A door like this has opened up only five or six times since we got up on our hind legs.
Should companies seek only to maximize shareholder value or strive to serve the often conflicting interests of all stakeholders?
Scandals at Enron, Global Crossing, ImClone, Tyco International and WorldCom, concerns about the independence of accountants who are charged with auditing financial statements, and questions about the incentive schema and investor recommendations at Credit Suisse First Boston and Merrill Lynch have all provided rich fodder for those who question the premise of shareholder supremacy.
Before attempting to declare a victor, however, it is helpful to consider Milton friedman compared to edward freeman the two theories actually say and what they do not say. The objective is to balance profit maximization with the long-term ability of the corporation to remain a going concern.
The fundamental distinction is that the stakeholder theory demands that interests of all stakeholders be considered even if it reduces company profitability. Third, it is sometimes claimed that the shareholder theory prohibits giving corporate funds to things such as charitable projects or investing in improved employee morale.
In fact, however, the shareholder theory supports those efforts — insofar as those initiatives are, in the end, the best investments of capital that are available. It is sometimes claimed that the stakeholder theory does not demand that a company focus on profitability.
As many observers have pointed out, the stakeholder view does have a historical tradition in the U. As long as the firm made a decent profit every year and raised the dividend it paid its stockholders, this was considered good enough.
One force was the pointed arguments of free-market economists. However, the prospect of such takeovers seemed to have made it, for a time, more dangerous for executives to acknowledge publicly anything other than the shareholder theory 14 or to behave in any fashion that could suggest a nonoptimal return to shareholders.
However, none of these assertions can withstand logical scrutiny. First, consider the assertion that the theories converge — that if managers take care of the stakeholders, they will wind up maximizing profits and shareholder returns in the long run.
Consider a business with many long-term employees that has manufactured its products for more than 30 years in a small Mid-western town. Those products have been sold in many foreign markets — but for the past 10 years, not in the United States.
Its executives have recently concluded that they can no longer afford to manufacture the products domestically, and the most cost-effective solution is to outsource the manufacturing to another country.
The shareholder theory would support closing the plant and would direct the executives to provide only what the law requires to the community and the employees, since there is little possibility of a backlash against the company due to a plant closing because the products are solely for export.
However, the stakeholder theory would infer a normative obligation to both the community and the employees; while it might not demand that the company continue to operate the plant, it would expect some attempt to retrain the employees, help the community attract new industry and so on. In many cases, though, the linkage between such actions and the profit and loss statement is either nonexistent or so indirect as to strain credulity.
The stakeholder theory demands that stakeholder interests be considered as an end in themselves. If stakeholder interests are being considered only as a means to the end of profitability, then managers are using stakeholders to effect the results dictated by the shareholder theory.
These are two very different concepts. Second, consider the assertion that U. To be sure, most U. However, it is startling to note that there is evidence that public perceptions may not comport with those of economists and the financial community.
Note that the study did not ask the managers about their own views on the question. Finally, consider the assertion that companies have no choice but to follow the shareholder theory, on the basis of law and market forces. Although some people claim that U. The duty of care simply means that directors should gather necessary information before making decisions; the duty of loyalty means that directors should be careful to act appropriately when there are conflicts of interest.
One obvious way in which this can be done is for the board of directors to dismiss senior executives who do not maximize profitability. However, research indicates that the forced departure of executives who do not maximize profits is by no means assured, showing it to be more likely when there is an outsider-dominated rather than an insider-dominated board.
For a similarly weak performance, a CEO is two to three times more likely to be dismissed during the first four years on the job or after having been on the job 10 years or more than in the period in between.
However, based on economic theory, there is still a way in which managers who do not maximize profits, and whose boards do not remove them, will wind up unemployed: Some have argued that the large number of mergers and acquisitions in the late s provides evidence that this assumption is accurate.
In fact, a seminal study by Julian Franks and Colin Mayer concluded that we cannot rely on hostile takeovers to perform such a disciplinary function.Business Day. Lufthansa to Shift Further Aircraft to Munich From Frankfurt.
Germany's Lufthansa said it would move more aircraft to Munich from Frankfurt, curbing growth at its main base. Business and Society Relationship Friedman v.s. Drucker Compare and contrast the two approaches to business ethics.
After review of the two articles, there are some notable differences between Milton Friedman and Peter Drucker’s approach to business ethics. Friedman’s main point is the primary responsibility of a business is to its stockholders and increasing its profits.
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Sep 20, · Freeman supports the Stakeholder Theory in saying that anyone who has a stake/claim in the firm has the right to be treated as a participating determining factor in the direction of a firm.
They are not just a means to the end. Friedman pretty much says the opposite. Milton Friedman, PhD, Nobel Laureate, Rest in Peace. "Maybe I did well and maybe I led the battle but nobody ever said we were going to win this thing at any point in time.