1 Introduction
Decisions in companies are often made by the management and influence not only the profit of a company, but also they influence the employees, many people outside of the company such as the supplier as well as the environment in the surrounding area of a company. Against this background, the question how a manager should act with regards to the owner of a company and the employees of a company is quite important.
A possible answer to this question can be discussed in the stockholder vs. stakeholder debate. Although there are reasonable arguments for both – the stockholder and the stakeholder theory – I will use this paper to show that the stakeholder approach is superior and should be used for business in companies. To reach my conclusion, I structured the paper in the following way: The second Chapter should explain the basic idea and the basic concept of the stockholder and the stakeholder theory. Based on this explanation the following third chapter will discuss arguments in favor of the Stockholder Theory. In the second section of the third chapter I try to invalidate these arguments and I will present arguments supporting the Stakeholder Theory. The final chapter four contains the conclusion of my paper. 2 Explanation of the Basic Concepts
2.1 Stockholder Theory
The stockholder theory, which is also known as “Friedman Doctrine” and is a model most often associated with the Noble Prize winning economic theorist Milton Friedman, defines a manager as an agent for the stockholders (Bowie and Werhane, 2005, p 21). A “stockholder” is a person, who has a monetary investment in a business or company. Many business schools follow the orthodox view that according to the stockholder theory, the unique purpose of the manager is to increase the profits of the company.
Consequently, a manager should try to maximize the wealth of the shareholders. Milton Friedman summarizes the theory by saying that “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.” (Beauchamp et al, 2008, p. 55) Theodore Levitt, a former editor of the Harvard Business Review, Robert Nozick, an American political philosopher as well as Albert Carr are supporter of the orthodox view of the Stockholder approach Albert Carr was persuaded that “business has its own morality“ (Bowie and Werhane, 2005, p. 22) and that you can compare the behavior of a businessman with a poker player. Other important supporters of the stockholder theory are in most cases supporter of the utilitarian view like Jeremy Bentham (Sandel, Michael J., 2009, p. 34). 2.2 Stakeholder Theory
The stakeholder theory, which is most closely associated with R. Edward Freeman, is a business theory which states that management has a fiduciary relationship to all its stakeholders. According to Freeman, the term “stakeholder” can be used in a narrow and a wider scope. The narrow definition includes persons who are vital and necessary for the benefit and the survival of a firm like stockholders, managers, suppliers, customers and employees. The wider scope defines a stakeholder as any group, which is affected by the actions of the firm such as families of employees (Bowie and Werhane, 2005, p. 26). The biggest challenge of the Stakeholder approach is to balance the competing claims by creating as much value as possible without tradeoffs between the different groups of stakeholders.
Therefore, Freeman is persuaded that every stakeholder would unanimously agree to six basic principles, no matter which stakeholder they would be: (Bowie and Werhane, 2005, p. 27) 1. The Principle of Entry and Exit: A Corporation has to define clear rules how you can enter and exit and how you can renegotiate conditions to know when a contract is valid and exists. 2. The Principle of Governance: To change a rule, the new rule must be adopted by unanimous consent of all stakeholders. 3. The Principle of Externalities: If there is a contract between a party A and B that imposes costs to a party C, the party C has to be part of the contract as well 4. The Principle of Contracting Costs: All parties of a contract have to share the contracting cost 5. The Principle of Agency: The manager have to serve all interests of all different stakeholder 6. The Principle of Limited Immortality: A corporation should be managed so that the interests of the Stakeholder can be served for long term as well. Other important supporters of the Stakeholder Theory are John Rawls, an American philosopher, and Immanuel Kant, a German philosopher. 3 Stockholder Theory vs. Stakeholder Theory
In the third chapter I will present arguments in favor of both theories. I want to arrange the arguments in descending order in terms of their importance. Against the background of an ethic course, I will focus on ethical principles and theories. Apart from that, economic reasons will be only used to support my arguments.
3.1 Arguments in favor of the Stockholder Theory
From my point of view, the most important argument in favor of the stockholder theory is given by Friedman. Friedman is persuaded that stockholders are the owner of the corporation and thus, the profit of the corporation belongs to them (Beauchamp et al, 2008). The stockholders have to carry the risk of the corporation. Besides, they are the last group of stakeholders who gets paid in the case of a bankruptcy. I agree with this statement so far that the stockholders are an essential part of a corporation and a manager has a fiduciary duty to them. Milton Friedman is of the opinion that it is the right of the stockholders to receive the profit of the company. Furthermore, they should share the profit among all corporate stakeholders through a voluntary contract (Beauchamp et al, 2008). Friedman is persuaded that such a voluntary contract can achieve an economic freedom. In ‘‘Anarchy, State and Utopia”, Robert Nozick said that economic freedom is the necessary condition for political freedom (Nozick, 1974). Nozick`s understanding of justice is a libertarian sense, because he emphasizes property rights and the free individual decision to redistribute property. To his mind, liberty is more important than equality. According to to the stockholder theory this argument states that the investors can keep all profits. Moreover, a manager should act in the best interest of a stockholder, since a stockholder has the property right on the company. However, the stockholders possess an optional right to redistribute the profit among the other stakeholders. The philosophical theory of utilitarianism, which is highly influenced by Jeremy Bentham and John Stuart Mill, supports the stockholder approach as well. Utilitarianism provides the following teleological reasoning: “Any action gains moral worth in so far it promotes the greatest good for the greatest number” (Bowie and Werhane,
2005). From a utilitarian point of view, a manager has only a fiduciary duty to the stockholders if the approach resulted in increasing prosperity for society. Therefore, they would accept negative consequences for a group of stakeholders like for example the employees. If the stockholders could receive higher profits and the prices for the customers could be cut, a utilitarian would relocate the production to another place, even if they have to dismiss local employees. The fourth and the last argument in favor of the stockholder theory is based on practical instead of ethical reasoning: The stockholder theory is often claimed to be a clear and simple approach. It allows the manager to focus on one specific group of stakeholders – namely the stockholder – so that a manager can fulfill his duties more efficiently. 3.2 Arguments against the Stockholder Theory and in favor of the Stakeholder Theory In the second section of chapter three I will now provide counterarguments and explain why I support the stakeholder theory. The most important reason why I chose the stakeholder theory is a justice argument. I am persuaded that the Libertarian Principle, formulated by Nozick, is unfair and the perception of justice is unethical. The main weakness of this theory is that Nozick does not question the property rights, which could be illegitimate and a result of unethical acquisition of property. Another weakness of Nozick’s theory is to my mind that the theory does not consider the inequality between the parties who voluntarily enter a contract. Often one`s social position is predetermined at birth and it is not easy to influence this situation. For example, the biggest influence on the education and the future career of children is the social status of their parents. It is a fact that wealthy parents can guarantee their children a good education, which is the basis for a vocational career. I think that Rawls’ Social Welfare Principle addresses this aspect of birthright lottery (Bowie and Werhane, 2005). I am convinced that many of the different groups of stakeholders would not choose the stockholder approach with the high salaries of the management and the focus on the stockholders. I quite support Rawls’ understanding of justice. To my mind, Rawls’ theory and definition of a fair acting is more in accordance with the justice principle of the Georgetown Mantra than the approach of Nozick. An interesting principle is to my mind the utilitarian principle. Although this is a logic and fair approach on a theoretical level, I think that there are
several errors on a practical level. I cannot support the utilitarian theory since it uses human beings as mere numbers in order to calculate the greatest good. During our discussions in class we had an example with an overweight guy at a bridge. As a utilitarian you should push him to rescue the other people at the construction site. To my mind, the utilitarian approach ignores autonomy in this case, the first of the Four Georgetown Principles. Thus, I quite prefer Kant’s approach because he respects the dignity of people. He supports the stakeholder approach by claiming that it is always wrong to treat persons as mere means to an end (Beauchamp et al, 2008). I think that you cannot use employees as simple means to earn higher profits for the stockholders. If you cannot avoid dismissing employees, a manger should respect the needs of the employees when laying them off. I agree with Friedman that stockholders bear the entrepreneurial risk and therefore, they are entitled to the profits. But I think that there are more groups, which contribute much more to the success of the company than the stockholders. Therefore, I agree with Freeman’s view of management`s duties. He said that a manager has a fiduciary duty to all its stakeholders, not only the stockholder (Bowie and Werhane, 2005, p. 25). Friedman talks about social responsibility and rejects deception and fraud as well, but to my mind, he fails to define the “Rules of the Game” exactly and there is space for a wrong interpretation so that Friedman`s theory eases unethical behavior (Bowie and Werhane, 2005, p. 21). To respond to the argument that the Stockholder approach is more practical, I would like to argue that the most business situations require complex answers and consider different aspects. To my mind, the stockholder theory is in many situations a too simplistic approach. I think that a manager must decide on a case-by-case basis rather than following only fixed rules. Against the background of the financial crisis, I quite support Freeman’s view that management has a fiduciary duty to all its stakeholders. The gap between rich and poor will remain within reasonable limits, only if there is not a priority between the interests of the stockholder over the interests of the other stakeholders. My last reason to support the stakeholder approach is based on a survey. Different studies have revealed that the returns for the stockholders in the long run are higher under a stakeholder management than under a stockholder management (Bowie and Werhane, 2005). I think this survey support the view
that a good relationship to suppliers, satisfied customers and motivated employees are essential for a successful business and more efficient than a mere focus on the stockholders’ interests. The corporation does not only focus on quarterly publishes figures so that the stakeholder approach allows you to achieve an effective strategy for the long-run as well. 4 Conclusion
After considering the arguments of both theories, I am persuaded that the stakeholder theory is the better approach for a management orientation. Although I think that there are convincing arguments for both theories, the reasons for my decision is that the stakeholder approach follows two principles of the Georgetown Mantra – namely autonomy and justice – in a way that matches my thinking and my conviction better. I believe that a manager has a fiduciary duty to all its stakeholders, although I think that it is a very difficult task to satisfy the competing the claims of the different stakeholder groups, especially during a financial or economic crisis. In summary, I prefer the stakeholder approach, but I think especially during a crisis it is difficult for a manager to spend other people’s money in a way that may not be consistent with their wishes. Therefore, I am persuaded that decisions made by a manager always depend on the situation.
Bibliography
Beauchamp, T.L., Bowie, N.E. & Arnold, D.G. 2008. Ethical Theory and Business, Pearson/Prentice Hall. Bowie, N.E. & Werhane, P.H. 2005. Management Ethics, John Wiley & Sons. Kenneth, Arrow J. 1963. Uncertainty and the Welfare Economies of Medical Care, The American Econmic Review, Volume 53, Number 5. Nozick, Robert. 1974. Anarchy, State and Utopia, Basic Books. Sandel, Michael J. 2009 Justice – What`s the right thing to do?, Farrar, Straus and Giroux
