The Stakeholder Theory: Aiding in the Long Term Success of Corporations

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The Stakeholder Theory: Aiding in the Long Term Success of Corporations

Managers of corporations, big and small, must make decisions everyday, incorporating the appropriate ethics and also maximizing corporate profit. The two major theories in decision-making are the Stockholder theory and the Stakeholder theory, both of which I will be explaining. First, I will explain the Stockholder theory as a short-term profit oriented model with regards to business ethics decisions. Then, I will explain how the Stakeholder theory and how it could be applied in the business ethics decision process. I intend to prove that the Stakeholder theory could provide the best support for a corporation in both the ethical decision-making and optimal performance in the long run

Milton Friedman, the developer of the Stockholder theory, stated, “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 says within the rules of game, which is to say, engage in open and free competition without deception and fraud. ” (Friedman 69). He separated the idea of business ethics into business decisions and ethical decisions, two concepts that could be explained independently. As defined by Friedman, the stockholders are the people who own a share of the stock, and only they have a moral claim on the corporation. The stockholder also means the founders of the corporation. In addition, the managers are only the agents of the individuals who own the corporation, and must carry out their duty towards the company’s stockholders by maximizing profits in their business decisions. Friedman stated the ethical regulations that are imposed by law were constraints to managers. From businesses’ point of view, managers should pursue profit maximization regardless of the ethicality of the decision. So when faced with the choice between an environmentally friendly but low margin product and one with a high margin but can be environmentally hazardous, a manager should most certainly choose the higher margin product despite its environmental implications. This is because in Stockholder Theory, the manager is considered stealing if he/she uses the stockholder’s funds in anything but pursuing profits. A manager is not allowed to use the funds for anything that deviates from pursuing maximal profit. In addition, Friedman’s “Taxation Argument” could explain this idea. It is said that the corporate social responsibility that is applied by managers is a means of losing profit in terms of incurring cost. Furthermore, since managers have no say in the distribution of the stockholders’ funds, a manager who acts socially responsible may not represent the goals of the stockholders and she/he does not represent the stockholders’ benefits. Overall, supporters of the Stockholder theory believe this theory is the best fit for a capitalistic society, in which the focus on profit and stockholders will have a trickle effect. Excess profits that earned from successful businesses can provide social responsibility through job creation, stable inflation rate and economic development of communities.

The Stakeholder theory, as stated by R. Edward Freeman, said that, “each of these stakeholder groups has a right not to be treated as a means to some end, and therefore must participate in determining the future direction of the firm in which they have a stake.”(Freeman 70). In addition, he defined the Stakeholder as “those groups who have a stake in or claim on firm. Specifically, a stakeholder includes suppliers, customers, employees, stockholders and local communities.” (Freeman 70), basically, just anyone who has an attachment of some sort from company. Freeman argued that “business ethics ” should not be treated separately from the concept of “business decisions”. It should be regarded as an entire concept. The Stakeholder theory proves that successful business is not primarily built on...
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