Corporate Ethics: Shareholder vs. Stakeholder Perspectives
Ethical Business Constituencies
Limitations of Ownership Rights
The traditional economic view of ownership is that it implies control and decision-making power. In the traditional (usually small) business, the owner and the manager were the same person with the same interest – making as much profit as possible. In the modern business corporation, ownership and management are separated. The dispersed shareholders are the owners. But these owners are, for the most part, naturally limited in how much they can influence the direction of the business. The managers are entrusted with that responsibility.
Ethical Obligations of Managers: The Shareholder View
The most important interest group that managers of a firm are supposed to serve is the shareholders. The shareholders are the owners of the firm, and their interest is in maximizing profit. The managers are responsible for generating profits for the owners. But the firm does not exist in a vacuum. The firm exists in a capitalist democracy, where the firm’s managers (and owners) must meet legal obligations to government. The firm’s owners and managers are also called upon to meet ethical obligations to other parties inside the firm, and in the market outside the firm and in society-at-large.
The Friedman Doctrine on Corporate Responsibility
Not everyone agrees with the last statement. You can read the following statement in Audi, page 9: “In a free economy…there is one and only one social responsibility of business…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…Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.” — Milton Friedman (1912–2006) from Capitalism and Freedom (1962).
Understanding the Shareholder View
Friedman offers what Audi called “the shareholder view.” This is the view that the interests of stockholders predominate over all other interests within, and outside of, a firm.
Key Business Stakeholders
These are the six constituencies of business corporations. Shareholders are one of these constituencies – and can be reasonably defined as the most important constituency. But there is also a reasonable argument that they are not the only constituency in the firm. “There is little doubt that human beings have moral rights not to be harmed and these are strong enough to limit shareholders’ rights to have management maximize profits.” — Audi, page 25. Here are the six stakeholders of the business corporation:
- Shareholders: The most important stakeholder in the firm.
- Employees (including managers): “They have the right to be treated with respect; not just with civility, but as persons with interests, feelings and vulnerabilities.” — Audi, page 25.
- Customers and Clients: “They have the right to be treated not only with respect – which implies avoiding deceptiveness – but also with some concern to satisfy their interests and not merely to make a profit on them.” — Audi, page 25-26.
- Suppliers: Businesses should have a relationship with suppliers “in which there is the kind of trust that leads suppliers to extend credit to the business, to management’s being loyal to suppliers, and sometimes to one side or both giving the other special privileges.” — Audi, page 26.
- Creditors: “They have put something at risk for the company and thereby also have a special right to consideration and, sometimes, to information not given to the public at large.” — Audi, page 26.
- The Community-at-Large: “the network of groups surrounding a business,” — Audi, page 26. What does a business corporation owe the community-at-large?
Do the other stakeholders – besides the shareholders – have a “stake” to claim of their own – a legitimate positive interest, or right, in the business firm? What is their share in the fortunes of the firm? Or does the firm merely have the obligation not to infringe on their rights in the negative; in other words, not to harm them?