A Society Has Grown Rapidly And Immensely Management
In the last 200 years, business corporations influence on the society has grown rapidly and immensely. Two contending theories are eminent when discussing the purpose of the modern business firm. Both theories present a structure for assessing company's governance procedures, managerial compensation policies, and the economic and societal performance of a firm. The first, shareholder theory, originates from an economic viewpoint that, the company's should focus firmly on those who have a monetary share of the company and that a firm's only purpose is to serve the needs and interests of the company's owners. On the other hand, the stakeholder theory broadens the first view, identifying the relevance of wealth creation in addition to the business's interactions with its integral groups, shareholders, suppliers, creditors, employees, regulators, customers, and native communities and effect on society as a whole. These stakeholders are those without whose participation the corporation cannot survive (Clarkson, 1995).This paper discuss the foundations of these two theories, provide an overview of some current progress within the theories, and conclude with some suggestions on how the two theories might be used to create a better effective structure for the role of the modern business firm.Shareholder Theory
The origins of the ideas shaping shareholder theory are more than 200 years old, with roots in Adam Smith's (1776), Wealth of Nations. In general, shareholder theory encompasses the idea that the main purpose of business lies in generating profits and increasing shareholder wealth. Shareholder theorists call for restricted government and supervisory interference in business, believing that society will also benefit from markets been regulated through the mechanism of the invisible hand, that is, if all businesses work towards their own self-interest by trying to maximize profits.
Some advocates of the shareholder view also were of the view that the invisible hand checks unlawful activities, arguing that the market will discipline or punish firms that involve themselves in illegal or unethical behaviour. They were of the view that too much oversight and regulation of firms is needless.
They believe that the state should be responsible for solving social problems. Corporate generosity and other actions not directly connected to creating shareholder wealth are a waste of shareholders' investments and, possibly, depraved since it amounts to stealing from them. Though this statement seems strong, Friedman conceived that the "business of business" is business; and that firms are formed to make money, not run the social or moral growth of society. According to Friedman, social and moral development is best handled by the government or by a voluntary organization. Wealth is shifted to issues outside the core expertise of their executives if businesses become tangled in public or social policy issues. If wealth is used inefficiently this way, society will be affected negatively in the long run. The negative view of Friedman towards socially involved companies went so far as to announce that such activities seized the role of constitutionally chosen officials.
It should also be noted that, Friedman never advocated firms behaving unlawfully, dishonestly, or unethically. Whilst supporting the corporate aim of make best use of shareholder wealth, he argued that it should be done within the ethical, moral and legal confines of society.Critics of the Shareholder Theory
Managers of an organization are led by the Board of Directors. These Directors direct how the business is supposed to be run and since they do not acquire profit directly from the objective of shareholder's wealth maximization except if they own stock, there is occasionally conflict between managers and stockholders. This conflict is referred to as agency problem. Shareholders are been served by managers as agents. Therefore, if there is an agency difficultly amongst the two parties, it causes hitches inside the organisation and can impede performance.
The view that managers principally have a responsibility of making the best use out of shareholders returns attested for the fall of Enron and various scandals like Imclone, WorldCom and Tyco International. There were various concerns on the freedom of auditors who were charged with the assessing of the financial statements of these companies. There were questions also raised concerning the investor recommendations and incentive schemes at Merill Lynch and Credit Suisse First Boston. These unfolding events and occurrences dampened advocators of the shareholder theory. This also paved way for people to start questioning the evidence of shareholder supremacy.Stakeholder Theory
The traditional meaning of a stakeholder is any individual or group who can be affected or affect the attainment of a business goals and objectives (Freeman 1984). Over the years the explanation for a stakeholder, the purpose of a firm and the role of managers are very unclear and disputed in various literatures. Freeman, who is the father of the stakeholder concept reformed his definition overtime. In one of his newest definitions Freeman (2004) defines stakeholders as groups whom are important to the continued existence and success of a business. His recent publication Freeman (2004) adds a new standard which reveals a fresh development in stakeholder theory. The new standard advocates for the concern of the views of stakeholders themselves, and that, their undertakings is essential to be taken into account when managing a business. He explains that stakeholders may convey an action against managers for not performing their required responsibility of care (Freeman 2004).
The stated principles and opinions of the stakeholder theory is referred to as normative stakeholder theory in literature. This theory enable stakeholders or managers know how they should act.It also serves as a guide for how they should view the purpose of the business, based on some ethical principle (Friedman 2006). There is also the descriptive stakeholder concept which is another approach to the stakeholder theory.
This theory appears embedded in organizational behaviour literature and designates the behaviour and features of stakeholders involved in a structure and how an firm interacts with them (Brenner and Cochran 1991; Jawahar and McLaughlin 2001).
The third concept, instrumental perspective on stakeholder theory addresses this more openly on the assumption that firms that give attention to their main stakeholders will acquire competitive advantage over those that do not (Clarkson 1995; Jones 1995). This means if managers treat stakeholders in line with the stakeholder concept the organization will be more successful in the long run.
In particular, Carroll A 1979 and Ed Freeman 1984, theorized that a firm could do better if firms takes the interests of all the their stakeholders into account, that is, they would attain better performance than by merely concentrating on interests of shareholders.
Carroll noted that businesses have four main responsibilities, that is, economic- to maximize shareholder wealth, legal -to conform to set laws and regulations, ethical -to know that the firm is part of a community, and thus has obligations to and an impact on, others, and discretionary- to engage in generosity. However, its responsibility to the economy should be major, that is, "the business of business is business." Likewise, Freeman supports that profit generation should be the product of a firm that is managed well. Unlike Friedman, yet, both Freeman and Carroll had the belief that if a business produces wealth for its stakeholders, it as well affects shareholders. Therefore the stakeholder theorist believe that taking all component groups into account is a better way of increasing overall performance unlike the stakeholder theory which emphasizes a business can only increase value on one dimension.Implications of Stakeholder theory to firms
The Stakeholder theory challenges small-business owners and leaders of corporations to reconsider their usual ways to running organisations. This theory enable firms move away from the primary concentration of a firm in acquiring profits in the short-run but to focus on the long term success of the business. In this current business world well-defined by advancing globalization, augmented concerns on corporate responsibility and economic insecurity, the stakeholder theory's core principles can assist as a model for start-ups and succour as a turn-around for waning companies. The stakeholder theory if properly understood will enable firms realize that their business values and it's relationships with stakeholders are critical to success, inspiring employees, helping managers to make profit and benefiting the society as a whole.Critics of the Stakeholder theory
Charles Blattberg, the political philosopher critiqued stakeholder theory for assuming that the interests of the several stakeholders can be, at best, compromised or balanced against each other. He claimed that this was a product of its prominence on negotiation as the principal way of discourse for dealing with clashes amongst stakeholder interests. Blattberg recommended that conversation instead and this leads him to support what he refers to as 'patriotic' idea of a firm as a substitute to that related with the stakeholder theory (Blattberg, Charles 2004). There is also limited headway made in respect to the positive link that exists between increased financial performance of a firm and a more inclusive stakeholder management, because of the inherent difficulty of trying to evaluate the effect of corporate engagements on stakeholders other than shareholders. Assessing a business's efficiency in its dealings with stakeholders outside the capital markets is very difficult to acheive.Political Sphere
The political problem which triggers the debate of the ways for businesses are managed has been existent for only about 150 years; society had observed the arrival and the spreading of businesses during this period of time (Chandler, 1977; Luhmann, 2000). In today's world, firms are everywhere, making it a 'society of organizations' (Etzioni, 1964). Economists have comprehensively been arguing on the two principal questions which businesses pose in the political dialogue since the 1930's (Knight, 1965; Coase, 1937). Their efforts are targetted at reflecting the "reasons of organizations" regardless of the fact that there are variations in the viewpoints of their research programs (Waldkirch, 2002), the explanations for the appearance and the triumphal rally of firms in today's world. Therefore the first, central question concerns the social role of organizations: why does a democratic society with market economy establish a system of free firms or, why do organisations exist in a market economy? So far as the affairs of an organisation are determined by management, another subordinate question relating to the social duty of management may appear: what are the rights and responsibilities an organisations management has? Or in whose interest should organisations be run (Hayek, 1967)? To be able to answer these questions: the shareholder approach reasons shareholders invest their money in the firm for them to serve the shareholders and that their management of the firm has the obligation to maximize the shareholder worth. The stakeholder approach on the contrary envisions firms as a tool for increasing the mutual gains of every stakeholder and hence requires management to balance their interests. At the first glance, the answers may appear to be entirely opposite to each other -a question can therefore be raised on how their advocates contend for the different outcomes and which argumentation is more substantial.Economic Sphere
In countries with a market economy it is generally agreed, that they pursue economic profitability. Yet, few people would also disagree that organizations also have other definite social obligations. Profitability and responsibility should and can be joined in an ideal world; though it is clear that they are at slightly conflicting.
Organizations must on one hand be more profitable to survive and businesses must gain higher returns on equity of shareholders than it would be appreciated if the money were to be put in a no-risk bank account. High stock prices reflect profit for investors which create trust for them; it also helps the business achieve it set targets and goals. The profits acquired by firms should not be seen only as an outcome, but as a basis of the company's competitive health and prosperity.
In this manner, we can thereby say firms are systems of groups and parties functioning together in the direction of a collective aim and not simply 'economic machines'. The economic environments around firms play a major part of the value of any company. In order to motivate people and society to work hard for the welfares of the company, there should be a level of trust must be built with them. Similarly it is also significant for the development of trust between the firms external environment like its customers, interest groups, suppliers, government and the organization itself. Such trust can only grow from the perceived security that the interests of all individuals and stakeholders are taken into account.Debates on Shareholder-Stakeholder theory and how to bridge the gap
A key principle of stakeholder concept unfortunately time and again gets lost in the arguments about its advantages, taking all an organisation's constituencies into account, that is, on some level in the practise of strategy formulation can be financially beneficial for the firm. Time and again, activists of the stakeholder theory often move away from this vital objective, instead concentrating on the significance of non-financial market stakeholders at the detriment of the company's owners. The good and positive thing about the two theories is that they both detect the significance of a business's financial success just that they promote different ways to that end. The stakeholder and shareholder theories are both theories the creation of value for the firm. They are also both centred on the notion that businesses should as much as they can create value if it is within the confines of the law. Stakeholder concepts vary from shareholder concepts, nevertheless, in identifying the fact that a business can maximize value by understanding how it is affected by and how it affects all its various constituencies. On the other hand, the shareholder theory is apparently antagonistic toward activities do not directly have any bearing on the organization's lowest line, whilst the stakeholder theory rotates round the decision-making of humans and, consequently, ethics. Stakeholder theory advocates are of the notion that is to talk about a business without ethics does not make, and vice versa. They are of the idea that it doesn't make sense to talk about either without talking about the choices we make as humans. Consequently, they cull the normally held separation thesis that ethical and economic matters in organizations are distinct, and offer more inclusive frameworks and justification for using to reflect on the role of organizations in society. Some of the basic questions that stakeholder theorists encourage managers to inquire are: If a decision is made who are value created for or destroyed? Whose privileges will be allowed or not? If I make this decision what kind of person will I be. Friedman was not against none of these. After all, Milton Friedman was of the view that organizations should maximize profits so long as it was within the regulations and that may not or may, include Corporate Social Responsibilities depending on the results produced. The viewpoint is that economists conventionally tend to ignore what they can't (precisely) measure because have had trouble measuring value outside of the bottom-line. Hence, they are not able to produce close-fitting mathematical models that characterize the loose actual world we find ourselves in.
A well-managed company outcome should be generating stable business and maximizing profits, and stakeholder theory can assist firms reach that goal perhaps very successfully than shareholder theoryâ€•by evaluating variables like the quality of products and services, good employees, business repute, reliable suppliers, cooperative financiers and helpful communities. To be brief, stakeholder theory acknowledges that firms have the potential for maximizing profit by creating a vibrant, long-term reputation amid stakeholders and by addressing interests and of real needs of such parties.
It can be said that stakeholder theory is a continuation of the shareholder theory and that its larger structure and understanding of the organizations relations with society at large can really produce better performance for the firm and thus, create more benefits for society at large. It can be sensible to assume that people can be both self-enlightened and self-interested, thereby generating the prospect for the merging of stakeholder and shareholder concept into one suitable theory.ConclusionBusiness firms face an increasingly competitive environment. The development of a world market for investment capital, in particular, increases the importance of competing for investment capital. Such increased competition, we believe, encourages firms to search for sources of organizational advantage that cannot be easily or quickly duplicated in order to continue to attract investment capital. Sustainable organizational advantage may be built with tacit assets that derive from developing relationships with key stakeholders: customers, employees, suppliers and communities where businesses operate. Stakeholder management may be complementary to shareholder value creation and may indeed provide a basis for competitive advantage as important resources and capabilities may be created that differentiate a firm from competitors. On the other hand, participating in social issues may be seen at best as a transactional investment easily copied by competitors. These are problems faced by managers when called upon to serve an expanded role in society. If an activity is directly tied to stakeholders, then investments may benefit not only stakeholders but also result in increased shareholder wealth.
Smith, Adam (1776), An Inquiry into the Nature and Causes of the Wealth of Nations, 1 (1 ed.), London: W. Strahan, retrieved 2012-12-07, volume 2.
Carroll, A. B. (1979). A three-dimensional conceptual model of corporate social performance. Academy of Management Review, 4, 497-505.
Davis, J.H., Schoorman, F.D. and Donaldson, L. (1997), Toward a Stewardship Theory of Management. Academy of Management Review, 22, 1, 20-47.
Freeman, R. Edward (1984). Strategic Management: A stakeholder approach. Boston: Pitman. ISBN 0-273-01913-9.
Freeman, R.E (2004). "A Stakeholder Theory of Modern Corporations", Ethical Theory and Business, 7th edn.
Friedman, Milton (1970). "The social responsibility of business is to increase its profits," New York Times Magazine, September 13, 1970, pp. 122-126.
Friedman, A.L. and Miles, S. (2006). "Stakeholders: Theory and Practice", Oxford University Press. .
Jensen, M. (2002). 'Value maximization, stakeholder theory, and the corporate objective function', Business Ethics Quarterly, 12 (2): 235-247.
Ghoshal, S. (2005), "Bad management theories are destroying good management practices," Academy of Learning & Education, 4 pp. 75-91.
Article name: A Society Has Grown Rapidly And Immensely Management essay, research paper, dissertation