Is the Only Responsibility of a Business to Make, through Legal Mns, as Much rfit as ssibl for Its Shrhldrs - Coursework Example

BUSINESS RESPONSIBILITY Name xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Course xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Instructor xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx Date Is the only responsibility of а business to make, through legal mеаns, as much рrоfit as роssiblе for its shаrеhоldеrs? The idea that the main responsibility of a business is to make money and maximize profits for the shareholders has generated heated debate among scholars and other interested parties. It has been one of the main issues comprising the management theory and practice. On one side are those like Milton Friedman who argue that business purely exist to make profits for the owners while other maintain that a business should be responsible to a wider group of interested parties or stakeholders. (Mackey and Sisodia 2012) This essay holds the view that business ought to be creating value for all the stakeholders. It argues that the although the purpose of any business investor out there is to make or maximize profits this is not the case for the other stakeholders such as employees, customers, suppliers and the public at large.(Jensen 2013) Freeman, Wicks and Parmar (2004) argues that the responsibility of any business out there is not only tied to maximizing profits for the shareholder but rather it should also consider the other stakeholder position. Given that a business has several stakeholders, the interest of each of these players should be taken into consideration. The business stakeholders include: the shareholders or the investors, suppliers, customers, funders in a situation where the business borrows from outside, the government, the employees and the community at large.Freeman, Wicks and Parmar argue that when the shareholders primacy notion holds and act as a guiding principle for the business, the interest of the other stakeholders is relegated. This might contribute to the failure of the company to meet its objecting as this is tantamount to ignoring an important constituency. The value optimization where all the stakeholders are taken care of ultimately translates to value maximization for the investors. When the interests of all the stakeholders are taken into consideration, the business builds a sustainable platform where all the stakeholders, and more so the investors or shareholders, maximize their value. (Mackey and Sisodia 2012)(Kolstad 2007) Shareholder value The notion that companies mainly exist for the sake of maximizing profits for the business owners seemed to gain prominence when Friedman wrote about more than four decades ago. The creed for separation of a business ownership led to the emergence of shareholder value views. It was greatly viewed that the people who are employed by the shareholders to manage the company should make decisions which are aimed at maximizing the business profits. The shareholders are the owners of the companies while those who are charged with the role of running the day to day affairs of the business are the agents. The relation between the two parties is an agency relationship. In the principle of separation of ownership and the control of the company the managers who are the sole agents of the shareholders should see to it that they run the business for the benefit of its owners. In his work Freeman seemed to endorse this fact with his much criticized affirmation that business purpose is to maximize profits as long as they operate within the legal framework. Freeman held the views that people should not confuse the role of the business with the social functions which are supposed to be performed by the government. According to Freeman the business solely exist to make profits for the shareholders. This view creates a wrong perception that the companies are not supposed to be in any way socially responsible as far as the other stakeholders are concerned. Given that there are other stakeholders, Freeman views implies that only the owners of the company should be targeted as far as getting the maximize benefits for the firm are concerned. (Mackey and Sisodia 2012) The view has sparked a lot of criticism from different fields especially in the corporate governance. The company does not exist on its own there are other players who are also important as far as its existence is concerned. (Strong and Mackey 2009)These stakeholders’ interests also need to be taken care of to ensure sustainability and long-term maximization of benefits for the investors. Stakeholders’ value is what needs to be built on as the company cannot exist without these parties. (Mackey and Sisodia 2012) The criticism of the shareholder value view and the realization that it takes more than one party to make the company successful has prompted some reaction. (Henry 2008) The damage that the companies had done to the physical and social environment got people thinking on whether they should operate for the benefits of the investors only or for the good of all the stakeholders. (Henry 2008) (Mackey and Sisodia 2012) Stakeholder value A business has different stakeholders and each one of the plays an important role. There is none that is important than the other as each need the other. They are mutually inclusive, if one of the stakeholders is not well incorporated in the business there is a likelihood of conflict at some point in time. The investor has the role of initiating the business and ensuring that it is well funded throughout its operation, the employees which include the top management have the role of running the business on a day to day basis on behalf of the investors or the shareholders. The other stakeholders, suppliers and customer ensure that the company is running smoothly as suppliers provide the company with the required raw materials and the customer buy the products. Government as a stakeholder provides the necessary infrastructures to enable the company run smoothly. The community on the other hand provides the labour, land and other factors that are needed for the company to thrive. (Linet 2013) (Mackey and Sisodia 2012) Bhattacharya, Sen and Korschun (2008) take the example of Whole Foods, a company that operates several food stores in various part of America. Whole Foods measures its success by the value the company creates to six stakeholders, that is the employees, customers, suppliers communities, investors and the environment. (Mackey and Sisodia 2012) Bhattacharya, Sen and Korschun (2008) argue that there is no magical formula that one might use to calculate the value which each stakeholder should get from the firm; it is basically a process which grows with the competitive market. No stakeholder will remain satisfied through the period and therefore the company has a role of ensuring that solutions are developed to make sure all the stakeholders work for the common good of the company. (Linet 2013)Caring for the other stakeholders is good for the business as it ensures that that customer enjoys the goodwill of these parties. There are those who argue that the line should be drawn between the line of believing that a business is entitled to take care of the community and environment as its large objective of corporate social responsibility. (Mackey and Sisodia 2012) (Stout 2013) They believe that donating money and time in the good of the other stakeholders such as community and environment is tantamount to stealing from the business owner. After all, the company assets belong to the shareholders. These are the people who view that management has the sole responsibility of ensuring that any activity that is undertaken in the company should be geared towards maximizing the shareholders value.It is no doubt that engaging in corporate social responsibility is good for the business, in the long term it goes in increasing the shareholders value. (Mackey and Sisodia 2012) (Henry 2008) Bhattacharya, Sen and Korschun gives an example of the Whole Food donation of the five percent to a not for profit organization of their choice. They target those organizations which have large membership; these members are contact and encouraged to buy at Whole Foods stores to support the selected organization activities. (Mackey and Sisodia 2012) This initiative brings hundred of shoppers who get to buy at Whole Foods in order to increase the amount of donation. Some of the shoppers end up becoming regular customers at Whole Foods. A five percent donation allow the business to support a noble cause but at the same time it is a worthwhile strategy for the Whole Foods investors as they get to gain at the end of day when the sales are increased due to the new customers who join the fraternity through the company’s social corporate responsibility initiative company which entirely focuses on treating the investors well will not make this kind of an intiative,this means that they will always loose a chance to grow their business through increasing the customer base. Focusing on all stakeholders ensures that none is left out and none feels marginalized. Although it is not possible to keep all the stakeholders satisfied at all time, taking care of their interest goes along in ensuring that they support the company and help in meeting its objectives. (Linet 2013) (Drucker 2012)(Jensen 2010) Bhattacharya, Sen and Korschun in their article observe that companies that are socially responsible stand a better chance of attracting and retaining employees who are talented compared to those that aim at maximizing the shareholders value. In evidence that Bhattacharya, Sen and Korschun collected from the top management and employees of blue chip companies which have capitalized on corporate social responsibility, they found that these companies were preferred by people who had higher skills. (Linet 2013) A company that participates in corporate social responsibilities markets itself internally as well as externally. The company gets to gain through getting high skilled people who contribute greatly to the success of the business.The employees in general also become motivated therefore increasing the production level of the company. (Henry 2008) (Yahanpath and Joseph 2011) Problem of focusing on shareholders value (Million, D 2013) sees shareholder primacy as one of the main contributing factor to the 2009 financial crisis. According to Million business managers were taking excessive risks in order to increase the shareholders return where they mainly focused on the earning per share. Focusing on shareholder primacy leads to neglect of other areas which greatly contribute to the long term viability of a company. Activities like research and development and the welfare of the customers take a back stage therefore contributing to downfall or stagnation of the company. (Linet 2013). (Henry 2008) A focus in shareholder value gives rise to a culture where those who are charged with the role of managing the business do anything to ensure that they reach the set targets. The company may engage in unethical conduct such as selling products which are not safe, exploit workers using harsh tactics on vendors and embark on a production process which has no regard to the environment therefore affecting the community. (Drucker 2012) Others may start manipulating their financial accounts so that they can avoid heavy taxations. All these conducts are aimed at meeting the targets which are set by the investors. The company may also engage in mergers and acquisition in order to increase the investors’ portofolio, this end up in tying company’s assets risking poor performance and eventual collapse of the companies. (Linet 2013) A business which aims at maximizing the shareholders gain will have no time for the other stakeholders. It will neglect the important obligation of ensuring that it is in harmony with other stakeholders especially the public and the customers. This places the company in an adversarial position with these stakeholders. The company will be labeled an enemy and exploiters by the large part of the community. This not only puts the business at an awkward position but also threatens the very survival of the company. The future will be at stake and the very shareholder value that the investors were trying to uphold or raise will be affected greatly. (Henry 2008) (McElroy and Engelen (2012) Those who advocate for shareholder value optimization find it hard to explain the exact shareholders who interests should be optimized. (Linet 2013) Is it the financial institution or the hedge funds which buy shares when they are high but abandon them when the company is not doing well. (Hull 2005) Shareholders value optimization may not benefit those who stick with the corporate during the thick times when the business sis down but those short term investors who wait for things to brighten up and buy stakes in large number to gain from the boom. Maximizing on profits in a company which sees this kind of trend means that other stakeholders will not gain from the company, therefore it will be a matter of time before it collapses. The shareholders -who include the short and long term investors-, will be affected greatly. When the short term investors or the speculators smell danger, they will exit without a notice leaving the loyal and true investors with a shell of a company. (Linet 2013). (Henry 2008) Companies which have focused on maintaining good and strong customer relationship such as Apple and Procter and Gamble have also done well in pleasing the shareholders compared to those who have put the shareholders interest before the other stakeholders. (Drucker 2012) Giving customer issues a priority in a company helps in minimizing undue risk and maximizes reinvestment in the long run creating a big cake which ends up benefiting all the stakeholders. A focus on shareholders interest is selfish, it only succeed in alienating other stakeholders leading to emotional detachment eventually leading to collapse of a business. (McElroy and Engelen (2012) (Quatro and Ronald 2006) (Pearlstein 2013) Striking a balance The fact that the community should be targeted as far as a company social responsibility is concerned does not mean that company does not have resposilities to other stakeholders’ .The business only needs to strike balance in an attempt to create value for all the stakeholders. For any company to prosper and survive, it must give return to the investors that compares well with the similar companies. Shareholders value is not created through giving preference to the investors over other stakeholder; rather it is created through providing superior products to the market that the business serves. (Drucker 2012) (Strong and Mackey 2009) Managers should attempt to strike a balance through satisfying and sufficing, as a corporate strategy satisficing has numerous advantages. One of the most obvious advantages is that it does not aim at resolving conflicts among the stakeholders through maximizing the interest of a small group who in most occasions are just short term, undiversified and opportunistic. The strategy allows the manager to decently serve the interest of all the stakeholders and more so the long term and committed investors. When managers are allowed to use this strategy they have the capacity to retain the earning and invest in activities which will guarantee the future growth of the company. They will also run the company in a social and responsible way, further guaranteeing a brighter future References Bhattacharya, C, Sen, S & Korschun, D 2008, ‘Using corporate social responsibility to win the war for talent’, MIT Sloan management review, vol. 49, no. 2, pp. 37-44. Freeman, R, Wicks, A & Parmar, B 2004, ‘Stakeholder theory and the corporate Objective revisited’, Organization Science, vol. 15, no. 3, pp. 364-369. Jensen, M 2010, ‘Value maximization, stakeholder theory, and the corporate objective function’, Journal of applied corporate finance, vol. 22, no. 1, pp. 32-42. Kolstad, I 2007, ‘Why firms should not always maximize profits’, Journal of Business Ethics, vol. 76, no. 2, pp. 137-145. Millon, D 2013, ‘Shareholder Primacy in the Classroom After the Financial Crisis’, Journal of Business & Technology Law, vol. 8, no. 1, pp. 191. Stout, L 2013, ‘On the Rise of Shareholder Primacy, Signs of Its Fall, and the Return of Managerialism (in the Closet)’, Seattle University Law Review, vol. 36, no. 2, pp.169. Yahanpath, N & Joseph, T 2011, ‘A brief review of the role of shareholder wealth Maximization and other factors contributing to the global financial crisis’, Qualitative Research in Financial Markets, vol. 3, no. 1, pp. 64-77 Pearlstein Steven, September 06, 2013, How the cult of shareholder value wrecked American business accessed from http://articles.washingtonpost.com/2013-09- 06/business/41816395_1_shareholder-value-directors-executives/4 Linet Stout (2013) Shareholder value myth, European Financial Review (2013) accessed from http://www.europeanfinancialreview.com/?p=6482 on 9/13/2013 Henry Anthony (2008) Understanding Strategic Management, Oxford University Press Drucker Peter (2012) Practice of management, Routledge Mark W. McElroy, J.M.L. van Engelen (2012) Corporate Sustainability Management: The Art and Science of Managing Non financial performance, Routledge John Mackey, Rajendra Sisodia (2012) Conscious Capitalism: Liberating the Heroic Spirit of Business, Harvard Business Press Strong Michael and Mackey John (2009) Be the Solution: How Entrepreneurs and Conscious Capitalists Can Solve All can solve the world problems, John Wiley and Sons  Hull Gull(2005) Abolition of Anti Trust, Transactional Publishers Scott Quatro and Ronald R. (2006) Executive Ethics: Ethical Dilemmas and Challenges for the C-suite.IAP Read More

The creed for separation of a business ownership led to the emergence of shareholder value views. It was greatly viewed that the people who are employed by the shareholders to manage the company should make decisions which are aimed at maximizing the business profits. The shareholders are the owners of the companies while those who are charged with the role of running the day to day affairs of the business are the agents. The relation between the two parties is an agency relationship. In the principle of separation of ownership and the control of the company the managers who are the sole agents of the shareholders should see to it that they run the business for the benefit of its owners.

In his work Freeman seemed to endorse this fact with his much criticized affirmation that business purpose is to maximize profits as long as they operate within the legal framework. Freeman held the views that people should not confuse the role of the business with the social functions which are supposed to be performed by the government. According to Freeman the business solely exist to make profits for the shareholders. This view creates a wrong perception that the companies are not supposed to be in any way socially responsible as far as the other stakeholders are concerned.

Given that there are other stakeholders, Freeman views implies that only the owners of the company should be targeted as far as getting the maximize benefits for the firm are concerned. (Mackey and Sisodia 2012) The view has sparked a lot of criticism from different fields especially in the corporate governance. The company does not exist on its own there are other players who are also important as far as its existence is concerned. (Strong and Mackey 2009)These stakeholders’ interests also need to be taken care of to ensure sustainability and long-term maximization of benefits for the investors.

Stakeholders’ value is what needs to be built on as the company cannot exist without these parties. (Mackey and Sisodia 2012) The criticism of the shareholder value view and the realization that it takes more than one party to make the company successful has prompted some reaction. (Henry 2008) The damage that the companies had done to the physical and social environment got people thinking on whether they should operate for the benefits of the investors only or for the good of all the stakeholders.

(Henry 2008) (Mackey and Sisodia 2012) Stakeholder value A business has different stakeholders and each one of the plays an important role. There is none that is important than the other as each need the other. They are mutually inclusive, if one of the stakeholders is not well incorporated in the business there is a likelihood of conflict at some point in time. The investor has the role of initiating the business and ensuring that it is well funded throughout its operation, the employees which include the top management have the role of running the business on a day to day basis on behalf of the investors or the shareholders.

The other stakeholders, suppliers and customer ensure that the company is running smoothly as suppliers provide the company with the required raw materials and the customer buy the products. Government as a stakeholder provides the necessary infrastructures to enable the company run smoothly. The community on the other hand provides the labour, land and other factors that are needed for the company to thrive. (Linet 2013) (Mackey and Sisodia 2012) Bhattacharya, Sen and Korschun (2008) take the example of Whole Foods, a company that operates several food stores in various part of America.

Whole Foods measures its success by the value the company creates to six stakeholders, that is the employees, customers, suppliers communities, investors and the environment. (Mackey and Sisodia 2012) Bhattacharya, Sen and Korschun (2008) argue that there is no magical formula that one might use to calculate the value which each stakeholder should get from the firm; it is basically a process which grows with the competitive market.

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