Stockholder vs Stakeholder

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Stockholder vs Stakeholder

• Two different Views about the purpose and aims of
  business

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Stockholder Theory

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

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Argument 1

• The Social Responsibility of Business is to
  increase its profits
• The Underlying Ethical principle Manager has
  Fiduciary Responsibility to Owners

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Purpose of business is NOT to

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

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Business is not Charity

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

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Argument 2

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

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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

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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

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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

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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.

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Argument 4

• No way for Executive to know how to solve social
  illsthats not his expertise!

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Argument 5

• Majority speaks through the law. Dont undermine
  or circumvent democracy by imposing ones views
  on other peoples money-use via subversive
  private tax

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PR or Charity?

• If Companies give money to good causes because it
  gives them good Public Relations, then count it
  as advertising and dont 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.

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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.

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Friedmans 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.

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Friedmans 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!

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Problem 1 with Friedmans Position

• It assumes that forces of competition are
  sufficiently vigorousbut they arent.
• Federal regulations are essential to force
  companies to act in an ethical manner. Such
  regulations direct the market towards ethical
  behavior.

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Problem 2 with Friedman

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

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Problem 3 with Friedman

• Maximizing profits is socially inefficient when
  costs are not paid
• Examples
• pollution
• traffic congestion
• No taxes poorly educated workforce

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Problem 4 with Friedman

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

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Stakeholder TheoryEd Freeman
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Managing for Stakeholders

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

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• 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.

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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 stockholders rights
• Usually ignores ethics the Separation Fallacy
  business decision vs ethical decision

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

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

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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?

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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.

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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.

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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.