Summary:
The Stockholder Theory maintains that managers should act merely as agents to the stockholder and only serve their interests-the maximization of profits. Milton Friedman's argument being, they are the owners of the business, and hence they should be entitled to all profits.
The Evolution of the Corporation
The Evolution of the Corporation
In a capitalist society where the growth and power of corporations are ever evolving it is critical to determine the effects and consequences this evolution brings upon the business world. The Stockholder Theory maintains that managers should act merely as agents to the stockholder and only serve their interests-the maximization of profits (45). Milton Friedman's argument being, they are the owners of the business, and hence they should be entitled to all profits (45). Although this simple profit-motive concept may achieve the desired result, and address all of the interests of the stakeholders it lacks compassion that is so prevalent, and in my opinion superior, in the following theory.
In Edward Freeman's A Stakeholder Theory of the Modern Corporation he suggests a transformation of the corporate system by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders (56). In its narrow definition stakeholders refer to customers, suppliers, management, owners, employees and the local community- those that are vital to the survival and success of the corporation. This direct approach of focusing on the interests of all those that are vital to its survival embraces all of the elements that have evolved in our society as a result of the absence of direct concern or lack of morality for the stakeholders in the Stockholders Theory.
Over the years, the sole pursuit of managerial capitalism, the basis of the Stockholder Theory, in its unconstrained manner through deception and manipulation has resulted in the promulgation of laws to protect the interests of stakeholders which Edward Freeman so willingly embraces. Examples of this include the Equal Pay Act of 1963 and the Civil Rights Act of 1964 to constrain management from discrimination hiring practices, and the Clean Air Act to protect the interests and environment of local communities (57). If law is the public's agency for translating morality into explicit social guidelines and practices it clearly illustrates the lack of morality imposed upon society as a result of the Stockholders Theory.
According to John Stuart Mill most persons, and perhaps all, have a basic moral sensitivity to the needs of their fellow human beings (17). This was so prominently displayed when Southeast Asia was devastated by the recent Tsunami disaster that touched the hearts of both the public and corporate society. Hundreds of millions of dollars were donated by the corporate sector to provide those misfortunate people with aid. No doubt some of those corporations were displaying true social responsibility while others were merely acting the part in order to simulate this appearance. This, in my opinion, is the underlying difference in the two theories I am presently critiquing. Clearly Freeman's Stakeholder theory is superior in this regard. With such massive profits accumulated by large corporations those that decide to bear social responsibility can significantly improve society as a whole.
Immanual Kant proposes that persons should be treated as ends and never purely as means to the ends of others (22). Kantian ethics nicely distinguishes the difference between Friedman's Stockholder theory and Freeman's Stakeholder Theory also known as "Kantian Capitalism" (55). Stockholder theory fails to respect the needs and concerns of those stakeholders that are not in an ownership position. When corporations neglect the needs of those that maintain its continuous existence the corporation can be easily jeopardized. The example followed illustrates how the Stakeholder theory is far superior and effective than the Stockholder theory.
Southwest Airlines suffered severe economic hardship following the September 11, 2001 terrorist attacks. When one would apply the stockholder theory it is assumed that cutbacks and lay offs would immediately follow. However, even facing the possibility of bankruptcy, Southwest Airlines was the only airline that did not lay off employees. The unusual respect and importance employees felt they were treated with enabled the corporation to establish a strong loyalty to the airline (23). To maintain the success of the airline many employees offered to work overtime as well as without pay to save the company money. Southwest Airlines did not see the relationship as an economic transaction but as a relationship of persons (23). Due to the special consideration of all stakeholders Southwest can still take pride as being a prominent airline. However, it is easy for one to speculate that if it weren't for their consideration and relationship with their employees they would not be around today.
When one looks at the history of the capitalist system it is clearly evident that corporate society has evolved from a very singular profit focused approach where absolutely nothing stood in the way of making the almighty dollar. Conditions were once so poor that even death was not regarded as a deterrent to making a profit. Now, as Freeman so accurately describes, the changing dynamics of the evolved corporations in his Stakeholder Theory, we can truly see that they have become social institutions bearing social responsibility. This is the corporate world that I want to see and contribute to. Where capitalism goes from here is anyone's question. Will it continue on its social path? Could capitalism be a precursor to a true socialist society for if we continually long to consider the welfare of others will we ever get to the point where the welfare of others takes precedent over ourselves? Some of us would like to think so but this is a topic for another paper.
Works Cited
Beachamp, Tom L., and Norman Bowie (eds). Ethical Theory and Business. 7th edition.Upper Saddle River, New Jersey: Pearson Prentice Hall, 2004.
Freeman, Edward R. and William E. Evans, A Stakeholder Theory of the ModernCorporation: Kantian Capitalism. Business Ethics Quarterly 3/4. (1988 and1993): 55-65. In Beachamp, Tom L., and Norman Bowie (eds). Ethical Theory and Business. 7th edition.Upper Saddle River, New Jersey: Pearson Prentice Hall,
Friedman, Milton. The Social Responsibility of Business Is to Increase Its Profits. NewYork Times Magazine, September 13, 1970: 50-55. In Beachamp, Tom L., andNorman Bowie (eds). Ethical Theory and Business. 7th edition. Upper SaddleRiver, New Jersey: Pearson Prentice Hall, 2004.
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