Shareholder vs Stakeholder vs Market Failure's Model

Topics: Fiduciary, Business ethics, Stock Pages: 6 (2229 words) Published: November 24, 2012
Business and ethics are often considered as opposite ends of a magnet, one in the means of seeking profit and other with the common assumption of refraining from profit maximization; so the question become is business ethics really an oxymoron? The usual perception of business ethics is very poor and pessimistic as many corporate executives say one thing yet do another. Although the maximization of self-interest and profit seeking is what drives the economy forward, but how should one’s actions be justified, is it ok to do as you wish as long as the law permits? Business managers along with other professionals have sets of ethical codes laid out and are to be followed. There is the bar set in place to monitor the practices of each individual lawyer; medical association for doctors as they perform medicine; and a ring to be worn to constantly remind the engineers of their professionalism and the potential consequences of their work (Heath). Managers on the other hand do not have an association to oversee the decisions they make, whether they are permissible by law or meet the moral obligations. However not having the standards on paper does not mean there aren’t any to be followed. In order to make justification for the type of behaviours business managers have and to outline the appropriate actions they should take, many ethical theories have been developed since. There are three that best represent the key perspectives in this matter; Friedman’s Shareholder theory, Freeman’s Stakeholder theory and Heath’s Market Failure Model of business ethics (Heath). Each of them is the pillars of which many other theories are based on but have very different and opposite views. The Shareholder theory suggests that manager has fiduciary duties to the shareholders only and must maximize profits as long as the law permits. The Stakeholder theory on the other hand suggests that managers have fiduciary duties to all stakeholders whom are positively or negatively affected by the decisions of the firm; shareholders are only of the stakeholders and their benefits cannot account for all. The making of one group’s benefits can only be made in conjunction of making all other stakeholders better too; shareholders are no more special than the suppliers, customers, employees and communities. Both the Stakeholder and Shareholder’s theories are biased towards different ends, one suggesting profits to be maximized for one group while the other stating that profits should be common good for all. Furthermore, the Market Failure Model of business ethics comes in between the two, yet containing arguments of both but in revised versions. I will argue in this paper that the Market Failure Model is the one that best describes the causes and effects of the business environment we have today and the role ethics play within it. First, an extraction and analysis of the Market Failure Model will be conducted and be used to explain why it is the best fit for the current business environment and ethics. I will then explain the shortfalls of the Shareholder and Stakeholder theories and why they lack considerations on a broader scope. Market Failure Model

Market failure is the situation when the competitive market fails to provide an efficient outcome. In order for an efficient allocation of resources, there must be the absence of externalities, symmetrical information between buyers and sellers, insurance markets, and utility maximizing agents whom are rational when making decisions (Heath). However in the real world, the above conditions are rarely met and thus the idea of a perfect market becomes only ideal in theory but impractical in reality. In response to such failure in the market, two corrective phenomenons exist. The first being the creation of corporations which is organized in a system of hierarchy. Managers have fiduciary duty to follow legal as well as moral constraints to achieve profit maximization for members in the hierarchy, in this case the...

Bibliography: Heath, J. (n.d.). Business ethics without stakeholders. In F. Allhoff & A. Vaidya (Eds.), Business in Ethical Focus: An Anthology (pp. 110-126). Peterborough: Broadview.
Friedman, M. F. (n.d.). The social responsibility of business is to increase its profits. In A. Allhoff & A. Vaidya (Eds.), Business in Ethical Focus: An Anthology(pp. 65-69). Peterborough: Broadview.
Freeman, E. F. (n.d.). A stakeholder theory of the modern corporation. In A. Allhoff & A. Vaidya (Eds.),Business in Ethical Focus: An Anthology (pp. 69-78). Peterborough: Broadview.
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