Although Directors may consider the interests of broad group of stakeholders, their primary legal accountability is to the shareholders. Discuss. Introduction Business organizations are social institutions in that they cannot exist except in relate to the society within which they operate (Bucholz and Rosenthal, 1997). Steinberg (2010) indicts that a CEO running the company should be overseen by himself or herself as chairman.
At board meetings, a joint chairman or CEO usually has the ability to determine what the agenda will look like, and the direction of discussion in the boardroom.
Crowther & Capaldi (2008) states that corporations are accountable to their stakeholders are called environmental accounting. The objectives is to incorporate the effect of the activities of the firm upon externalities and to view the firm as a network which extends beyond to include not just the business environment which it operates but also the whole society.
The ethical justifications for the competing theories of business in society which is the most common distinction made is between shareholder theories, the stakeholder theories and also the social contract theory.
Body According to Cooper (2004) the managers of a business have fiduciary duty to the shareholders of that business, which require them to have an honest and open relationship with the shareholders and does not gain illegitimately from their office, which so called stakeholders paradox. Shareholders invest in shares in order to maximize their own returns and then managers are obliged to target this end.
However the restrictive definition of shareholder value has often been associated with short-termism and a neglect of wider corporate responsibilities in the interests of immediate profit maximisation (Clarke 2007) According to Friedman (1970) in a free society, there is one and only responsibility of business, that is 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 description and fraud.
Though there were many previous interpreters viewed Friedman’s stance on business ethics as a merely self-interested position that saw business ethics as antithetical to profitability. Tsukamoto (2006) states that Friedman’s reference to rules of ethical custom does not invoke some idealistic agenda for corporate social responsibility, for instance, truly altruistic philanthropy. Rather, Friedman’s reference to ethical custom is likely to relate to not yet codified ethical conduct and grey areas of self-interested behaviour. In reality, things have never been that simple.
Companies have always had to integrate the interests of stakeholders other than their shareholders into their decision-making processes. Marchica (2004) states that shareholder capitalism is when management of the firm became separated from the ownership of the firm. And in order to be successful, the top managers of the business had to simultaneously satisfy the owners, employees and their unions, suppliers and customers. But Donaldson ; Werhane (2008) states that shareholder capitalism simply does not describe how business operates.
An example is Wal-Mart. It is stands for “everyday low price”. The point is that if an entrepreneur or an executive can find a purpose that speaks to the hearts and minds of key stakeholders, it is more likely that there will be sustained success. However, the managerial view of business with the shareholders at the center is inherently resistant to change. It puts shareholder’s interests over and above the interest of customers, suppliers, employees, and others, as if these interests must conflict with each other.
It understands a business as an essentially hierarchical organization fastened together with authority to act in the shareholders’ interests. (Donaldson ; Werhane 2008) also discussed that the doctrine of “privity of contract,” companies must take the interest of customers into account, by law. For instances, minimum wages and the effects of business development on the lives of local community members, the executives and their companies must take account of them. The law has evolved over the years to give de facto standing to the claims of groups other than shareholders.
It has in effect, required the claims of customers, suppliers, local communities, and employees be taken into consideration. (Donaldson ; Werhane, 2008) Crowther ; Capaldi (2008) indict that a stakeholder is that this is any person, who has an interest in the activity of an organization. So owners, investors, employees, customers, suppliers, the citizens living around the location of the organization’s operations and the government are all stakeholders. Stakeholder has invested something in the organization and is therefore subject to some risk from that organization’s activities.
Stakeholder theory is based upon the notion of the social contract between an organization and society and is premised the notion that if organization affects any stakeholder then it has a concomitant responsibility towards the stakeholders (Crowther ; Capaldi 2008). This focus on values, both economic and moral, pushes managers to be explicit about their goals and how they want to do business, and especially about what kinds of relationships they want and need to create with their stakeholders in order to manage their organization.
For example, in Financial services, the large banks have needed to be reminded there is more to their business than reducing costs by closing branches and cutting staff. A strategy that has won business as well as hearts and minds is to integrate with the community in the development of appropriate and relevant services . Freeman (1984) defined that stakeholders is any group or individual who can affect or is affected by the achievement of the organization’s objectives. He considered the stakeholder concept more as a framework than a theory.
The legal framework forces companies to assume a certain responsibility for stakeholders, such as employees, suppliers and business partners, customers and governments. Ignoring the concerns of stakeholders might trigger serious financial or reputational disadvantages and may violate existing normative standards, such as those outlined in the UN Declaration of Human Rights. Consequently, companies cannot afford to disregard their stakeholders, for all kinds of economic, legal and ethical reasons. (Freeman 2008)
So, Instead of concentrating on shareholders alone, companies have to live up to the challenge of managing all these different and often contradictory interests. Freeman defines stakeholder theory as redistribute benefits to stakeholders and redistributes important decision-making power to stakeholders (Stieb 2008) Freeman also states stakeholders as something more extensive, complex, and nuanced and managing stakeholders effectively was essential to the very survival and prosperity of the enterprise (2008).
In contrast with freeman, an important consequence of this is that shareholders are no longer regarded as the most constituents and shareholder value is not the sole criterion for assessing the company’s performance. The stakeholder model has become the dominant framework for seeing companies as integrated in, rather than separated from, the rest of society. ( Blowfield ; Murray 2008)
Social Contract is where a contract is made between body citizens for the organization of the society and as a basis for legal and political power within that society. It attempts to make transparent the workings of an organization; such that where an organization is not benefiting society some corrective action can be done. (Cooper 2004) Conclusion I discuss agree that directors may consider the interest of a board group of stakeholders, but their primary legal accountability is to the company’s shareholders.
Corporate responsibility is really about ensuring that the company can grow on a sustainable basis, while ensuring fairness to all stakeholders. Clarke (2007) states that the wider commitments to building engaged and inclusive relationships with employees, economic partners, the community and the environment become a means of achieving enlightened shareholder value through access to a lower cost of capital, enhanced reputation, minimised risks and new business opportunities.
Shareholder theories have been both ethical and legal in nature. Overriding justification that follows a shareholder approach will benefit society as a whole, but it has failure to recognize how certain actions affect others in society whereas for stakeholders’ theory, it has been argue to be not a theory but more like a framework. Jones (1995) claimed that it provides an integrate theme for the corporate social responsibility field.
Therefore, the competing shareholder and stakeholder theory are actually conflicting how it is achieved. As for social contract, it implies some form of altruistic behavior which is the converse of selfishness. Recognition of this closely intertwined the relationship of mutual independency between the society at large, which reflected in the accounting of originations, can help bring about a closer, and possibly more harmonious, relationship between the organization and society.
Given that the managers and workers of an organization are also stakeholders in that society in other capacities, such as consumers, citizens and inhabitants, this reinforced the mutual independency. (Crowther ; Capaldi 2008) The effective integration of corporate social and environmental responsibilities could potentially release greater value for both shareholders and wider stakeholders and the first steps in accepting a deeper responsibility is in adopting a more positive orientation to stakeholders and the wider community, engaging with and investing in the community.
Blowfield, M and Murray, A 2008, “Corparate responsibility: a Critical Introduction”, Oxford University Press, New York Clarke, T 2007, The evolution of director duties: bridging the divide between corporate governance and corporate social responsibility, Journal of General Management, vol. 32, no. 3, pp 89-104 Cooper, S 2004, “Corpoatre Social Perforance: A stakeholder Approach”, Ashgate Publishing Limited, London Cosans, C 2009, Does Milton Friedman Support a Vigorous Business Ethics? , vol. 87, no. 1, pp391-394
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