Although Directors may consider the interests of a broad group of stakeholders, their primary legal accountability is to the companys shareholders. Discuss.

University Degree Business and Administrative studies

Ethics Assignment 1: Research Essay

Although Directors may consider the interests of a broad group of stakeholders, their primary legal accountability is to the company’s shareholders. Discuss.

The Board of Directors is the people who sit atop the organisational hierarchy. One of the responsibilities is to make the long-term decisions based on the organisation’s past and present, then apply these decisions for the organisation’s future. Part of their decision is which of the various stakeholders of the organisation to apply their interests into, the shareholders, those who invest their money into the organisation, or others who are affected by the operations of the organisation’s existence and operations. This is an ethical issue that many managers find difficult to balance, and different managers will have different viewpoints as to which path to follow. Stakeholders are the people who are affected and have a vested interest in the organisation’s existence and operations (Barille & Cameron, 2008). Part of this group of people who hold a vested interest in the organisation’s existence and operations are the shareholders, the people who have invested their own money into the organisation, looking for financial gain through the organisation’s profits. The ethical issue here is, because generally there are people who are affected by an organisation’s actions and pursuit to attain profitability, organisations must find who to cater to, and how much attention they should give them. This paper will explore different views on what the expectations and obligations of an organisation are, and how far they extend, subsequently I will put forward my view on the topic.

There are many different perceptions of the term ‘Corporate Social Responsibility’ (CSR), but I will explore only three, a classical view that address mainly the fundamental and legal obligations organisations have, and a two other contemporary modern view that explore the beyond the legal obligations and exploring the ethical obligation organisations have to external stakeholders. Carroll (1979) defines CSR as the perceived obligations organisations have, mainly to the external environment, the environment that exists outside the boundaries of the organisation. Epstein (1999) also state that CSR and its related concepts relate to the external analysis of the organisation, as it address the influence it has on society. Moir (2001) provides examples such as the employees, the marketplace and the broad community. He goes on to state that to be socially responsible, an organisation needs not only to act ethically, but in a manner that the broad society perceives to be ethical.

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Friedman’s (1962) perception of CSR is that socially responsible organisations operate simply to increase business and achieve organisational goals, goals that are generally profitability, which will generate a return for the employees, the organisation and shareholders. He also believes that through promoting “community interests”, managers are only promoting their own prestige and status, as a method of manipulating shareholders out of their investments. Schilizzi (2002) also adopts a similar view on CSR, claiming that it is only a means for a larger goal – profit, so whilst managers appear to be ethical and socially responsible initially, their long term goals are most likely only for profit, and not out of the goodness of their heart. Friedman (1970) also argues that business executives should not be allowed to use the money of stakeholders, like employees or shareholders, to fund the organisation’s social interests. The classical view is a hardened and cynical point of view, Friedman strongly believes that an organisation will be “socially responsible” through generating profits, spending their profits to generate future profits, and providing their product or service and employment for the community. Although I believe that organisations should aim to become as socially responsible as possible, we must remember that their sole purpose and legal obligations do not extend beyond generating profits in a legal and honest manner and then distributing these profits to stakeholders who have a financial stake in the organisation – shareholders and employees.

Whilst Friedman holds a view of CSR from an organisational or business perspective, Carroll and Freeman hold beliefs on CSR from a more external point of view. There is a phrase that is used a lot in the modern, contemporary view that is used a lot – good corporate citizen. S181 Australian Corporations Act 2001 states that the duty of an organisation is to operate for its own interests and for a proper purpose. Cheney (2004) stated that this allowed organisations not only to act on their own self-serving interests, but to also act in a manner that is environmentally and socially responsible. A model relating to CSR is Carroll’s (1991) model that separates the responsibilities of an organisation onto four different sections, Economic, Legal, Ethical and Philanthropic, with Economic at the bottom, and philanthropic at the top. Carroll stated that organisation’s first responsibility is to acquire profits, believing that without profit, an organisation cannot be ethical. The second level is the Legal Responsibility; organisations are expected to carry out their work lawfully and to abide by laws that are in place. Trevino, Hartman and Brown’s (2000) article points out that because the law generally lags behind ethical thinking, there is a large gray area, a fine line that separates what is ethical and what is unethical. The ethical responsibility an organisation has is to its stakeholders, exceed the legal obligations an organisation has, and applying ethical behaviour to act in a way that is viewed as acceptable to stakeholders. The final section is the “optional” section, the effort of an organisation to promote goodwill through donations or charitable activities, though failure to do so is generally not considered to be unethical. Carroll (1998) states that a good corporate citizen is a person who earns enough profit for the organisation, so that they can operate for an assumed infinite life, and for shareholders, so they receive a return on their investment, but still provide the rest of the stakeholders with other benefits such as employment and products or services they sell.

Freeman (2008) adopts a heavily stakeholder influenced approach, recognizing the stakeholders of an organisation. Freeman’s idea is “managing for stakeholders”, identifying the different types of stakeholders of an organisation, the “primary” stakeholders and the “secondary” stakeholders. He believes that even though an organisation has stakeholders that they would have little to no control over or knowledge about, they should still acknowledge their existence and understand that they need to accommodate their needs none the less. He surmises that if an organisation is able to run in an ethical manner and balance the interests of various stakeholders, then that organisation will have the best chance at achieving the most long-term success; thus leaving those who have a financial stake in the organisation with a better return on their investment. Freeman’s approach is much like the approach of Galbreath (2008). Galbreath explored how organisations could develop and build strategies and be socially responsible whilst doing so. His model shows how an organisation would build CSR into each component of their strategy. However, he recognizes the difficulty in balancing their priorities between the accomplishment of goals or missions and the amount of social responsibility. If an organisation goes out of their way to be socially responsible, it will only increase the amount of stakeholders, and given that organisations possess scarce and limited resources (Pearce and Doh, 2005), they need to maintain their original goal of achieving profits.

His above model illustrates that whilst organisations are developing strategies for their future and incorporating factors like their customers, resources and markets into these strategies, CSR should be factored in, to ensure that they are acting ethically, and prevent ethical issues that might arise from their operations.

I believe that ultimately, organisations are profit-seeking entities, and a reason for this is because of the prestige an organisation earns through ethical behaviour and a good reputation. I believe that the managers in an organisation should do everything in their power to earn as much profit as possible but also be as moral as they can in their actions. An organisation has a legal obligation to their shareholders, and should keep them as their first priority. I also believe that in a free-market economy, organisations will naturally become more ethically responsible for their actions or inactions, through the public. If an organisation is perceived to be unethical or they lose their legitimacy (Epstein, 1999), managers will aim to change their acts, improve their reputation, and maintain their customer base. This will in effect cause an organisation to act more ethically in the future, to ensure they do not lose any more customers. If an organisation wishes to become a socially responsible, or improve their moral identity, they certainly have the option to do so. Carroll’s (1991) model is a good general guide as to what steps managers should take to be perceived as moral, if they advance higher up on Carroll’s table, they generally will be perceived as socially responsible. In my view, the best CSR approach a manager should follow is Friedman’s viewpoint, believing that if an organisation strives in its pursuit for profit, so long as it is legal, they will provide public with the product or service they sell, employment, and money for the free-market economy, with that being enough to be viewed as socially responsible. Although we as the society generally believe organisations should do more, we should let managers operate the organisation as they wish, so long as the actions they take are legal.

Word Count: 1619.

References

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