Freeman Reading - DLauer PDF

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R. Edward Freeman - A Stakeholder Theory of the Modern Corporation. TEDx - with E. Freeman ● To make business better we need a conceptual revolution on new ideas ● Create a new story about business ● There are 3 flaws of business ○ The purpose of business is to make a profit/money ○ Business and Ethics contraction ○ People are not simple beings of self-interest ● There is a mismatch between the story we tell about business and what it actually takes to run a successful business. ● Business is about creating value together ● Business is about creating value for stakeholder and not making trade-offs Thesis: Replacing the notion that managers have a duty to stakeholders with the concepts that managers bear a fiduciary relationship to stakeholders. ● ●

Suppliers, customers, employees, stockholders, local community, and management in its role agent for the groups Stakeholder groups has a right not to be treated as a means to an end, and must therefore participate in determining the future direction of the firm they have a stake in.

For whose benefit and at whose expense should the firm be managed? The Attack of Managerial Capitalism Purpose: to challenge the assumption that management’s primary responsibility is to the shareholder. 1. The Legal Argument ● The usual premiss is that of managerial capitalism: management works vigorously to pursue the interest of the shareholder. ● Legally, a coporation has limited liability, the status of “legal person”, and must act “in contemplation of the law”, by restraint of the law. ● Because of progressive legal sanctions corporations have become sensitive to other interests who make demands on the company ○ Consumer rights ■ Caveat emptor > caveat vending or ○ Product safety laws ■ In 1980 one car company recalled more cars than it sold. ○ Environmental legislation ● The law has evolved to effectively constrain the pursuit of stockholders interests at the expense of other claimants of the firm —> customers, suppliers,

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employees According to the managerial capitalism the firm should be managed in the interest of the stockholders. The law restricts that.

2. The Economic Argument ● A firm concerned only with profit will have no incentives to curb its side effects of consequences of industrial commercial activity (externalities) “it will internalize the benefits and externalizer the cost 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. ● Managerial capitalism seeks to maximize the interests of the stockholders. ● The “invisible hand” notions —> it contends that it creates the greatest good for the greatest number, therefore government must not intervene ● No one has an incentive to be environmentally responsible. There is a small marginal gain for firms. ● Externalities, moral hazards, and monopoly power have led to more external power on managerial capitalism. ○ firms will avoid competition, which lowers profits, and instead seek a market where they can exploit and monopolize production - leading to ogolopolies ● Due to these economic facts of life, there are de facto constraints on the ability to act in the best interests of stockholders The Stakeholder Theory of the Firm 1. The Stakeholder Concept ● Logic is identical to that of the stockholder their ● Stakeholders can benefit, be harmed by, have the rights violated or respected by corporate decisions ○ “Narrow Definition”: groups who are vital to the survival and success of the firm (Freeman uses this definition) ○ “Wide Definition”: groups or individuals who are affected or can affect a corporation. ● 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

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exchange resources for products and in return receive benefits of the products. Because of the crucial income supply of 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.

Stakeholders in the Modern Corporation —> Owners, Suppliers, Management, Employees, Local Community, Customers 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 to be aligned for the health of the firm. ○ For example, if wages are to 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.. ● Management has an explicit or implicit employment contract. ● Must look after the health of the organization. ● Multiple claims of stakeholders —> management must manage the relationship between the different stakeholders and keep them in balance. ○ Some stakeholders may benefit at the expense of another. 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.”...