Shareholder Primacy or Social Responsibility?

Introduction

A casual glimpse at the role of the business establishment may be presumed to be for the purpose of profit-making. With such a presumption, it is possible for the management to undertake the same with the caution that returns from investments are realized at all cost. In such a situation, the operations of the business dwell on the movement of stock regardless of the prints or marks left on the paths. However, the operations or functions of the business activities should incorporate all forces and factors that govern that business. Just as scientist put it that matter has weight and occupies space, the same can be said of the business establishment. It has weight, which exerts some force on the surrounding and also takes up the space that could have been used for other beneficial activities. This simply implies that there is more than the businesses should give to the surroundings than the goods and services it produces. The surrounding, in this case, includes the community, the environment, the shareholders, the staff, and the general legal environment (Keay 2010, p. 400).

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Shareholder Primacy

According to Keay (2010, p. 410), the issue of shareholder primacy remains a controversial issue with some people arguing in support, whereas others disagree with the concept. For instance, the arguments of Merrick Dodd and Adolph Berle about shareholder primacy are stated by Lynn Stout in her article. Adolph argued that the sole aim of business firms is to maximise the value of shareholders. Merrick contracted the idea by stating that as an economic institution, business corporations have a role to play in society in addition to making a profit. Although the debate on shareholder primacy is still on, a common point of agreement has not been reached.

A study carried out in Brookings show that business schools stress on profit maximization and increased value of shareholders as the major aim of business corporations. Because of influence from what students are taught, they tend to think that the main objective of corporations is to maximise the value of shareholders, and it should be the guiding principle in decision making. The shareholder primacy theory affects companies, investors, and the public negatively. Emphasis on the value of shareholders is very dangerous to business organisations. This is because shareholder value is not universal. The needs and interests for shareholders differ depending on social responsibilities, diversification degree, duration of investments, and perception of business ethics. The idea of shareholder value centre on a small group of opportunistic and short-sighted shareholders whose aim is to impose extra costs against business ethics. Instead of focusing on long-term performance, managers are likely to concentrate on short-term earnings, harm employees, society members, and customers to maximize the value of shareholders. Moreover, managers are likely to discourage savings and improvement in business firms as well as luring business firms into reckless and irresponsible behaviours not acceptable in society. This will affect not only the shareholders but also members of the community, customers, and employees. The paper will argue for and against the notion that the main objective of management is to maximise the wealth of shareholders and owners (Keay (2010, p. 420).

Corporate Social Responsibility

Corporate Social Responsibility (CSR) refers to the duty of business firms to engage in long-lasting goals that have positive impacts on society. CSR requires business firms to behave in accordance with the laws of the society; contribute toward economic development and improve the living conditions of employees, families, local, and the larger society. Business firms should operate for the benefit of the whole society. CSR means operating businesses according to the rules and interests of the society, giving a positive response to the needs and expectations of the society, readiness to act beyond regulatory confrontation, balancing community and shareholders’ interests, and behaving responsibly within and outside the community (Husted & Salazar 2006, p. 77).

Dimensions of Corporate Social Responsibility

According to Beurden (2008, p. 409), business organisations have four major responsibilities to accomplish. First, the economic responsibilities, which includes things like giving investment to the owners and the stakeholders. Second, the legal responsibilities, which includes compliance and going by the expected rules. Third, are the moral/ethical responsibilities, which entail doing that which is right, fair, and just. Fourth, is the discretionary judgment responsibility? In this case, the company can decide how it wants to give back to society, and this includes philanthropic contributions and activities. The mentioned responsibilities are termed as Community Social Responsibilities (CSR). CSR is essential for the operation of the business, and there should be some frameworks within which the business should operate so as to realize its CSR. Also the sustainability of the business is pegged on ways in which its CRS are managed.

Corporate Social Responsibility (CRS) is an integral part of business activities. Different companies have different ways of embracing this concept because they have different views of its potential usefulness and applicability (Cannon 1992, p. 12). Sceptics conclude that it is a way of slowing down and diluting a company’s focus on wealth creation. Proponents of this model define it as success in business. It gives it an opportunity for it to look beyond the narrow hole of profits into benefiting the whole community at large. The business organisation is expected to fulfil some important functions to the community and the business world at large. According to the postulation by the Business Impact (2000, p. 2), there are key principles that the business should base its operation. They include treating employees fairly and equally operating ethically with the highest form of integrity possible, giving due respect to basic human rights, caring to the neighbours in their communities, and sustaining the environment for future use.

Studies have shown that the behaviour of some organisations is not socially acceptable. The issue whether the major aim of management in business is to maximise the value of shareholders is a controversial issue. Some people argue that business operations should be less concerned about issues and problems affecting the society. The issue is discussed by two schools of thought. The free market view is for the view that the guiding principle of business operations is to increase the wealth of shareholders. On the other hand, corporate social responsibilities hold that social issues should be of major concern to business firms.

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According to Wilcke (2004, p. 199), a famous economist Milton Friedman, in his article entitled New York Times Magazine published in 1988 argued that businesses are operated for the benefit of shareholders. Friedman stated that the benefits of business operations based on other missions are likely to be low because such businesses are non-competitive. Lack of sufficient funds renders business operations impossible. Even today his argument receives support from many managers (Smith 2003, p. 65). However, although profits making is a key factor in businesses, efficient business organisations should provide more than profits for the organisation. Good business firms bring improvements to the markets, which in turn create job opportunities, contribute toward growth of the economy, and improve the environment and living conditions of people. Growth in businesses is generated through development of new products for the benefits of the larger society (Ahlstrom 2010, p. 11).

Reasons against Shareholder Primacy

According to Ahlstrom (2010, p. 12), the growth of firms and supply of goods and services to large numbers of consumers can be realised through disruptive innovation. An effective disruptive innovation contributes to growth of firms and production of new products. If economic growth in business firms is maintained, the benefits trickle down to people at the bottom of the economic pyramid. Moreover, increased income is realised at the company. Business should aim at growth driven through innovation, especially disruptive innovation. If disruptive innovation is embraced by firms, competition, and increased profit will result from the activities.

Improvement in technology plays a major role in growth of business firms through increase in the production of goods. For instance, use of machinery in business firms has reduced workload that took an employee an hour to produce in 1890 to seven minutes in the United States. Technological innovation has seen this increase in production. Customers and employees benefit from growing firms under proper management. Problems in the world can be addressed better through cooperation of citizens and wealthy companies. Through innovations, business firms bring new products to the market, and at the same time create job opportunities for the citizens. The society benefits through jobs that enable them to earn income, and availability of new products in market while business owners benefit through increased revenue. Ahlstrom (2010, p. 12) states that the guiding principle of business should be production and availability of new goods, which in turn will create employment opportunities and contribute to growth of economy. This will benefit shareholders and the community.

Compassion is an important concept in business operations. According to Bejou (2011, p. 2), the interests of an individuals and what other people consider good or bad are psychologically linked by compassion. Compassion refers to respect, commitment, and responsibility shown toward other people. Companies should concentrate on exercising compassion to improve community lives rather than making profit. Bejou (2011, p. 3) argues that the benefits of a company is realized only when compassion is incorporated in the operations, values, goals, culture, missions, decisions, vision, and strategies applied in running the company. This will improve living standards of society members through reduced suffering. Bejau (2011, p. 3) identified compassionate values in companies. These include: following integrity principles, working toward the welfare and human rights of children, customers, employees, and shareholders, working toward issues affecting the community such as disasters, diseases, and poverty. Companies should consider the needs of the community such as hospitals, schools, roads. Stakeholders should be allowed to exercise freedom. These and other values should be applied as guiding principles in business operations. Although it may be difficult to apply all the necessary values, companies should include a number of values into their corporate strategy. Compassionate values and profit making should be treated equally by business operators if the success of the business is to be realized. Examples of companies that apply compassionate values as well as catering for the needs of shareholders include Ford Motor Company, PepsiCo, Aeropostale, Inc., AT & T, Costco Wholesale, and Green Mountain Coffee Roasters, Inc. (GMCR).

Cosans (2009, p. 396) states that if Milton’s principle was to be followed by business operators, businesses, and the larger society would be affected negatively. This is because inadequate policies likely to affect smooth running of businesses are likely to be embraced. The only way to avoid causing harm is through ensuring that interests of businesses are not achieved at the expense of other people. It is important for every business to consider its duties. Friedman stressed the role of stakeholder theory in business operation. Traditionally, shareholders or stockholders were perceived to be owners of business firms. It was the duty of the management to consider to needs and interests of shareholders to increase wealth. According to Cosans, the stakeholder theory holds that apart from value maximization, other parties such as customers, suppliers, employees, financiers, political groups, governmental bodies, trade unions, and associations should be considered” (2009, p. 396). Competitors are also considered as stakeholders because they can affect business operations and stakeholders. The theory requires managers to examine the effects its decisions will have on business parties as well as stakeholders and act toward their interests and benefits. In response to stakeholder theory, Friedman encouraged managers to concentrate on duties that do not endanger the lives of other people as well contribute to profit making in the organization. It is impossible to maximize value if stakeholders’ interests are ignored in business planning (Cosans 2009, p. 396).

Shaw (2009, p. 569) highlights that capitalism creates a favourable environment for managers and shareholders to use harmful methods such as theft, deception, and corruption for personal gain. However, the success of a business cannot be realized if it lacks rules governing its operations. These include practicing justice, honesty, and truthfulness in business operations. These values prevent managers from acting against benefits of stakeholders. To prevent shareholders from benefiting at the expense of the stakeholders and minimize unethical behaviours in business firms, the management should ensure business decisions consider the needs of stakeholders the society included.

According to Ronnegard and Smith (2010, p. 3), the issue of businesses operating to maximize value is not only harmful to stakeholders but also the shareholders. Shareholders are human beings and possess qualities of normal human beings. The shareholders of a business firms are brought up in different environments, religious backgrounds, ethnicities among other factors. Because of these differences, shareholders have different interests, opinions, and values. For instance, some may prefer short-term investments while others may prefer long-term investments, for investments to be used during retirement age, and payment of school fees. Other shareholders are concerned about the effects the firms will have on their interests and assets, others mind of personal wealth, while others show less concern about the firm. However, the majority of shareholders are interested in making profit without affecting third parties negatively. Lack of common value among shareholders makes it impossible for businesses to succeed because of differences in things valued by shareholders. This means that strategies applied to run a business may favour some shareholders at the expense of others (Ronnegard & Smith 2010, p. 4).

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Keay (2010, p. 370) argues that the responsibility of a business firm lays with managers not shareholders. Although they own the business, daily operations are planned and executed by the management. Shareholders are not entitled to wages or salaries like employees and managers. What shareholders get is dividends. Based on this, shareholders should not control assets of the firms because the success of the firm does not in any way depend on them. It is the duty of the managing body to ensure that necessary strategies are applied in running the firm to avoid operating at a loss. The people who count much to success of the business are employees and customers. It is important for management to cater for the needs of the employees and customers (community) to promote the business. The advantages of focusing on stakeholders outweigh those of the shareholders. However, management should also ensure that the firm is operating at a profit (Keay 2010, p. 390).

According to Anderson et al. (2008, p.165), a business cannot survive simply because shareholders have used their capital to invest in a particular business. In order for the business to prosper and be able to supply shareholders with dividends, various stakeholders must participate. For instance, people must be employed to do work in exchange for payments, and customers to buy manufactured products. Business is a two way thing, which requires cooperation of shareholders and stakeholders, and the success of business depends on both. Stakeholders also have expectations, such as promotion and security in job just like shareholders expect to get profit. Employees expect to enjoy the benefits of their hard work. It is upon the shareholders to ensure that expectations of employees are met. This will motivate employees to keep on working hard, for example, improvement in the quality of services offered to customers, which will in turn increase profit. If the management focused on shareholders, stakeholders would feel neglected and demotivated to work leading to decreased production. To maximize profits, stakeholders should receive the same respect and treatment from the management like shareholders (Anderson et al. 2008, p. 185).

Arguments in Support of Shareholder Primacy

Proponents of shareholder primacy believe in free market view. This is the view that business firms should concentrate on increased production of goods and services to increase wealth. Proponents argue that the only responsibility business firms have in the society is to use its resources in activities, which earn business owners profit as long as competition is open and free, and non-corrupt. Proponents believe that money taken outside the business is like imposing tax on one-self; managers should never let money out. They assert that the responsibility of directors is to amass before give out shareholders’ assets. They believe that social and economic development is based on capitalism and free market.

Ireland (2005, p. 50) highlights that proponents of shareholder primacy argue that shareholders risk through investing in businesses to get dividends. Because they have invested with the expectations of gaining profit, there is nothing wrong with shareholders aiming at maximizing value. If the business operates at a loss, it is the shareholders who bear the burden not stakeholders. Second, it is important to understand that if shareholders are not protected, they will be reluctant to make investments. This is mainly because they fear most of the benefits will trickle down to the employees and other stakeholders instead of benefitting them. If shareholders fail to invest, the economy of the country will go down. The number of job opportunities will decrease. High rates of unemployment are likely to increase the rate of crimes in the country. To avoid this, needs, and interests of shareholders should be put into consideration to encourage them to invest more. This will create job opportunities, increase production of goods and improve the quality of people’s lives in the society (Ireland 2005, p. 90).

Conclusion

Shareholder primacy is a major challenge to community social responsibility because the majority of managing bodies in corporations aim at maximizing the wealth of owners at the expense of stakeholders. Studies show that the majority of corporations have not embraced community social responsibility norm. To prevent shareholders from benefiting at the expense of the stakeholders and minimize unethical behaviours in business firms, the management should ensure business decisions consider the needs of stakeholders the society included. However, it should be understood that stakeholders play a major role in the success of business firms. Managing directors should consider the needs of the society as much as they consider needs of shareholders because both parties are important. Just like other organizations, such as non-profit making and governmental bodies, corporations have a role to play in the society. If shareholders and management bodies can understand the effects of shareholder primacy, fast economic growth would be realized. Based on information gathered, corporations should embrace community social development in favour of shareholder supremacy.

List of References

Ahlstrom, D 2010, Innovation and growth: how business contributes to society, Academy of Management Perspectives, vol. 2, pp. 11-24.

Anderson, M, Jones, M, Marshall, S, Mitchell, R & Ramsay, I 2008, Shareholder primacy and directors’ duties: an Australian perspective, Journal of Corporate Law Studies, vol. 8no. 2, pp.161-190.

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Bejou, D 2011, Compassion as the new philosophy of business, Journal of Relationship Marketing, vol. 10, pp. 1-6.

Beurden, P 2008, The worth of values -a literature review on the relation between corporate social and financial performance, Journal of Business Ethics, vol. 82, pp. 407-424.

Cosans, C 2009, Does Milton Friedman support a vigorous business ethics? Journal of Business Ethics, vol. 87, pp. 391-399.

Husted, B & Salazar, J 2006, Taking Friedman seriously: maximizing profits and social performance, Journal of Management Studies, vol. 43, no. 1, pp. 75-91.

Ireland, P 2005, Shareholder primacy and the distribution of wealth, Modern Law Review, vol. 68,no. 1, pp. 49-81.

Keay, A 2010, Shareholder primacy in corporate law: can it survive? Should it survive? European Company & Financial Law Review, vol. 7, no. 3, pp. 369-413.

Ronnegard, D & Smith, N 2010, Corporate social responsibility and the legitimacy of the shareholder primacy norm: a rawlsian analysis, Insead Working Papers Collection, vol. 1, pp.1-4.

Shaw, W 2009, Marxism, business ethics, and corporate social responsibility, Journal of Business Ethics, vol. 84, pp. 565-576.

Smith, N 2003, Corporate social responsibility: whether or how? California Management Review, vol. 45, no. 4, pp. 52-76.

Wilcke, R 2004 An appropriate ethical model for business and a critique of Milton Friedman’s thesis, The Independent Review, vol. 2, pp. 187-209.

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