Business Ethics - R. Edward Freeman PDF

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Lecture R. Edward Freeman A Stakeholder Theory of the Modern Corporation Business Ethics VIDEO - Want people who want to be there, who offer great service for customers - These kinds of companies, as long as you make no mistakes in the community, they can create value - Companies who have a purpose of making the world a better place, making a difference - People, Planet, Profit (P.P.P) - Etc, whole foods - Enterprise first, trying to find an integrative way to include stakeholders, then the rest comes - Make your difference, but make sure you can still take care of your shareholders at the same time - Everything should work together cohesively and efficiently, all receiving the same attention Purpose - To challenge the assumption that management’s primary responsibility is the shareholders or the stockholder - Management’s role is to return profits back to investors - Freeman says this has gotten out of hand, he thinks we need to take a more collaborative approach to how corporations do business Introduction - At whose benefit and at whose expense should the firm be managed? - Milton Freedman: - The management has a direct responsibility/ they’re #1 responsibility is to the shareholders/stockholders/investors, and that's the only responsibility - Return profits back to shareholders, that is the contract that was established when the investment took place - Self-interested approach of profit, profit, profit - R. Edward Freeman: - Stakeholders listed below - Thinks these groups should be working in an even way, collaborative way and well integrated, where there’s equality, everyone and everything should run in harmony (PEOPLE PLANET PROFIT = SUCCESS AND MOVES INNOVATION) - Stakeholders and Shareholders are different, but for freedman they have a close relationship and almost the same value (equal players in the creation of financial/economic entity) - What is a stakeholder? - Someone or group who has an interest or concern in something, especially a business - Freeman thinks we should take care of all of these groups

- Suppliers - Customers - Employees - Stockholders - Local community - Company management The Attack on Managerial Capitalism - The Legal Argument - Calls only returning profits to investors is managerial capitalism - Says this is under attack - The usual premiss is that of managerial capitalism: management works vigorously to pursue the interest of the shareholder - Legally, a corporation has limited liability, the status of “legal person”, And must act “in contemplation of the law”, by restraint of the law - Law will step in at some point if managerial capitalism continues - Corporations have to shift and change according to how culture and social demands are changing, otherwise they will suffer/or the law will step in - Because of progressive legal sanctions corporations have become sensitive to other interests who make demands on the company - Consumer rights - Caveat emptor (Buyer beware) -> (turns into) -> caveat venditor (vendor beware) - Product safety laws - In 1980 one car company recalled more cars than it sold (Chrysler) - Product safety laws - Environmental legislation - Clean air act - Clean water act - Carbon taxes - All to say that if corporations will not pay attention or take care of everyone and everything, then the law will step in and protect these other entities that support the corporation (employees, customers, environment, society) - Managerial Capitalism will not last or succeed The Attack on Managerial Capitalism - The Economic Argument - A firm concerned only with profits will have no incentive to curb it’s side effects or consequences of industrial or commercial activity (“externalities”) “since the marginal gain of the one firm’s action is small.” It will “internalize the benefits and externalize the costs of their actions.” - By the same reasoning there is no incentive to economize on the part of the producer or consumer, so there is an excessive use of resources involved

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Resources are already limited (Simon) If we have a scarcity of resources, then we have no way for manufacturing or industrialization which will cause economic destruction - Firms will avoid competition, which lowers profits, and instead seek a market where they can exploit and monopolize production – leading to oligopolies. - “Externalities, moral hazards, and monopoly power have led to more external control on managerial capitalism.” A Stakeholder Theory of the Firm - The Stakeholder Concept - Logic is identical to that of the stockholder theory - Each stakeholder has made an investment of some degree, therefore, the company then owes you a return on this investment - It could be an employee giving up their job at one company to work at another, they are bringing resources into the company and making an investment, therefore they need equal consideration - Customers make a purchase, and use a limited amount of money to make this purchase, and so they deserve to be treated with some degree of respect and positive return - Freeman Has Two Definitions of Stakeholders: - Narrow definition of Stakeholder - Those groups that are vital to the survival of the corporation - Pursued by the author - Suppliers, employees, etc - Wide definition of Stakeholders (vague definition) - Any group or individual who can affect or is affected by the corporation - The weaker definition - The environment - Competitors (do spark and create initiative for the corporation to innovate and become better/create better products) A Stakeholder Theory of the Firm - Owners - Have a financial stake in a firm and expect some kind of financial return - Employees - Have their jobs and livelihoods at stake and usually expect wages, benefits, purpose, security - Suppliers - Have committed their resources and labour to firm - In return, when the firm who is a customer of the supplier, treats it supplier as a valued member; as a stakeholder, the supplier will respond when the firm is in need - Customers - Exchange resources for products and in return receive benefits of the products - Because of the crucial income supply to the customer, paying attention to

customers’ needs in turn addresses the needs of the suppliers and owners Community - Provides land, labour, (tax) support, infrastructure, etc.,,, - In return, the community expects an income base and a good corporate citizen A Stakeholder Theory of the Firm -

A Stakeholder Theory of the Firm - The Role of Management - Management has a balancing role to find the right weight of stakeholder interests - The interest may temporarily be out of synch but long-term they need to be aligned for the health of the firm - For example, if wages are too high, product quality may suffer, customers will leave, suppliers suffer, owners sell their stock, there is less money for research and design, products fall further behind in competitiveness, etc… - This is a basic management theory, you have to have them all in harmony and balance - Sometimes it may be not be in sink for a short period of time which can be normal, for example if there's a scandal or shift in strategies or roles, but eventually you want to get back on track Conclusion - Implementation of stakeholder management principles, in the long run, mitigates the need for an industrial policy and an increasing role for government intervention and regulation - Freeman thinks equal and collaborative environments/strategies will lead to a win-win situation for everyone - Makes for a great and successful company...