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The main responsibility of business is to increase the profit for its shareholders – discuss Essay

The main responsibility of business is to increase the profit for its shareholders – discuss ’. First I am going to explain the role of shareholders and how they affect the decision making of businesses. I will then discuss other stakeholders and the responsibilities that the business ‘owes’ to them. I also plan to look at examples of real life businesses that have made decisions based on the different stakeholder’s needs and wants and compare this in terms of ethical theories. Shareholders are just one form of stakeholders that have a stake in the business.

They invest in businesses in order to see a return on their money through profits. It could be argued that investing large amount s of money into a business is risky and so the largest incentive is financial. A business is usually run by a group of managers/directors on behalf of the shareholders. Shareholders attend annual general meetings in order to use their powers and exert control over the Directors.

However, it is important to note that shareholders can also be directors. For example all John Lewis employees own shares of the company, so they have more of an incentive for the business to be successful in order to keep their jobs and investments safe. Shareholders also have certain duties to fulfil; this is laid out in the Companies Act 2006. Directors have responsibilities to their employers, the shareholders, ensuring the business is successful financially. However, Freidman (1970) also states that Directors need to conform ‘to the basic rules of society, both those embodied in law and those embodied in ethical custom’.

This suggests conflicts of interest as some decisions made by directors may benefit shareholders in financial gains, but other stakeholders such as the environment or customers may suffer as a result. An example of this is the case study by Fisher and Lovell (2005) concerning a large pharmaceutical company. In order to achieve shareholders aims to gain high profits, the price of life saving drugs were too expensive for the people that needed them and thousands of people continued to die. This posed great ethical issues and bad publicity for the company who claimed they were ‘subject to the disciplines of the financial markets’ and that they needed to be ‘compensated for the opportunity cost’ of supplying these markets, hence the high prices and high profits.

This may have had a negative effect on the customers, but it satisfied the shareholder needs and contributed positively to the economy. The question remains as to whether the shareholders needs should be the main aims of the directors or whether it should be the moral right to those without the money for expensive drugs to be able to live. On the other hand, it could be argued that the corporation is like any other, where should the line be drawn? Should food companies reduce the price of their food to the point where the starving can afford to buy it?

This would create complex and expensive issues for different industries. Since this, the Companies Act 2006 has set out guidelines for directors to ‘have regards to their wider corporate social responsibility, with specific mention of the surrounding community and environment.’ Although this is clearly a step forward as the ethical issues are being recognised, this is still very vague and is still open to abuse from international corporations.

In 2006 84% of employers in the Mckinsey & Co survey (Mckinsey 2006) said Large companies should ‘generate high returns to investors but balance [that] with contributions to the broader public good.’ Employees are another stakeholder of the business who may be mistreated in order to increase shareholders wealth. A recent example of this is the ‘shocking human cost of producing the must-have Apple iPhones and iPads’ Chamberlain (2011) where long working hours were introduced in order to meet the growing demand of Apples success.

A major thinker concerned with this subject was Karl Marx who saw profit as the result of capitalist exploitation of workers. This shows how ethical responsibilities go beyond making a profit. When a business makes a conscious effort to not only satisfy shareholder needs, but considers other stakeholders, it is known as the Stakeholder theory (Freeman).

This theory is said to be most effective when working to the point that all stakeholders are heading in the same ‘direction’. How often is this theory used in reality? In conclusion the main responsibility of a business is to increase shareholders profits. In most cases this is the reason why businesses were set up in the first place, a money maker. Should businesses, with a separate legal identity, have any social responsibilities? A community and environment is vital to a business, the people it employs and the customers it serves.

Therefore minimising conflicts of interest would be ideal. However the only way of doing this is to standardise ethical practises, bringing in more legislation and possibly costing businesses a lot of money in un-doing cut costs.

Chamberlain ‘Apple’s Chinese workers treated ‘inhumanely, like machines’ The Observer, Saturday 30 April 2011 Companies Act 2006 http://www.rtcoopers.com/companiesact2006.php Edward Freeman “What is Stakeholder Theory?” Business Roundtable Institute for Corporate Ethics, available at www.youtube.com/watch?v=bIRUaLcvPe8. Fisher and Lovell 2005 sited in ‘Business Ethics and Values, Harlow: FT/ Prentice Hall (2nd Edition) pp 315-6 Mckinsey & Co “The McKinsey Global Survey of Business Executives: Business and Society,” January 2006, Milton Friedman, “The Social Responsibility of Business,” The New York Times Magazine, Sept. 13, 1970.


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