So when the question was asked, “Which theory of business ethics do you follow” I admit my response was unexpected and certainly not scholarly or academic. My response?
“The theory that keeps you out of federal prison!”
As you might expect from reading the former article – see here – the conversation quickly turned in a different direction. However, the original question was valid. As there are three leading practical theories of business ethics – the Stockholder, the Stakeholder and the Social Contract Theories.
In Part Two – we’ll explore in layman’s terms the Stockholder Theory and look at how it might apply in business today!
If you spent some time reviewing business ethics history (something I am not real fond of – but perhaps a necessary evil), you will note that the Stockholder Theory is the oldest of perceptions or theories related to business ethics. Today, well let’s say that it might be out of favor as this theory is one that would resonate with the 1% not the “Occupy Wall Street” crowd who seem to favor “social responsibility” over capitalism.
Let’s first start with why a business is formed… Businesses (organizations) take many forms – for profit, not-for-profit, associations, education, government, etc. As such the business person’s responsibilities are to manage the business and use business resources to accomplish the businesses mission or purpose. Example – Apple Computer (now the world’s most valuable company) has a mission statement as follows:
Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with iPad.
Ethically then the employees and management of Apple Computer are obliged to conduct themselves in a way that accomplishes Apple’s objective and business purpose. Let’s see how the Stockholder Theory would apply as it relates to our example – Apple.
THE STOCKHOLDER THEORY
Businesses are created for a purpose and owned by individuals – stockholders (although the ownership form may vary – in other words this would apply to other forms of business ownership – partnership, LLC, etc.) and therefore, the responsibility of those who are hired to run the business are, in a sense, fiduciaries of the owner’s interests. Under this theory, the actions (ethical choices) of those empowered to run the business are limited to expending business resources in ways that meet the stockholders interests or are aligned with the stockholders interests.
If, for example, the stockholders have created the business that is designed to maximize profit for the stockholders – then one might assume that business choices will be focused on maximizing revenue and minimizing costs – even if that includes using cheap labor in a foreign country. On the other hand, if a company is formed with stockholders directing that part of the company mission is to provide local jobs, then ethics would dictate that management choices would favor the objective over the cost minimization. The significant issue under the Stockholder Theory is that the stockholders rule over any other “social responsibility” that might be perceived by outsiders.
Milton Friedman states, “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.”
Friedman uses two words that seem to define the boundary of ethics in this stockholder theory – “deception or fraud”. From a practical perspective, in the stockholder theory, management is obligated to advance the business purpose and increase the value of the business for the benefit of the stockholders by using any means short of “deception or fraud.”
A great example that has caught media attention (this is election season – November 2012) is the example of several business owners who are strongly encouraging their employees to be active in the election of the candidate that they feel will provide favorable business conditions for their business. Emails stating attend the rally of a specific candidate “or less” or mandates that require phone calls to be made to encourage a “get out the vote” have come under media scrutiny. The question is – are such actions “unethical”? Using the stockholder theory – if they advance the objective of the stockholder (in this case the advancement of his/her business interests) and they are not deceptive or illegal (fraudulent) then one would conclude that they are ethical.
Keep in mind…this is just a THEORY!
The challenge with the Stockholder Theory is – it is based on the idea of true capitalism – a real free market economy. Nice to write, but non-existent. Today we live in a world where businesses are competing by gaining government subsidies, tax breaks, having state-conferred monopoly status (cable TV franchises are an example) and an environment where governmental regulations dictate the form and format of business enterprise. Management is no longer focused solely on the stockholder’s profit in the pure sense, but rather focused on how to maneuver through the entangled mess of governmental bureaucracy that we find so prevalent today.
Back to Apple. Under the Stockholder Theory if Apple had only the bottom line to consider then hiring cheap labor in China would be ethical and no problem. Yet, we know different. Since there is a concept of social justice (fairly compensating someone for work performed in a humane way) when it comes to employees, Apple had to listen to concerns from the public (consumers) who complained that Apple’s bottom line was not enough. Based on the Stockholder Theory, if enough people were concerned that Apple was not socially responsible, then enough people might elect not to buy Apple’s product, therefore it is in the best interest of the stockholders to add a bit of social responsibility into the mix to preserve and protect Apple’s financial interest from the ultimate power – the purchaser.
Ethics – making the right decision based on all the facts and circumstances – in the case of the Stockholder Theory – to satisfy the needs and demands of the stockholders from whom the business got it’s start and for whom the business ultimately serves.
WHAT ARE YOUR THOUGHTS? YOUR COMMENTS ARE WELCOME!
I have posted this Comment in Response to an Assignment I am completing for a Business Ethics Class:
Even though this article is not specifically arguing that the Stockholder theory is widely in ‘favour’ in today’s socially responsible crowd, there is still that 1% (richest people in the world) who are in favour, and who will, sometime in 2016, own more than half of the world’s wealth (Richest 1% will own more than the rest by 2016: Oxfam, 2015). These people may see this theory as being as valid today as it was in 1970 when Milton Friedman first said that the responsibility of business is “to make as much money as possible while conforming to the basic rules of the society” (Friedman, M. 1970).
As key owners (shareholders) of the many large companies, this 1% still have major influence over the rest of us 99% and thus contribute way more to the ethical foundations of big business than their numerical value may suggest. It could well be that many industries like Apple, although appearing to follow the stakeholder theory (The theory where all groups associated with a particular company, have some degree of claim in “determining the future direction of the firm in which they have a stake” (Freeman, R. 1993)), may in fact be using defensive strategies in acting socially responsible. Everyone knows of Apple’s mission to be the world’s best computer designer, and this mission may therefore drive managers and employees alike, but is there a greater foundation on which this mission has been built? Could it in fact be that in order to maximise its profits for its owners (influential 1%ers), management have set the mission standards so high that products can be valued higher and retain their value for longer as they are considered the world’s best products. This mission statement may appear to reflect the customer’s valued stake in Apple as they receive the world’s finest phone and tablet device, but are the customers and other stakeholders just a means to the ultimate end? This end being “to use its resources and engage in activities designed to increase its profits” (Friedman, M. 1970). If this means producing the finest products in a highly competitive environment, in order for the company to charge the highest possible price to consumers, then couldn’t this simply be the stakeholder theory re-packaged to appear more socially appropriate?
This article suggests that under the stockholder theory, Apple would become more socially responsible if it meant preserving its primary financial interest; the purchaser’s willingness to consume Apple’s products. Could it be that top companies are still driven by its primary stakeholder – the stockholder, who view managers as agents who are primarily responsible to act in their best interest? This being to increase the value and return on their investment (Friedman, M. 1970). Management may only consider the other stakeholders if and only if it is in the best interests of their primary stakeholder. Take for example the number of jobs outsourced in 2015 in the U.S., nearly 2.4 million jobs were lost (Job Overseas Outsourcing Statistics, October 6, 2015) due to companies pushing for greater efficiency and reduced costs in order to maximise profits. Three quarters of 3.2 million jobs that were lost to outsourcing to China from 2001 to 2013 were in the manufacturing sector (Outsourcing to China Cost U.S 3.2 Million Jobs Since 2001, December 11, 2014). How could anyone conclude that businesses operate in a socially responsible manner, when whole communities and cities, like the 2010 Ford manufacturing closure in Minnesota which caused 750 job losses. The new workers at the Mexico plant receive less than a tenth of what their U.S counterparts make, which helped contribute to Ford’s record $1.7 billion third quarter profit (The reason Ford is making record profits –They’re shipping tons of jobs overseas, October, 2010).
This trend does not suggest that big companies consider the social impact in their quest for profit maximisation, but want to “take advantage of lax labour and environmental regulations” (Loomis, E. July 22, 2013) of other developing and third world nations to gain more for their shareholders. When companies can’t get away with polluting the airways and the waterways in their port of origins due to the uproar and reputation it would have on their bottom line, they simply find somewhere where it is legally permissible to do so.
In addition to lobbying against socially unacceptable practices and to changing the laws that require big business to conform to socially acceptable standards of responsibility, individuals need a change in values when they come to investing in a company. As wealth accumulation appears to be leaning more towards the 1% who now account for just over half of all investing, it is then these people who need to re-educate themselves as to what constitutes a good investment and a good return on that investment. A good investment must include a company that considers all stakeholders as holding a valued share in the affairs of the business and not just whether a business offers a better financial return than other options. If this fundamental change of values doesn’t start becoming the trend of the majority, than management, who ultimately are responsible to act on their shareholders behalf, will just continue to find loopholes in the regulatory systems of other nations in order to boost the financial return for their investors.
This is ultimately why laws have had to be made and public protests carried out. Shareholders want as much financial return as possible without considering the costs that may be incurred to the environment and health of local communities, or the conditions of workers who go unnoticed in nations whose laws permit harsher treatment to employees. Shareholders must start to invest in more sustainable stakeholder focussed companies whose management are aimed at greater returns for all stakeholders.
Reference List:
Business Insider. The Reason Ford Is Making Record Profits – They’re Shipping Tons Of Jobs Overseas. Retrieved from http://www.businessinsider.com/ford-motors-is-closing-factories-and-shipping-jobs-overseas-2010-10
Freeman, R. E. (2004). A stakeholder theory of the modern corporation. In T. L. Beauchamp & N. E. Bowie (Eds.), Ethical theory and business (7th ed., pp. 55–64). Upper Saddle River, NJ: Pearson Education.
Friedman, M. (1970, September 13). The social responsibility of business is to increase its profits. The New York Times magazine, 32–33, 122–124. Retrieved from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
Loomis, E. (July 22, 2013). The Environmental and Human Health Effects of Outsourcing Garment Production to Bangladesh. [Web blog post.] Retrieved from http://www.lawyersgunsmoneyblog.com
Open Polytechnic of New Zealand. (2015). Module 4, 71203 Business Ethics. Lower Hutt, NZ: Scholes, V.
Rueters. Richest 1% will own more than the rest by 2016: Oxfam. Retrieved from http://www.reuters.com/article/us-davos-meeting-inequality-idUSKBN0KS0SW20150119
Statistic Brain. Job Overseas Outsourcing Statistics. Retrieved from http://www.statisticbrain.com/outsourcing-statistics-by-country/
US News. Peralta, K. (2014). Outsourcing to China Cost U.S 3.2 Million Jobs Since 2001. Retrieved from http://www.usnews.com/news/blogs/data-mine/2014/12/11/outsourcing-to-china-cost-us-32-million-jobs-since-2001