Week 5 –Finances Essay
Week 5 –Finances
Debate on profit maximization ethics and corporate social responsibility:
Traditionally, the duty of company’s management is to improve the financial welfare of the shareholders of the company by maximum of profits provided it is under the law. This is the canonical law and economics account (Elhauge: 2004)
Companies are therefore liable for any act(s) that causes more that usual harm under an independent law. However if the operations do not cause any undesired effect, then, it is socially acceptable that the company maximizes profits.
The management of companies is therefore required to consider the interests of other stakeholders in their daily operations.
This is as a result of the law that was enacted at the height of corporate takeovers during the 1980s. This law could however be construed to mean that the management of corporations only consider the interests of others only if doing so enhances the company’s profits.
Shareholders and management have no legal duty to maximize profit although they have a legal discretion to forego on profits in the public interest. (Elhauge: 2004) According to Manuel Costello Branco and Lucia Lima Rodriquez companies only engage in corporate social responsibility if they are set to gain from such an undertaking. (Brancho & Rodriguez: 2007)
Corporate social responsibility may include environmental protection, human resource management, health and safety at work, relation with community and with suppliers and customers. (Branco & Rodriguez: 2007) CSR boarders on ethics and management should therefore consider the impacts of their activities on the various stakeholders. It is also considered to be a competition strategy which can give a company competitive advantage. (Branco & Rodriguez: 2007)
This debate on CSR is on shareholders-stakeholders point of view where shareholders view is that management should maximize their wealth while the stakeholders view is towards all stakeholders (Friedman 1998, Jensen 2001)
The classical view of business encompasses purely economic basis and constrained profit making views. This is the shareholders view. The stakeholders view on the other hand is of socially aware business where corporations are sensitive to needs if other stakeholders (Lantos: 2001)
Companies should therefore, not ignore the interests of other stakeholders if doing so could impact negatively on the company’s intention of maximizing shareholders wealth. (Stern berg 1997, Jensen 2001) Ethics basically is what constitutes right or wrong behavior in business in terms of operations and situations happening in companies.
In the daily operations of companies many unethical actions and decisions are made. Corporate citizenship concept is propagated by the society where businesses promote goals that they view as important while at the same time solving social problems thus rejecting the idea of profit maximization and law compliance.
The results of an activity rather than the activity itself are what determine whether an action is ethical or not. Clarkson further elaborates that an actions is morally right if it generates the greatest amount of good to many people. (Utilitarian theory) (Clarkson: 1995)
It is evident therefore that the concept of ethics is controversial in the sense that there are conflicting positions as to what constitutes what is morally right or wrong as shown by Kantian ethics and Utilitarian ethics. (Hymson 2007) In business ethics, because of competition, actions of one company e.g. adoption of lower prices leads to the other companies adopting the same pricing strategy and hence business ethics tend to be uniform (Hymson 2007)
Monopolistic businesses where there is no competition can elect to apply personal ethics. But the cost of following personal ethics is borne by the employees. Hence argument gives credence to the idea that businesses only social responsibility is t maximize profits (Friedman: 1998).
Outside business ethics, CSR is usually all about making profits.
The government should take charge and ensure that companies do not undertake business practice that cause undesirable effects on the community and therefore it should pass laws and regulations that guide corporations in the business practice (Reich 2007).
The stiff competition that many corporations in the world today face makes them focus more on ways of making more profits and therefore the need of government regulations to protect the environment, consumers and even the employees.
Robert Reich further alludes to the fact that corporations cannot be moral or immoral and can only be responsible if publicly held by their shareholders. The shareholders interest is to maximize their profits and therefore companies should do public good in their quest to maximize their profits (Reich 2007)
Reasons for government regulations
An example of company that could justify the government regulations is Wal-Mart. This corporation on one hand spends money on CSR projects but on the other it is against employees union, pays low wages with minimum benefits. The company also is against living wage initiatives. Wal-Mart has also been accused of forcing employees to perform overtime duties, sex and race discrimination and a whole lot of other things. The World com and Enron scandals are other examples that call for government regulations on CSR and business ethics. The list is endless, Adelphi, Tyco, Computer associates. All these cases touch on the subject of business ethics. Business ethics violations can also lead to illegalities as exemplified by the Enron and World com cases (Hymson 2007)
Hymson, E.B (2007) Law: The force that harmonizes business ethics with profit maximization. Retrieved on 4/3/2008 from http://www.salsb.org/slj/vol-xv/14hymson.pdf
Elhauge, E. (2004) Sacrificing corporate profits in the public interest. Retrieved on 4/3/08 from http://www.law.harvard.edu/programs/olin_center/corporate_governance/papers/04.Elhauge.sacrificing-corporate-profits.pdf.
Branco, M.C and Rodriguez L. L (2007). Positioning stakeholders’ theory within the debate on corporate social responsibility (Vol 12. No. 1). Retrieved on 4/3/2008 from
Friedman. (1998), “The social responsibility of business is to increase
its profits”, in Pincus, L.B. (Ed.), Perspectives in business ethics,
Jensen, M.C. (2001) “Value Maximization, Stakeholder Theory, and
the Corporate Objective Function”, Journal of Applied Corporate
Finance, Vol.14 No.3
Sternberg. (1997) “The Defects of Stakeholder Theory”, Corporate
Governance, Vol 5 No.1.
Lantos, G.P. (2001) “The boundaries of strategic corporate social
responsibility”, Journal of Consumer Marketing, Vol.18 No.7
Clarkson, M.B.E. (1995) “A Stakeholder Framework for Analyzing
and Evaluating Corporate Social Performance”, Academy of
Management Review, Vol.20 No.1
Robert Reich, R (2007). Super capitalism. The Transformation of Business, Democracy and Everyday Life.