Stockholder Management versus Stakeholder Management - Essay Example

Stockholder Management versus Stakeholder Management This paper is an analysis on two essays, The Social Responsibility of Business is to Increase its Profits by Milton Friedman (1999) and A Stakeholder Theory of the Modern Corporation by Edward Freeman (1999). This is in an attempt to determine as well as present which normative theory of business ethics is more superior. Is it the stockholder management, advocated by the former or the stakeholder management of the latter? Stockholder Theory In The Social Responsibility of Business is to Increase its Profits, Friedman argued that the mission and purpose of a corporate organization is to maximize its profit for the stockholders otherwise known as stockholder management. Here, stockholders shell out the capital that the managers could use in order to realize specific goals. Friedman supports his arguments by certain important points. First, is that this classical view of stockholder management is in consonance with the free-enterprise system where a corporate executive is an employee of the stockholders and has responsibility “to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society.” (Friedman, p. 52) He stressed that a businessman who supports “social responsibility” in business is a mere rhetoric since it equates to an unadulterated form of socialism and against the concept of free-enterprise. Another salient point that Friedman elaborated on is that the managers of a corporation are just agents of the owners. “They are empowered to manage the money advanced by the stockholders, but are bound by their agency relationship to do so exclusively for the purposes delineated by their stockholder principals.” (p. 66) Friedman’s essay is a treatise that discussed why it would be wrong for a particular managerial team to undertake social responsibility activities for the company since it is against the interest of the stockholders. The author underscored the fact that the company pays its dues to the society by paying taxes and whatever societal ills and deficiencies there are; it is the responsibility of a government. Stakeholder Theory In A Stakeholder Theory of the Modern Corporation, Edward Freeman (1999) criticizes Friedman and his school’s arguments that a corporation must only take into consideration the profit of the stockholders because they own the company. His most important point is that the stockholder is not the only party who has a stake in the company and, hence, placing these other parties’ interest subordinate to those of the stockholders’ is unethical and a bad management practice. This was called the stakeholder concept where a company stakeholder is not only confined to those who have financial stakes on the organization but cover those groups and individuals who “benefit from or harmed by; and whose rights are violated or respected by corporate actions.” (p. 58) Although Freeman acknowledges that the classic view on management - the stockholder management - is sound and that it has shaped the US corporations in previous years, it pointed to the changing business landscape that calls for a transformation on the traditional perspective. According to the author, managerial capitalism can be revitalized “by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders.” (Freeman p. 56) Basically, Freeman is in agreement with Friedman’s views in the context of his treatment of the stockholders as a stakeholder in the company. For instance, he did not assail the basic idea of managerial capitalism where the management vigorously pursues the interest of stockholders, because he also believes that the management must advance the interest of the stakeholders. Claiming that his views are just a modification of the classical management practice, Freeman supports Friedman’s basic assumption that the management must look after the health of the corporation which is the primary interest of its owners. Moreover, in the words of Freeman, himself, he outlined similarities between his stakeholder concept and the stockholder management. According to him, they both either explicitly or implicitly recognize the preeminent moral value of individual consent. For instance, in the stockholder theory, the ethical obligation is derived from the voluntary agreement that a manager makes on accepting his position to use the stockholder’s resources. For the stakeholder theory, such obligation is derived from the claims that every stakeholder is entitled to have a say on corporate decisions that affect his interests. Friedman, however, puts importance on the stockholders as the sole stakeholder in a corporate organization. Freeman disagreed emphasizing that business, particularly today, counts stakeholders besides the stockholders themselves, such as the management, employees, the consumers and the communities where the corporate organization operates. Here, the management is no longer accountable to the stockholders alone, instead it must work towards reconciling the needs of its various stakeholders. We have now a case where the theories disagree as to what purpose should the corporate organization take and whose interest it should advance. Furthermore, Freeman assails Freidman’s assumption that the management, the employees – the people within the corporation – must work to achieve the aims set forth by the stockholders. He used Immanuel Kant’s principle of respect for persons as he stressed that business should not use their stakeholders as means for business ends. So while Freidman stressed that the management and the employees under it should pursue profits for the benefit of the stockholders, Freeman urged that all stakeholders are entitled to participate in determining the future direction of the firm in which they have a stake. If Freidman places all the business prerogative according to the desires of the stockholder or to their interest, Freeman wants the firm’s management to represent the interests of all the stakeholders in the decision-making process as well as in developing business policies and in managing the business. For proponents of the stockholder theory, this is not acceptable because such principle would in effect instruct managers to use the stockholders’ money in ways they have not approved such as providing other stakeholders benefits, like autonomously approving wage packages, purchasing arrangements, sales contracts and charitable activities in line with the concept of “social responsibility.” Friedman explained that a corporate executive is chosen by the stockholders to represent their interest and such justification disappears when the corporate executive imposes taxes and spends the proceeds for “social” purposes such as catering to the needs of the participants in the stakeholder concept. (p. 52) Ethical Theories The stockholder theory advocated by Friedman is based mainly on the utilitarian theories and managerial capitalism that is encouraged by free-market economists. Here, an individual may pursue private profit in a free market system and advance his interest. By doing such, that individual is, in effect, promoting general interest as he frequently promotes that of the society more effectually than when he really intends to promote it. (p. 67) This line of reasoning stresses that there is no justification for claiming that business or business persons have any social responsibilities besides paying taxes and maximizing profits legally and honestly. What the critics assail in the utilitarian theory is that it supposedly promotes anything that will lead to the generation of revenue even if the strategies employed are illegal or immoral. Friedman also presented a deontological argument for the stockholder theory. It relied on the assumption that principles of conduct must be upheld even at the expense of the generalized benefits because individuals should honor the obligations they have entered into, consciously and voluntarily. The stakeholder theory, on the other hand, invokes Kant’s principle of respect on persons. As previously mentioned, this is the basis why Freeman came up with the concept of stakeholders besides the stake claimed by the stockholders. The rationale is that the interest of groups and individuals who are central to the survival of the corporation must not be unfairly subordinated to those of the stockholders. For adherents of the stakeholder theory, this is important for the company-employee relationship which results to productive output. The same is also true in the case of company-supplier or company-customer relationships and so forth. What Freeman tries to follow is the functional analysis of good, which originally used by the Greeks as a method of reasoning. The main argument is that the socially responsible corporation is the better corporation. Freeman also referred to the normative core for his theory which is expected to capture the liberal idea of fairness which ensures equality among stakeholders in terms of their moral rights. Criticisms on the stakeholder theory are primarily anchored on the number of stakeholders that have claims on the company so there is an expectation of conflict and difficulty in balancing each of the stakeholders’ interests. As Freeman himself stipulated, this theory is still on its development stages, therefore details on the rights of each of the stakeholders are not as clear cut so, in effect, it adds to the uncertainty and, for some, unreliability of this management methodology. Strictly, in terms of business ethical possibility, one is inclined to favor the stakeholder’s argument as superior to that of the stockholder theory. This is best justified by an elaboration of employees’ motivation under the two theories: In stockholder management approach, an employee’s well being is being looked after because it is expected to increase productivity and, hence, the stockholder’s profit. On the other hand, an employee in the stakeholder theory gets good treatment because that is the right thing to do. However, we should also underscore the fact that in Freeman’s pursuit of social responsibility, the management of a corporation may be violating its contract with its stockholders which also raises questions on ethics. So, perhaps, here, we are choosing one from the other on the premise of which is the lesser evil. As to which would be more effective and profitable in the long-run, it is still the stockholder theory that offers the best and proven roadmap. Adherents and critics alike agree that the primary purpose of a corporation is to generate profits. At the end of the day, even if the company has balanced all the interests of the stakeholders, if there are no profits; all the efforts will go down the drain. Finally, we also have the word of Freeman that his theory only seeks to modify the stockholder management concept and that “obviously, there is more work to be done to spell out these principles in terms of model legislation.” (p. 64) References Freeman, E. (1999). A Stakeholder Theory of the Modern Corporation. In Tom L. Beauchamp and Norman E. Bowie (Eds.) Ethical Theory in Business (56-64). Prentice Hall College Div Friedman, M. (1999). The Social Responsibility of Business is to Increase its Profits. In Tom L. Beauchamp and Norman E. Bowie (Eds.) Ethical Theory in Business (50-55). Prentice Hall College Div Read More