Instrumental stakeholder theory suggests that those businesses that are managed in the name of all stakeholders tend to maximise profits for shareholders. Discuss.
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A stakeholder in an organization is any group or individual who can affect or is affected by, the achievement of the organization objectives.
In any given organization today, it consists of the following stakeholders,
The shareholders of any given company are of the view that corporations should be managed on the sole basis of increasing the personal wealth of shareholders, where as the stakeholders corporation are of the view that corporations should be managed in the interest of all its stakeholders.
Stakeholder theory of the firm:
The stakeholder theory of the firm is probably the most popular and influential theory to be emerged from business ethics (Stark 1994).
Whilst the term ‘stakeholder’ was first documented in the 1960s, the theoretical approach was in the main developed and brought forward by Edward Freeman (1984) in the 1980s. The stakeholder approach starts by looking at various groups to which the organization has an obligation to. The main claim to be mentioned here is that corporations are not always managed by the interests of their shareholders alone but there is a whole range of groups, or stakeholders, that have a legitimate interest in the corporation as well.
A stakeholder of a corporation is an individual or group which either;
Is harmed by, or benefits from, the corporation,
Whose rights can be violated, or have to be respected, by the corporation (Evan & Freeman 1993).
Stakeholder principle: businesses should consider all stakeholders’ interests that are affected by a business practice.
“For stakeholders it is a matter or moral obligation, individuals and groups that contribute to the organization should be permitted some say in how the organization is managed”.
This definition clearly demonstrates that the range of stakeholders differs from company to company, and even for the same company in various scenarios. According to Milton Friedman, businesses should only be run in the interest of their owners. This shows a relationship with the conventional stockholder model of the organization, where managers only obligation is to shareholders.
As research shows us, in developed nations today, managers have a special association with the company shareholders, so therefore the stakeholder theory has to provide a persuasive reason why other groups also have a lawful claim over the organization?
Should managers prioritize stakeholders?
It is because of the above interest conflicts, that Donald & Preston (1995) came out with a stakeholder theory which could be explained in the three different steps,
Normative Stakeholder Theory:
According to this theory, it is right and correct that corporations be managed in the interest of all its stakeholders.
This theory suggests that it is ethically / morally better to manage in the interest of all stakeholders and not just shareholders.
Freeman & Philips (2002) strongly suggested that it is of vital importance for the management of the organization to look after its stakeholders.
Descriptive Stakeholder Theory:
According to this theory, corporation management deeds are funnelled by the interests of employees, suppliers etc. Accordingly the stakeholder theory more accurately describes the actions of corporate management then the shareholder theory.
Instrumental Stakeholder Theory:
This theory suggests that, to maximise the shareholder value over an uncertain time frame, managers ought to pay attention to key stakeholder’s relationship.
(Freeman & Philips 2002: 337)
The sense that we get from this stakeholder theory that unless we keep others happy, we wont be able to get the maximum out of them, if we want to get the maximum out of our employees of suppliers we need to look after them. Other wise they will go else where their demands are met and they get the sense of respect.
Corporations are regarded as being detach from those who work in them, administer them, and invest in them.
In legal terms today, shareholders theoretically own the corporation. The law in the Anglo American countries strengthens the elementary importance of shareholders. And it’s these shareholders, who through voting rights exercise their powers over the corporation and make the management to stir in their way.
The idea that an individual or a specific group of people own a corporation is problematic? And has been widely argued over the period of time. On the other side we can also say that it’s these shareholders that own the corporation, yet again shareholders only own shares (or a stock) in the organization, so this is again problematic? And what we always forget is that, it’s also because of these stakeholders that corporations exists, if shareholders feel they are of utmost importance, stakeholders are amongst the same list.
Should A Corporation Have Social Responsibilities?
In 1970, Nobel Prize winning economist, Milton Friedman published an article that has since become a classic among who question the alleged social role of corporations. One of his arguments was that managers should not, and cannot decide what’s in the society’s best interest. This is the government job rather then the corporation job. He further argued that the corporate managers are neither trained to set and achieve social goals nor they are elected by the people to do so.
According to Greening & Turban 2000, employees might be attracted to work, and even be more committed to, corporations apparent as being socially responsible.
In 2001,Oil giant Exxon Mobil experienced a consumer boycott in many EU countries, in response to the corporations refusal to sign up to the Kyoto global warming protocol.
In the US & EU countries, no one is allowed to buy cigarettes under the age of 16. In this issue, even the companies act responsibly and clearly mention on the packs that smoking is injurious to health.
Today, corporation heavily relies on the contribution of a much wider set of electorate or stakeholders in modern civilization (i.e. consumers, suppliers, etc). And hence have a duty to take in to account the interests and goals of these stakeholders, as well as those of shareholders.
Corporate accountability refers to whether a corporation is answerable in some way for the consequences of its actions.
Friedman argued that corporations should only be involved in commercial activities and thus should only be answerable to their shareholders.
In the last decade, a lot of corporate have been bought to scrutiny, e.g. McDonald’s have been questioned about their social responsibility, and have faced huge criticism from people across the globe for its food, which has been blamed for obesity in children / adults. Not only this, McDonald’s packaging was also causing harm to the torrential rain forests in Latin America along with its employees getting harshly treated and being paid below national average wages.
Another good example of corporation accountability would be of Enron, the US energy giant. In 2001, Enron which once used to be one of the eight top companies in the US filed for chapter 11 protection against bankruptcy and later collapsed, resulting in loss of billions of dollars of shareholders wealth, along with the loss of more then 20,000 employee jobs. The company used to hide its debt on its financial documents and used to mention a rise in profits (where as actually the company was making a loss) on its annual report. This incident caught the eye of world media, and governments across the globe made / amended laws to prevent future catastrophes like that of Enron.
In 2002, it was revealed that Jean – Pierre Garnier, the French CEO of the British pharmaceutical giant Glaxo Smith Kline (GSK), was seeking a massive increase to his salary of ?7 m, despite the company’s poor performance and falling share price. Then why such a demand is planned by shareholders?
Shareholders want the management to act in their best interest, and want to get the ceiling out of their venture in the company, where as managers on the other side have certain interests as well, high salaries. The shareholders of GSK might consider a pay rise for the CEO since they rely on management skills for a good return. Apart from the CEO in GSK, no one else will get a pay rise which is un-ethical, as it’s the lower management staffs that performs all the tasks. The company’s employee who form the back bone of any given organization are not taken in to account when such decisions are made, this brings disrepute amongst various stakeholders of the business.
What Do We Mean By Ethics?
Business ethics in the study of business situation, activities and decisions where issues of right and wrong are addressed
(Crane and Matten 2004:8)
When business talk about ethics, it usually means three things,
They are not breaking the law,
Avoid such actions which could result in lawsuits,
Avoid actions that are bad for the company’s image.
People have argued in the past that there is figurative relation between ethics and businesses in which ethics naturally emerge from profit oriented businesses.
To collude, it principally means to enter a secret conformity. In the world of business, collusion normally occurs when competitors unite to fix the price of a certain product at certain level. When such a scenario takes place, it is also known as alliance.
Again when such an alliance is formed, the top executives of the company only worry about their financial packages, shareholders benefits and are least concerned about the voice of various stakeholders in this regard.
Government and Regulations:
In today’s world, government consists of a variety of an establishment, at various levels and contribute to the same influence to issue regulation.
These regulations / laws serve as codifications in to overt rules on what the society regards as right and wrong. Regulations could be defined as rules, which are issued by government bodies to constrain, encourage, or enable particular business behaviours.
Corporations can equally benefit and suffer from government legislation and regulations. And thus would try their best to influence government activities in such regards.
Governments are also stakeholders in any given company, as any company’s advancement is good news for the government as in return the government will get more tax from organizations, which in return it could spend on public welfare. It’s because of this, that governments across the globe introduce legislation and try their very best to make sure every one follows them in every possible manner. Governments argue these legislations / laws are there for company’s own benefit. Through rules and regulations governments keep a close eye on corporate activities, and thus have an impact on corporate activities. As it’s these corporate, organization that provides tax to the government. No government can live without taxation.
Apart from the government, private bodies such as the Financial Services Authority exist for the benefit of the interests of stakeholders. These independent bodies also keep a close eye on corporate movements.
Ethics is concerned with the study of morality and the application of reason to clarify specific rules and principles that determine right and wrong for any given situation. These rules and principles are called as ethical theories.
“An action is morally right if it results in the greatest amount of good for the greatest amount o people affected by the action”. (Crane & Matten 2004:84)
In other words, this principle is also known as “Greatest Happiness Principle”. By mentioning of happiness in utilitarianism, it means the presence of pleasure and absence of pain. To give a clearer view of the moral standard set up by the theory, more information is required as if what things provide pleasure and pain etc?
On the other side this supplementary theory does not base on the morality of life on which this theory is based upon, that pleasure and absence of pain are the only things desirable. (John Stuart Mill).
Utilitarianism has been of quit some importance as it puts the hub of the ethical verdict erratic, which is very frequently used in economics as a factor that measures the value of performance. Utilitarianism weighs up the good and bad points of a given approach, and then decides which approach satisfies the greatest good for the greatest number.
Utilitarianism is further divided in to two parts,
This type of utilitarianism evidently states that an action is right if it produces the supreme equilibrium of happiness over pain.
This type of utilitarianism states that and action is right if and only if it conforms to a set of rules, the general acceptance of which would produce the greatest balance of pleasure over pain for every one.
Apart from the benefits of utilitarianism, there are problems affiliated with it such as;
What does the greatest good signify?
Trouble of Quantification:
How does one work out the utmost good? One they know what it is?
Division of Utility:
How can one be sure that the deeds they turn out were the one they were eager for?
The employees of any company should be treated with respect as they are also the stakeholders of that company. It’s these stakeholders that the company performs over the span of time. They should be given respect and treated with dignity; individual rights should be protected according to Kantian theory. They should not only be treated as means to the employers of the company.
German Philosopher Immanuel Kant (1724 – 1804) was of the view that ethics and decisions about right and wrong were not dependent on a particular situation. Kant believed that ethics were a question of certain non-figurative norms and unchangeable principles that human should apply to certain problems. Kant believed that human beings did not need some sort of church or God or some other superior authority to make these principled decisions. Kant believed that humans should be allowed to decide these principles themselves.
To further help humanity, Kant developed a theoretical skeleton, through which these principles could be derived from; this table was known as “Categorical Imperative”. This categorical imperative of Kent, consisted of three main points,
Act only according to that maxim by which you can at the same time will that should become a universal law,
Act so that you can treat humanity, whether is your own person or in that of another, always as an end and never as a means only,
Act only so that the will through its maxims could regards itself as the same time as universal law giving,
Kant believed that the above three maxims could be used for every possible action, and that the actions will be regarded as morally right if it survives all three tests.
Kant was of the view that murder is immoral, because if people were allowed to murder each other there will be no population on the planet, lying is immoral, because if every one was allowed to lie, ,the concept of truth would be impossible.
A major draw back for Kant was that it had paid no attention on consequences.
Today, in the UK & EU on cigarette packaging it is clearly mentioned that it’s harmful to health and that it has its consequences. But still individuals smoke it. Though the company acts socially responsible and makes its consumers aware of its side affects but customers still buy them, making their own choice and individual decision.
In the end we could conclude, that for the progression of any organization it is of vital importance that the firm should not only give importance to its shareholders, but also the various other stakeholders should also get priority, like employees, suppliers, customers etc. As if the corporation takes care of its employees, suppliers etc, they will in return put in more effort towards the organization which would result is the organization being a global success. The shareholder & stakeholder relation is a two way string; no organization can succeed with out any of these two bodies.