Adam Smith’s “invisible hand” tend to maximize utility because it will result in the most favorable happiness/unhappiness ratio. On the hand) Advocates of stakeholder theory argue that all stakeholders (shareholders, employees, customers, suppliers, society etc) should be taken into considerations erectly in the utilitarian calculation and that this would be a more ethically defensible approach. ” Choose one side of this argument and use a utilitarian framework to argue in favor, using the framework to show the weakness in the opposite view Introduction Utilitarianism is a Justification for free-market capitalism.
It is a moral perspective that aims to achieve the greatest social benefit net of social cost or, more express informally as “one that maximizes utility’ Both shareholder and stakeholders are theories of Corporate Social Responsibility (CARS) and deciding the role of a firm. It can also be used as guidance for business ethics, because employees of a corporation should make decisions according to following theory “an action is morally right if the consequences of that action are more favorable than unfavorable” theory. Unfortunately, the theories are very much at odds.
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Before choosing any side of argument, it is important for us to provide an outline of the theory, as we understand it. The origins ideas of shareholder theory were started by Adam Smith’s (1776) from the book “The Wealth of Nations” more than 200 years old. In brief, it surrounded the dead that the firm’s main purpose of is to generate profit and thus increase shareholder wealth. Freeman (1994) defined the term “stakeholder” as “any cluster or person that can influence or be influenced by the objectives set by the organization’s” In general the concept is about what the organization should be and how it should be conceptualized.
Stakeholders can be employees, suppliers, customers, local communities, MONGO and many other more. In this essay I argue in favor of stakeholder theory explaining how positive relationship can create competitive advantage in corporations. Following that, I explain the limitation of the opposite view. Finally, I draw some conclusions. Strength of Stakeholder Theory Engaging different stakeholders’ of the corporation require establishing good lines of communication and improving relationship with them.
Once this relationship had been established, stakeholders can have their say and the firm can listen and respond. Roger Martin who is the head of University of Torso’s Rattan School of Management calls on organizations which focus on maximizing shareholder value (often referred to as maximizing shareholder wealth) is “tragically flawed premise”, ND argues that “it is time to abandon it. ” Instead of concentrating on shareholder value, it should aim to maximize customer satisfaction. ” This was supported by Paul Pullman who told the Finance Times when he became a boss of Milliner.
In his speech, he mentioned that: “He does not work for the shareholder and to be honest, he work for the consumer and the customer… He is not driven and will not drive the business model by driving shareholder value. ” – Paul Pullman All managers are representative of all stakeholders and have two duties to carry out: ) To ensure that the stakeholders rights in the firm are not violated; ii) To balance the legitimate interests of the corporation’s investor, individuals and constituencies that contribute to the company’s wealth creation and other activities through voluntarily or involuntarily.
The objective of the corporation is to maintain profit minimization and always remain a going concern. Researches had been done to analysis and understand about whether and how a good stakeholder relationship correlation can ensure a corporation’s success and it is proven it help in certain ways.
Positive Stakeholder Relationships Create Competitive Advantage in Corporations “It doesn’t matter how good the market research is and how bright the management team is, and it is the quality of relationships among all people in the organization that has enormous bearing on the quality of decisions and their execution. ” – Jeff Mooney, Chairman & CEO, A&W Food Services From the above citations, we can interpret that all stakeholder relationships between the firm must be taken into the utilitarian calculation in order to gain market share between the competitors in the market.
It is manifested in six ways: Organization and the shareholder’s relationship With the popularity of social media, it makes it possible for many big corporations around the world to be boycott by advocacy groups through public awareness and the corporation’s image and revenue have suffered damage as a result, in most cases the markets that is affected is only a small part of their overall customers. For example: “Don’t Buy It” campaign was launched to boycott Mediumistic because they plan to extract minerals from the sea from one of the world heritage reserve which whales and endangered species came to breed.
In additional to corporation’s image and revenue, it might create a risk to the shareholder as there is a possible of more long term damage impact for shareholder value of controversies. Some of items are difficult for companies to discuss and quantify and may include: 1) Loss of license and unable to operate in certain part of the world (Egg: Monsanto Withdrawing Applications to Grow New GUM Crops in Europe) 2) Eliminate of supplier or employers of choices to work with or in the corporation. Egg Shell’s experience after twin shocks incident) ) Loss of the value of the brand This will results in extra direct cost the firm need to re-invest to gain back the reputation. Organization and employee’s relationship In today’s highly competitive markets, innovation plays a key role for firm’s to survive in the market and to be success. Research has proven that highly innovative corporation is through having good relationships with the top management and staff of the company and among themselves (Cook and Wills, 1999).
Organization and supplier’s relationship Similarly, good relationships with business partners such as suppliers are basic acquirement to innovation too as well as to ensure effectiveness and efficiency. Additional to that, this kind of relationships require more flexibility and are dependent on mutual trust, sharing of knowledge and communication between the supplier and corporation. (Matthews et al, 1998) Organization and local community’s relationship Due to the increase power of the media and technology in the world, companies also recognize that a relationship with the local community is also important.
This is especially true where everything can be known almost instantaneously in our networked world. This was illustrated in the case of Shell and Merck in the US. Shell I-J tows a used oil rig into the North Atlantic Ocean to sink it after four years of study and approval. Non Government Organization (Greenback gallivanted Community) opposes to the sinking, and ordered the company to stop. As a result, Shell suffered damage such as finance lost and threats against the service stations.
Organization and customer’s relationship With the increase demand in the service sector, the relationships with its customers are important. Brand loyalty had also been recognized as valuable intangible assets such as loyalty and customer happiness has facilitated financial value of brands. Organization and other stakeholders relationship When firm have positive relationships with other’s stakeholder, it provides the firm the opportunities to develop new markets between different stakeholders and industries.
For example: BP successfully bid for oil right in Alaska is due to positive reputations for community involvement. Corporate Social Responsibility and Finance Performance Studies had been conducted using CARS databases to establish relation between measurements of stakeholder relationships and the corporation’s finance reforming. (Collins and Operas 1995 and Haddock and Graces 1997) Firms that had strong finance are able to invest in corporate social responsibility, such as establishing good employee relations, showing concern to the environment, or community relations with the local people the corporation invested in.
In return, it can help the company to promote respect in the marketplace. Additional advantage for corporation is that it can help the firm to gain a possible listing in the stock exchange. As such, this may enhance the company’s stock price making it more profitable and shareholders happier. Weakness of Shareholder Theory In general, shareholder theory encompasses the idea that the main purpose of business firm’s main purpose of is to generate profit and thus increase shareholder wealth.
Adam Smith summaries in his book what is invisible hand: “Every individual necessarily labors to render the annual revenue of the society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for society that it was no part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.
I have never known much good done by those who affected to trade for the public good (Adam Smith – 1776). ” Unfortunately, this theory is often mistaken by the managers in several ways. Firstly, manager often misunderstood the statement that they can do anything to make a profit; even the theory urges manager to do so through legal means. The maximizing of shareholder (often referred to as maximizing shareholder wealth) was often the topic of many professions in economic and finance communities until 2002 where a lot of corporate executive was charged.
We must remember that shareholder get their capital returns through: I) profit of the corporation paid out in form of dividends. The original idea of shareholder theory and Minot Friedman citied in his essay: “The Social Responsibility of Business Is to Increase Profits. – Minot Friedman (1970)” We can interpret that the theory talks about dividends is increase through profitability rather than increase share price in a stock market. Many critics the hooray had drove many executives in the corporation to behave in such a way and it must be Jettisoned and bankrupt.
Secondly, Argument had been voiced against the theory is that a focus on shareholder wealth encourages businesses to focus on the corporation’s short-term profit minimization (Smith, AAA). In this view, you will be putting a risk to the relationships that will determine the success of the corporation in a long run. ” Thirdly, even the shareholder-friendly USA does not have a legal requirement for managers to act according to a shareholder’s advantage and in fact there is a law for erectors to consider also other interest too.
Although firm that are willing to have an openly pledging to their shareholders seem to do better in comparison with others, this doesn’t mean maximizing the shareholder’s value is the business society’s most desirable corporate target or that markets for good and services, wealth and labor which stress the managers to seek on that specific goal. Fourthly, markets are imperfect which mean that profit minimization is not clearly defined and there is possible of conflicts of interest or in many cases unresolved.
Under this assumption financial researches have shown that stakeholder-oriented firms are usually more successful than shareholder-oriented firms, because market forces are forcing it to do so. Lastly: Some claim that the theory does not encourage shareholder to treat their employees and other stakeholders Justly. This argument has a simple counterargument. Imaging treating a company’s stakeholders badly will result the business to fail as they may not want to have any business dealing with company. Corporation that treats its employees poorly is probably going to suffer by having an uncommitted and weak workforce.
As a result, such a company’s profits would suffer too. Conclusions The purpose of this essay is not to provide a correct argument to the fundamental question, which theory is better on deciding how a corporation should be in today’s current world, neither to determine the beneficial on the two theories. Although the shareholder theory seems an idealistic for implementation, but short of good reasons and argument for convincing the stakeholders, whereas the stakeholder theory try to avoid some major weakness in the argumentation, but has to come up with an idealistic method for implementation.