Friedman presents his efficiency perspective of social responsibility clear and simple, according to Friedman the business of business is business. His perspective is based on a free market environment. In Friedman's essay his first argument states that a corporate executive is an employee of the owners of the business. Critical Analyse of R. Edward Freeman's Essay on "A Stakeholder Theory of the Modern Corporation" In Edward Freeman's4 in his essay entitled "A Stakeholder Theory of the Modern Corporation", suggests a transformation of the corporate system by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders (Freeman: par. 56). In its narrow definition stakeholders refer to customers, suppliers, management, owners, employees and the local community- those that are vital to the survival and success of the corporation. This direct approach of focusing on the interests of all those that are vital to its survival embraces all of the elements that have evolved in our society as a result of the absence of direct concern or lack of morality for the stakeholders in the Stockholders Theory. The stakeholder theory is therefore based on the premise that the employees of a corporation, especially its managers and directors, can be held accountable for harmful side-effects of corporate behavior (Freeman: 1984). Even Evan and Freeman concede the present laws would have to significantly change in order to create a stakeholder-driven firm (1988/1993 pp. 264-265). One response to this position is to argue that even if the firm must be run on behalf of shareholders, it does not necessarily follow that all shareholders are profit-maximizing entities. This argument, however, is problematic. First, the majority of shares is held not by individuals but by other corporations (such as insurance companies) and fund managers. From the discussion above it is clear that corporate investors will seek profit maximization. Fund managers compete with each other on the basis of returns in order to attract investors and therefore also demand maximum corporate profitability. So-called 'ethical' funds do not provide an exception to this rule. They claim investors do not have to sacrifice returns in order to invest ethically and hence must also demand corporate profitability. Critical Analyse of John Hasnas's Essay on "The Normative Theories of Business Ethics: A Guide for the Perplexed" John Hasnas5 points to a particular relationship between the nature of business and any normative theory that would be applied to a business setting. Hasnas adopts the following definition of a business from Robert Hessen's article, A New Concept of Corporations: A Contractual and Private Property Model". A business is, "a voluntary association of individuals, united by a network of contacts," organized to achieve a specific end (Hasnas, 1998:72). For Hasnas, an adequate theory does not add to the ethical commitments that one explicitly takes up as a participant in a business and an adequate theory takes into account all the ethical commitments that are explicit in a business. Hasnas described social responsibility as those ethical obligations, if any, that businesses or business persons have to expend business resources in ways that do not promote the specific purposes for which the business is organized (Hasnas, 1998: 66). The concept stakeholder provides a very broad umbrella under which a wide range of normative positions can be accommodated. According to Hasnas, "when viewed as a normative theory, the stakeholder theory asserts that, regardless of whether stakeholder management leads to improved financial performance, managers should manage the business for the benefit of all stakeholders" (Hasnas, 1998: 126). As managers must give equal consideration to all stakeholders involved, conflicts of interest may arise. Hence, in its normative form, the stakeholder model does imply that corporations do have social responsibilities. Critical Analyse of John R. Boatright's Article on "Fiduciary Duties and the Stakeholder-Management Relation: Or, What's So Special About Stakeholders" In this essay, Boatright6 treated the shareholders as owners on "Equity Argument". Managers do not appear to have a special fiduciary responsibility to shareholders because the shareholders already have built-in protections that other stakeholders do not possess. Shareholders are sufficiently protected by the right they have to elect the board of directors, vote on shareholder resolutions, etc. John Boatright distinguishes social responsibility from social responsiveness with an analogy: "[A] responsible motorist is one who stops to offer whatever aid is available to another motorist in distress; but a responsive motorist is one who carries a flashlight, tools, battery cables, and so on and is prepared to offer effective aid (Boatright, at 390)". The variety of social demands that corporations must respond to include the economic, legal, ethical, and discretionary responsibilities described above (Epstein, 1987: 368). The theory of fiduciary duty has dominated the business culture in the United States and the United Kingdom since the early 1980s. In the beginning backed by Reagan and Thatcher, the market model still reigns supremely. In the 1990s, the market model is characterized by the omnipresence of Wall Street. Its presence is felt way beyond dealing rooms, boardrooms or classrooms. In a rebuff, Boatright argues that the stakeholder paradox can be eliminated if stockholder claims are seen as one kind of claim among others (employees, customers, etc.) using a broadly utilitarian idea of property rights (Boatright, 1994: 393). Both the corporate social responsiveness viewpoint and stakeholder theory have been challenged by claims that they fail to provide management with any clear guidance on how to behave (Hess, 55:1999). The idea of corporate social responsiveness fails to provide a normative standard or a set of values for management to follow in responding to societal pressures (Boatright, 1994: 390).Similarly, stakeholder theory has been criticized for its failure to provide guidance in how to weigh and balance the interests of the relevant stakeholders (Donaldson, 1989: 45-46). Donaldson and Dunfee argue that ISCT may serve as a normative foundation for stakeholder theory (Donaldson, 1989: 235). In this context, applying stakeholder theory requires looking to the relevant community norms to determine who is a stakeholder and what obligations the corporation owes the stakeholders (Donaldson, 1989: 250-63). When there are conflicting norms, the authors suggest that the situation becomes almost an empirical question of identifying the dominant legitimate norms.7 Conclusion Recent events reveal serious weaknesses of the stakeholder theory about the social responsibilities of business which lacks prohibitions against fraud and deception. This is a glaring deficiency of standard versions of the stakeholder theory, but it is easily remedied by adding explicit prohibitions against fraud and deception. In addition, recent events highlight the stakeholder theory''s very naive and unrealistic hopes and expectations for business executives as moral arbiters and agents of social improvement. Recent events do not constitute an objection to the shareholder theory about the social responsibilities of business; however, these events make evident the implausibility of strong versions of the invisible hand theory. Both the purpose of corporation and the stakeholder theory need to add a constraint that requires executives to respect the professional obligations of employees. Freeman is wrong to think that stakeholders are not being treated with respect on the purpose of corporation and using Rawls's theory is problematic (Rawls, 2001). Bibliography Andrew L. Friedman and Samantha Miles, Stakeholders: theory and practice: Book Review, Int. J. Green Economics, Vol. 1, Nos. 1/2, 2006. Archie B. Carroll, Business and Society: Managing Corporate Social Performance 29, 32-33 (1983); William C. Frederick, Values, Nature, and Culture in the American Corporation 217-18 (1995). Boatright, John (1994), "Fiduciary Duties and the shareholder-management relation: Or, what's so special about shareholders" Business Ethics Quarterly 4. Boatright, R. John. (1993). Ethics and the Conduct of Business 390 (1993). Milton Friedman", http://www.rowan.edu/philosop/clowney/Busethic/comments.htm Donaldson, Thomas. (1989). The Ethics of International Business 45-46 (1989). Evan, William M. & R. Edward Freeman (1995), "A Stakeholder Theory of the Modern Corporation: Kantian Capitalism," in: Hoffman, W.M. & R.E. Frederick (1995), "Business Ethics: Readings and Cases in Corporate Morality," New York: McGraw Hill. Freeman, Edward R. and William E. Evans, A Stakeholder Theory of the Modern Corporation: Kantian Capitalism. Business Ethics Quarterly 3/4. (1988 and 1993): 55-65. In Beachamp, Tom L., and Norman Bowie (eds). Ethical Theory and Business. 7th edition. Upper Saddle River, New Jersey: Pearson Prentice Hall, Freeman, R. Edward (1984), "Strategic Management: A Stakeholder Approach," Englewood Cliffs, New Jersey: Prentice Hall Press. Freeman, R. Edward, and D. Reed. 1983. Stockholders and Stakeholders: A New Perspective on Corporate Governance. In Corporate Governance: A Definitive Exploration of the Issues, edited by C. Huizinga. Los Angeles: UCLA Extension Press. Friedman M. "The social responsibility of business is to increase its profits". New York Times 1970. Friedman, M., Friedman, R. 1962. Capitalism and Freedom. Chicago: University of Chicago Press Friedman, Milton. The Social Responsibility of Business Is to Increase Its Profits. New York Times Magazine, September 13, 1970: 50-55. In Beachamp, Tom L., and Norman Bowie (eds). Ethical Theory and Business. 7th edition. Upper Saddle River, New Jersey: Pearson Prentice Hall, 2004. Hasnas, John (1998), "The Normative Theories of Business Ethics: A Guide for the Perplexed," Business Ethics Quarterly 1, p. 26. Henderson, David (2001), "Misguided Virtue: False Notions of Corporate Social Responsibility," Wellington: New Zealand Business Roundtable. Hess, David, "Social Reporting: A Reflexive Law Approach to Corporate Social Responsiveness", 25 Iowa Journal of Corporation Law, 41: 1999, http://webuser.bus.umich.edu/dwhess/Hess%20J%20Corp%20Law%20HTML.html In Capitalism and Freedom (1962), Chicago, University of Chicago Press, 1962, p. 133. In the United States, the leading court cases are Dodge v. Ford (1919) and A. P. Smith Manufacturing Co. v. Barlow (1953). Jensen, Michael & W.H. Meckling (1976), "Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure," Journal of Financial Economics 3, Oct. 1976. Johannes van de Ven, "The Rise of Ethics in Corporate Management- License to Operate or Moral Vanity", SCG Occasional, London - August 2003. R. Edward Freeman & Daniel R. Gilbert, Jr., Corporate Strategy and the Search for Ethics 104-05 (1988); Barry Mitnick, M. Systematics and CSR: The Theory and Processes of Normative Referencing, 34 Bus. & Soc'y 5 (1995). Rawls, John. 2001. The Law of Peoples; with 'The Idea of Public Reason Revisited'. Cambridge, Mass.: Harvard University Press. United Nations 2002. UN Secretary-General Calls for Change at Summit [accessed 17 September 2004]. Available from http://www.johannesburgsummit.org/html/whats_new/feature_story36.htm. William R. Evan and R. Edward Freeman, "A Stakeholder Theory of the Firm: Kantian Capitalism," in Ethical Theory and Business, ed. Tom L. Beauchamp and Norman E. Bowie (Englewood Cliffs, N. J.: Prentice- Hall, 1993), 82. For a critique, see Barry, Business Ethics, chap. 4. Read More