Stockholder vs Stakeholder

TWO DIFFERENT VIEWS ABOUT THE PURPOSE AND

AIMS OF BUSINESS
 Stockholder Theory

Milton Friedman : The Purpose of Business

is to make money for the owner or
stockholders.
 Argument 1

“The Social Responsibility of Business is to

increase its profits”

The Underlying Ethical principle: Manager has

Fiduciary Responsibility to Owners…
A fiduciary duty is a legal or ethical relationship of
confidence or trust regarding the management of
money or property between two or more parties
 Purpose of business is NOT to :

provide employment
eliminate discrimination
avoid pollution
help the community
make life better for workers
 Business is not Charity

To think business

should do anything
other than make a
profit is to preach
socialism and
undermine free
society.
 Argument 2

Businesses cannot have responsibility,

because only people can have
responsibilities.
 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…”
 Ethical issues

“…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
Business Responsibilities vs. Personal Social Responsibilities

social Fiduciary
responsibilities of responsibility: To
the executive: make money for
Family, conscience, stockholders
feelings of charity,
church, clubs, city,
country
 Agent to Stockholders

He must act as an agent of the stockholders, not

society in general.
He is a manager not…..
 Argument 4

No way for Executive to know how to solve

social ills—that’s not his expertise!
 Argument 5

Majority speaks through the law. Don’t

undermine or circumvent democracy by
imposing one’s views on other people’s
money-use via subversive private ‘tax’
 PR or Charity?

If Companies give money to good causes because it

gives them good Public Relations, then count it as
advertising and don’t 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.
Publicity or Charity
 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.
 Friedman’s 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.”
 Friedman’s 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!
Problem #1 with Friedman’s Position

Federal regulations are essential to force companies

to act in an ethical manner. Such regulations direct
the market towards ethical behavior.
 Problem #2 with Friedman

Distribution of income that results from

unrestrained profit maximization is very unequal.
 Problem #3 with Friedman

Maximizing profits is socially inefficient when costs

are not paid
Examples:
 pollution
 traffic congestion
 No taxes– poorly educated workforce
 Problem #4 with Friedman

Maximizing profits is socially inefficient when seller

has great advantage over buyer
Stakeholder Theory:Ed Freeman
 Managing for Stakeholders

“Managing for stakeholders is about creating

as much value as possible for stakeholders,
without resorting to tradeoffs.”

A trade-off (or tradeoff) is a situation that

involves losing one quality or aspect of something in
return for gaining another quality or aspect/or
opportunity cost
“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.”
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 stockholder’s rights

 Usually ignores ethics : Separatist view

business decision vs ethical decision
Three reasons that the separation of business and ethics is a
fallacy:

 1. Open Questions
 2. Integration Thesis
 3. Responsibility Principle
 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?
 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.
 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.
 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.”