Greek method of reasoning to corporate social responsibility
One determines what a good (socially responsible) corporation by investigating the purpose corporations should serve in society.
Friedman's view on purpose of a corporation.
His 2 main arguments
- Maximise stockholder profits.
- 1. Stockholders are the owners of the corporation, and hence corporate profits belong to the stockholders.
- Managers are agents of the stockholders (ie to maximise shareholder wealth).
- Donating firm's income to charity is an illegitimate use of stockholder's money.
- Stock holders free to donate their dividends to charity.
- If society decides that private charity is insufficient to meet the needs of the poor, maintain art museums, finance research for curing diseases, it is the responsibility of government to raise the money through taxation.
- 2. Stockholders are entitled to their profits as a result of a contract among the corporate stakeholder.
- A product/service result of productive efforts between stakeholders eg. employees, managers, customers, suppliers, local community & stockholders.
- In return for services, local community paid in taxes, staff in wages, suppliers the price agreed based on supply and demand. Left over is profit, payment to stockholders for bearing the risk of supplying capital.
- Each party in the manufacture and sale of a product receives the remunerations to which it has freely agreed.
Why does Friedman believe the stakeholders' voluntary contractual arrangements maximise economic freedom and that economic freedom is a necessary condition for political freedom?
- Political rights gain efficacy in a capitalist system.
- Eg. Private employers are forced by competitive pressures to be concerned primarily with a prospective employee's ability to produce rather than with that person's political views.
- The existence of capitalist markets limits the number of politically based decisions and thereby increases freedom.
Forces businesses to not care about political views. Allowing people to hold their own views.
Dodge v Ford Motor Company
- Embodies the classical view that a corporation's primary responsibility is to seek stockholder profit.
- Court ruled that the benefits of higher salaries for Ford workers and the benefits of auto prices to consumers must not take priority over stockholder interests.
- According to Dodge, interests of the stockholder are supreme.
Criticisms of Friedman's view
- His view justifies anything that will lead to the maximisation of profits, including acting immorally or illegally if the manager can get away with it.
- However this criticism may be unfair bc in his original article it says "stays within the rules of the game" and 'without deception or fraud'.
- Friedman's arguments presume the existence of a robust democracy in which citizens determine the rules of the game, and businesses do not unduly influence the process by which those rules are determined.
- Friedman never fully elaborated on what the rules of the game in a capitalist economy are.
- Criticised also as it it may see employees, customers and suppliers as mere tools.
- So if wages can be cut to generate profit, it should be cut.
- Theoretically follows Friedman's view but practically, the manager can usually generate profits only if she treats employees, customers and suppliers well.
- This insight has led to field of Positive organisational scholarship.
Smith Manufacturing v Barlow et al
- Smith Manufacturing v Barlow et al: a charitable contribution to Princeton Uni was deemed to be a legitimate exercise of management authority.
- An act that supports public welfare can also be in the best interest of the corp itself.
- So, a Friedmanite may treat employees well in order to generate profit.
The social responsibility of business in Friedman's article
"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".
What is corporate governance?
Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled.
Who are stakeholders?
- Any person or group affected by corporate decisions is a stakeholder.
- Most stakeholder analyses focused on a special group of stakeholders: namely, members of groups whose existence was necessary for the firm's survival.
- Traditionally 6 stakeholders have been identified: stockholders, employees, customers, managers, suppliers and local community.
What is stakeholder theory of management?
- Managers who use this perspective see their task as harmonising the legitimate interests of the primary corporate stakeholders.
- Freeman argues that managers have an ethical duty to manage the organisation for all stakeholders.
Limitation of stakeholder theory
- Still in early developmental stage.
- Much has been said about obligations of managers to corporate stakeholders however little said about obligations of stakeholders to the corporation.
- Eg. do employees have obligation to stay with company if they have been trained for a better salary?
Stakeholder theory must specify in more detail the rights and responsibilities
that each stakeholder group has
, and to suggest how the conflicting rights and responsibilities among stakeholder groups can be resolved.
Boatright's difficulties with stakeholder theory
- Concedes that the purpose of the firm is to benefit every stakeholder group.
- However argues that management decision making is an inefficient means of protecting the interest of nonshareholder stakeholders and that a system of corporate governance marked by shareholder primacy better serves the interests of all stakeholders.
- He believes it most efficiently maximises the welfare of all stakeholder groups.
- Argues stakeholder theory complements stockholder in 2 ways:
- 1. reminds managers that they have an obligation to correct for such things as market failures and externalities to ensure that markets work as they should to produce benefits for all.
- 2. stakeholder management can be seen as a guide for ethical management of the firm rather than as an alternative system of corporate governance.
Managing to please Wall St
- May not be in the public interest to retain traditional idea about the preeminence of the stockholder.
- Critics have argued US managers forced to manage to please Wall Street, which means managing for the short term.
- These critics have argued focus on short term has led to inordinate cutbacks in employees and frayed relationships with staff.
- However if a shift is made to consider long-term profitability, then greater likelihood that, in terms of managerial behaviour, the stockholder theory and the stakeholder theory will coincide.
Wayne Cascio on Wal-mart and and costco
- Wal-Mart famous for low prices- provide affordable products for customers who lack ample financial resources.
- However come under criticism for unfair and illegal labor practices eg. underpayment, sexual discrimination, illegal alien workers.
- Costco is an aggressive and highly successful competitor.
- Over 5 years stock rose by 55% while W dropped by 10%.
- Costco was taking good care of employees and customers and excellent relationships with other stakeholders.
argues that if Costco an be profitable while ensuring that all its stakeholders are treated well, Wal-Mart should be able to do the same.
Charitable giving and attempt by corporations to solve social problems can be defended on Friedmanite grounds.
In twin cities Minneapolis/St. Paul, believed that Target maintains a competitive advantage over WalMart bc of reputation for charitable activities.
What distinguishes Friedmanite from a stakeholder theorist
- The motivation a manager has for considering stakeholder interests.
- Friedmanite treats stakeholder well to make a profit
- Whereas the stakeholder theorist trates stakeholders well because it is the right thing to do.
- Paradoxiacally, treating stakeholders well because it is right may end up being more profitable.
Eric Orts and Alan Strudler: while stakeholder theory helps to identify legitimate interests that companies must take into account, it does not provide sufficient ethical guidance.
- Argue that a purely strategic in instrumental approach to stakeholders would allow a company to use unethical means to 'manage' stakeholders.
- Also argue that being a stakeholder is a matter of degree (eg. some have more stake than others), and since stakeholder theory does not take into account the variety of different relationships, it is too vague to be useful.
- They call for reflection on ethical principles that should guide managers in light of the difficult ethical problems hat confront businesses.
Ethical Cultures & Moral responsibility
- Managers can help create and maintain ethically praiseworthy business practices by cultivating an ethical culture within organisations.
- Through values or mission statements that serve to clarify, for employees and others, the core beliefs of the organisation.
- Also employee codes of conduct.
- Screen employees that meet their values/ train them/ evaluate their compliance.
- Chief Ethics Officer- mentor managers on how to foster an ethical culture within an organisation.
Trevino and Nelson
- Organisational cultures can be strong/weak, ethical/unethical.
- They emphasise the importance of codes of conduct, orientation and training programs, incentive structures and evaluation systems in cultivating a strong ethical culture within organisations.
- They argue that without such systems in place, employees likely to make organisation decisions driven by their own values rather than org values.
- Hypocritical leaders who fail to walk the talk encourage unethical employee behaviour.
John Boatright on who to blame for misconduct
- Boatright argues that US federal regulations place too much legal responsibility for corporate wrongdoings on corporate executives.
- He argues that if we take seriously the role of managers as agents, and transaction cost economics, we should conclude that corporate misconduct is primarily due to conflict of interest b/w managers and shareholders and that,
- From this perspective, misconduct can be best prevented by placing primary responsibility for wrongdoing on corporations and their shareholders.