Shareholder (liberal market) vs stakeholder (cooperative market) views and economies review the surrounding theoretical debates as well as their practical implications in both the political and economic spheres
Shareholder (liberal market) vs stakeholder (cooperative market) views and economies – review the surrounding theoretical debates as well as their practical implications in both the political and economic spheres
In the ever changing global business environment, the area of ‘business ethics’ brings one of the most hugely debated topic that involves the surroundings of the corporate objectives, whether the managers should base it on the interests of shareholders where their wealth is maximised or to balance the interests of all associated stakeholders. This in recent times has often been referred to as the Friedman (shareholder) vs Freeman (stakeholder) debate (Freeman, 2008). Conversely, it is the classical model of the Friedman’s Shareholder Theory that is the most influential of theories in corporate social responsibility to date. Nevertheless, with a dynamic business environment involving a vast growth of competitors, raising awareness and knowledge of customers about the environment and government intervention in markets forces, executives must consider all the interests of each group when establishing the business objectives. Yet, in the 21st century a number of global corporate scandals such as Enron, Global Crossing, Xerox, Worldcom etc. (Forbes.com, 2002) raises the question whether the shareholder theory of corporate governance leads to unethical behaviours amongst senior members of corporations thus ultimately leading to the failure of the fundamental role of maximising shareholder value. Many experts now advocate the stakeholder approach with a wider perspective to management. The two theories are normative theories in the theme of ‘Corporate Social Responsibility’ and dictates the roles a corporation must fulfill (Smith, 2003, p.85). Before proclaiming which of the two theories is most predominant at the present time, a thorough analysis of both theories would give a comprehending view of their fundamental involvement in the political and economic world.
A shareholder is defined as the “legal owner of a company, known as ‘members’ who enjoy rights such as receiving dividends and company profits” (Morrison, 2010, p.15). They are the actual owners of the company and are entitled to the profits if the firm performs well or face losses if the firm fails to create business. It is the individuals or corporations who take a calculated risk and invest their own capital into the business in the expectation of accumulating wealth over the long run. The significance of shareholder value maximisation is exhibited in the managers behavior on how they prioritise the increase the market value of shares and dividends. The shareholder theory states that and that managers are merely agents to stockholders who serves in their interest and to believe that business should pursue other objectives other than profits is to preach socialism and undermine the free society (Friedman, 1970). Therefore, the shareholder theory asserts that the underlying ethical principle is that executives have a legal fiduciary duty to the company’s owners, which requires managers to operate in the best interest of the stockholders by maximising the value of their stake in the business and not to employ strategies to fulfill the desires of other stakeholders i.e. employees, suppliers, community etc. The other group that is instrumental to the value of a company are stakeholders. A stakeholder can be defined as “…any group or individual who can affect, or is affected by the achievement of the organisations objectives” (Freeman, 1984, p.46). According to Freeman et al., (2010, p.9) the stakeholder theory is a fundamental theory of how business works at its optimum level and highlights the importance of creating value for stakeholders where a business cannot segregate any stake but to integrate all the interests of each stake. Werhane and Freeman (2003, p.7) states that, “[stakeholders] are important not merely because one could not exist or achieve profits without them, but also because they are individuals – human beings with rights and interests”. Putting this into a managerial perspective, each group of stakeholders are vital to the success of the business and it is their duty to figure out how to collaborate and respect all interests of each group. Over the last few decades, a strong polarisation of concepts have emerged between the two theories where the shareholder theory of Friedman focuses on wealth maximisation and the stakeholder theory of Freeman centres around the creation of value.
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The development the shareholder approach originated from the concept of individual liberty and private property operating in a legal democracy and is based on the influential liberal ideas from John Locke (Held, 2012, p.64-65). It can be extrapolated that from the basis of contractual rights, it is assumed that the approach should be directed and aimed primarily for the benefit of the owners of the property rights and prioritise on their decisions on how their assets are utilised correspondingly. According to Friedman:
“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to according to the business according to their desires, which generally will be to make as much money as possible while confronting to the basic rules of society, [and if the money is spent on society in general, it is in effect] spending someone else’s money for a general social interest” (Friedman, 1970, p.1-2).
The executives of a firm under the shareholder model must take into account that the shareholders are the real owners of the firm and that they are legally entitled to any profits the firm generates. Shareholders invest in a corporation and employ the executives with the expectation of a higher return on their capital employed in the long run and act in compliance with the only interest of stockholders interests. The responsibility for executives is therefore to focus generally on maximimsing shareholder wealth and Milton Friedman further emphasises this basic concept by arguing that:
“[In a free market], there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud“ (Friedman, 1970, p.6).
Friedman assumes that firms have a social obligation to maximise profits as it leads to the greatest allocation of social good in the form of capital investment. This can be further assisted by neo-liberal governance to allow the mechanisms of the markets naturally adjust itself to function in the most efficient manner. He also assumes that companies will naturally behave to the normal constraints that the market contains for example if a company is believed to be in business with unethical suppliers, then customers will stop buying their products and services.
The view to whether the shareholder theory is obsolete due to the dynamic business environment has raised questions whether it is still put into practice in the modern corporation. The utilitarian principle can be exerted in the field of ethics especially in the favour of the shareholder model and there are two different forms being act utilitarianism and rule utilitarianism. The distinction between the two is that act utilitarianism leans more towards consequentialism specific to a case whereas rule utilitarianism is based on rules and is a more generalised method by judging what maximises pleasure. The Kantianism principle on the other hand is favoured towards the stakeholder model and is primarily concerned with doing the right actions as it is within the moral duty to do so. By looking into Nikes recent child labour scandal, their “executives and managers… make decisions… that benefit stockholders at the expense of employees, suppliers, customers…” (Des Jardins, 2011, p.69). Through a utilitarian point of view, the firm takes measures that produce the most significant good over discontent for their shareholders. Low costs is the main focal point and measures taken up such as limiting employee wages and benefits help contribute to the fiduciary duties to their shareholders. Yet it can be argued that the constant pursuit of profits does not necessarily result in the greatest common good for society as a number of local businesses and their employees may start having financial difficulties and become insolvent. It can be concluded that there can limits to utilitarianism as it generally disregards the ethical importance of of citizen’s responsibility for their well being (Sandbu, 2011).
Carroll (1991) defines corporate social responsibility using a four part model shaped in a pyramid. The four aspects of responsibilities includes the economic responsibility to become profitable, legal responsibility to adhere and respect the laws, ethical responsibility to undertake what is morally right and philanthropic responsibility to donate to diverse types of social, educational, cultural purposes. Combining the utilitarian and kantianism grounds along the lines of corporate social responsibility states that Nike must focus on fairly fulfilling the needs of not only shareholders but also stakeholders as all living humans have a value in society. This can be achieved by introducing the theory of ‘Stakeholder Dialogues’ of Dryzek where management considers the views of all those who have an important interest and Nike may be able to please not only their shareholders but also a wider majority of people who hold a stake in the company (Dryzek and Dunleavy, 2008, p.222). This in turn will be beneficial as, “…each stakeholder will be more or less motivated to commit to the firm, and this will influence the very level of the organisational quasi-rent” (Aglietta and Reberioux, 2005, p.39).
The stakeholder theory opposes the idea that shareholders should be prioritised in management decisions where it is argued that the “stakeholder theory does not give primacy to one stakeholder group over another, though there will be times when one group will benefit at the expense of others” (Evan and Freeman cited in DesJardin, 2011, p.70; Branco and Rodrigues, 2007, p.8). Although theory takes into account the wider spectrum of managerial duties to the various stakeholders, the problem arises when “the normative weighting of competing stakeholder interests… is in direct conflict with the important interests of other legitimate stakeholders” (Frederick, 1999, p.40). Frederick questions whether it is suitable for decisions to be favoured towards stakeholders when a firm’s financial welfare is at risk? A prime example is the ongoing dispute between British Airways and their employees which started during the 2009 global recession. British Airways now part of the parent group International Airlines Group had cut jobs, salaries and restructured pension schemes to help aid the survival of the company in the highly competitive industry (The Guardian, 2012). Where more than one in five jobs will be lost if the plans take place, should the firm itself become unprofitable and avoid terminating contracts that will affect a large number of their long-term employees, loyal customers by reducing airline routes and stockholders by market reputation that affects share price? This is an example of conflicting stakeholder interests and the executives must find a way to balance the interests of all parties involved. Nonetheless, is has caused problems for management since the theory does not give guidance as “it is not easy to find a way to accommodate all stakeholder interests as it is easier to trade-off one interest for another” (Freeman et al., 2010, p.27). The managerial task is therefore to reconsider the various issues and construct a strategy so the interests of each party can be mutual, thus creating value for all concerned. If management struggles to find common interests and “if trade-offs have to be made… then executives must figure out how to make the trade-offs, and immediately begin improving the trade-offs for all sides” (Freeman et al., 2010, p.28). Stakeholder theory is about not making trade-offs but finding the interests that head in the same direction, consequently maximising stakeholder value.
Businesses have a political role in society on the reason that they believe it is within their obligation to change and adapt to market factors. By analysing the literature of political theory on citizenship, a framework can be developed by which the political roles of corporations can be evaluated. Business exist because of society and its characteristics has been formed by factors in society and are regarded as ‘artificial persons’ in the eyes of the law. This legal status given to corporations treats them in the same manner as human beings and therefore can be metaphorically perceived to be ‘corporate citizens’. There will always be an open debate about how we interpret corporate citizenship, value and relevance reflecting upon the business and social background within firms. The rights given to corporations are very similar to the rights of citizens where both face punishments on breaching the letter and spirit of the law and the fundamental difference between the two is that corporations cannot cast a political vote and claim protection from self-incrimination (Crane, 2008). Citizenship under a democratic governance requires participation and is put into three main models of citizenship and democracy; civic republicanism, developmental democracy and deliberative democracy all demand different behaviours and conventions of participation. A civic republican attitude would require the firm to take into account the wider public good even if it incurs internal costs. In a developmental democracy, firms would need to be highly involved in society and have very close relations with one another. The deliberative democracy allows firms to reflect and consider the conditions of the whole community by having a deliberative role in participation. All three political models of citizenship assumes that corporations can be recognised as functioning similar to citizens by participating in debates, has a division in decision making and responsibilities in governing. Yet as discussed, the true significance of citizenship being applied to corporations is limited in the sense of political entitlements and it can be argued that by allowing corporations into the political process could be unsuitable that accountability to constituencies and stakeholders could be waned.
During the 1990s, globalisation had surged and made changes in the international capitalist environment affecting the stakeholding proposals. The two dominant models of corporate governance can be seen functioning in different states where the shareholder model is generally adapted in the Anglo-American environment such as the US, Canada and the UK, whereas the stakeholder model is more general in continental Europe especially in Germany and Japan (Blakeley and Bryson, 2002). Capital accumulation is the resulting process of globalisation and the capitalist business explores the national models in depth and is the most efficient way to date to sustain an economy. The economic restructuring of the 1970s has inflicted costs especially on the working class by restructuring disproportionately and globalisation has spiraled the deterritorialisation of social, political and economic means ultimately leading to greater insecurity and inequality. The limitations of the stakeholding theory is that it fails to acknowledge the mechanisms of liberal market capitalism which can be conveyed through the limited rights of workers in free markets leading to the exploitation of labour for profit. Nevertheless, in free markets, without any government intervention or competitive markets, there will be no obligations to achieve societal objectives therefore the phenomenon of globalisation produces implications for the idea of corporate citizenship.
Taking into account the different arguments discussed, there are different approaches to corporate governance. The critical question for companies is whether to create maximum value for shareholders or stakeholders to make the business successful. Both the theories are juxtaposed and putting both pure in economic terms will contain no ethical manner at all. The debate between Friedman and Freeman becomes a philosophical situation of liberalism and libertarianism. The political philosophy has significant importance in both business ethics and corporate governance because of the boundaries set by the government. But there has been consensus to resolving such dissimilarities by democracy which allows citizens choose how they are governed through political justice and this can provide a practical resolution to the conflict.
The shareholder value maximisation generally seems to be the clear and effective strategy adapted in many modern practices yet after the corporate scandals in the 21st century, the shareholder theory can be viewed to be impractical as executives focus on the sole responsibility of maximising shareholder value and where stakeholders lost faith and trust in those who were in power. Through the globalisation process, some multinational corporations now exert more influence politically than governments and with a more powerful democratic model, stakeholders have gained more influence to demand certain behaviours from corporations. By just focusing on shareholders fails to understand what makes capitalism work, that all stakeholders can create something no individual being can generate alone. It is a system of social collaboration and businesses must create value for each stakeholder in the long-term due to the ever changing business environment. The moral approach to corporate social responsibility would be to take into account the corporate stakeholder responsibility thesis where it considers that all stakeholder groups are vital to the success of the business and figuring out how to make these interests joint will result in maximising stakeholder value but also leading to maximising shareholder value as well.
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