Paste your essay in here…Everyday thousands of newly established firms are entering markets, old firms are switching markets and some businesses are undergoing mergers. The majority of these corporate firms share one common goal – generating profit. Profit is what influences almost every decision made and seems to be considered the most important goal. There are other important duties that are considered but not at the same magnitude as profits, such as, social responsibility. It seems we live in a world where making substantial amounts of profit is more important than focusing on social responsibility. In this day and age, we need to focus on propelling the idea of social responsibility and creating values for stakeholders which is what R. Edward Freeman suggested. It is important for firms to consider social responsibility and to behave in a way that is morally right. In this essay R. Edward Freeman’s approach will be used to justify the importance of corporate social responsibility and how this theory dominates that of Milton Friedman and Joseph Heath. The idea of social responsibility in philosophy, emphasizes a business' concern for social welfare. Generally, managers can improve relationships and sustain their business by looking out for the society involved. This way, by setting moral objectives firms are likely to reap success in the long run as they are looking out for the lives of others rather than raising capital for other purposes.
Freeman's stakeholder theory has a central focus, that is accounting for every stakeholder in the company. a stakeholder is anyone with an interest in the business, including employees, shareholders, customers and even the community. Basically, a stakeholder is any group or anyone that has an affect or can be affected by the business. As stated earlier, by improving relationships and looking out for society businesses can be successful, which is what Freeman suggests. He says executives who manage businesses should look out for stakeholders by creating value for them and that “we need to pay careful attention to how these relationships are managed and how value gets created for these stakeholders”. Corporate social responsibility means to look out for the stakeholders by reducing the burden of any actions that cause negative environmental impacts like pollution or exploiting consumers. Adding on, Freeman argues that one stakeholder group cannot be the focus of the business, it is important not to isolate any stakeholder and to focus on the interest of all stakeholders. I believe this approach reaps success for businesses as it shows a moral perspective when making decisions within a firm. It shows that firms are looking to improve the welfare of society as opposed to making profits for one specific group e.g. shareholders. The point Freeman makes here is the idea of inclusion, which is sensible idea because including everyone in society makes them feel important thereby creating good relationships that are likely going to last longer. By following this idea, a firm reaps success through improving welfare of the society and at the same time generating profits as more people are going to be involved with firms that have a positive outlook when making business decisions. There would be no reason for firms to focus on generating profit if they aren’t mainly focused on satisfying stakeholders such as customers. For instance, if customers feel that their interests are not taken into consideration by the business then the number of customer sales will fall. This means the level of investment in the business is also likely to fall because customers are generally a large part of a business. There no doubt that there will be conflicting interests between stakeholders of the business however according to freeman's theory, it is the primary duty of managers and executives to make the decision that creates the most value for stakeholders across the business. His words "Executives must understand that business is fully situated in the realm of humanity." state that if interests conflict it is the duty of the managers and executives to unravel the problem and come up with a solution that involves the interests of everyone. The dominant theory is a theory that contrasts with that of freeman's, specifically the idea of inclusion. The dominant theory states "businesses are to be managed solely for the benefit of shareholders. Any other benefits (or harms) that are created are incidental”. This instantly shows firms that uphold the dominant theory have one main objecting – generating profit. This model contradicts freeman’s idea of inclusivity as it focuses on one stakeholder group as oppose to all, immediately ruling out the interest of anyone else in the business. This will not only lead to failure as other stakeholders lose interest but also create a negative reputation for the business. Unlike freeman’s theory, the dominant theory lacks morality as it doesn’t focus on what is right. It isolates the interests of shareholders from other members of the business. The fact that this model focuses on generating profits for one stakeholder group shows that looking out for humanity is not important and thereby meaning that 'shareholders' in this case are more important that the rest of society. This is ethically wrong because it claims that not every human being is important. Whereas Freeman has a more liberal point of view where everyone should be treated equally by considering all interests rather than just that of the shareholders. No stakeholder interest is viable in isolation of other stakeholders. However, the dominant model may reflect a real-life situation where shareholders are the main investors and also the major contributors to raise capital for the business. In this case it would be fair to focus on raising higher profits in order to provide sufficient returns to the shareholders who provided funding and showed their trust in the business. It would seem fair to put the interests of shareholders above that of all others. As the shareholders are adding greater value to the business than others it would make sense to that their interests are favored above all. In contrast to this, the dominance model is resistant to change. This means that changes will be made if and only if shareholders are unhappy. Clearly decisions made in the business are centered around shareholders and all others are ignored. “According to this view the only change that counts is change oriented towards shareholder value”, there is no point in focusing on shareholders if customers aren’t happy. If customers are unhappy with factors such as poor-quality goods then consumer purchases will fall and so the business itself will not generate enough capital to provide shareholders with their returns. Freeman’s stakeholder theory holds strong in proving that it is important to consider all interests and that the dominance theory will not reap success in the long term if it is unable to make ethical decisions.
Milton Friedman has a shareholder approach towards taking responsibility for actions. His theory follows the idea where a firm attempts to maximize profit and take a portion of the profits made, and distribute it amongst the shareholders of the company. The reason is that shareholders deserve an award for the risk they have taken by being major contributors of the business. And more importantly, Friedman says the social responsibility lies in the hands of the shareholders, it is up to them to make the ethical decisions and not the executives of the firm. In his paper, Friedman goes on to say, "What does it mean that "business" has responsibilities? Only people can have responsibilities." He claims that corporate firms only have one task and that is to maximize profits for themselves and for the shareholders. It is up to the shareholders to take on the social responsibility of looking out for the society. Adding on, corporate firms are appointed by shareholders to do whatever needs to be done to generate profits provided that firms operate "within the rules of the game". Friedman claims that firms having social responsibility is pure rhetoric. If their main focus is on employers or customers then the firm will have goals such as reducing price of goods, making them more easily available to customers and thereby preventing inflation. Firstly, preventing inflation would only work if firms collectively look out for the welfare of society. However according to Friedman's theory, lowering the price is not in the best interest of the shareholders let alone the executives. This would also be an unfair decision because it would conflict with the interests of the shareholders. And once again, according to this theory the social responsibility lies in the hands of the shareholders and not the executives. Focusing on profitability may lead to beneficial outcomes for instance, increasing the price would generate higher revenue. This means that shareholders can expect greater returns, allowing them to take greater care of society. In this way, I believe Friedman makes a point where it is the responsibility of the shareholders to take action to look out for the society. However, this can only happen if firms focus on the interests of shareholders as oppose to the other stakeholders. Unfortunately, it is not certain that shareholders will use their returns to take social action and provide for their society. For the case that shareholders do take social action, there will be no point in doing so if firms that focus on profit create negative social costs such as pollution. If the respected society are experiencing pollution then the social action taken by shareholders will not offset the negative impacts of profitability. And by looking out for society the interests of shareholders are overlooked. Going back to Friedman’s point where actions are taken in the best interest of the shareholders, increasing the price of goods would benefit the corporation greatly. Two points can be made here, one is that increasing the price would not only burden the welfare of society but also the corporation itself because of inflation. Inflation increases costs greatly making it difficult for citizens to spend more as purchasing power falls. If corporations focus on objectives that raise profits then it can lead to negative outcomes. If purchasing power falls then firms receive less business. The second point is that there is no reason to focus only on shareholders if it leaves customers, employers and other stakeholders unhappy. And so, I argue that Freeman’s stakeholder theory dominates Milton’s stockholder theory because it takes into account who contribute to the firm’s wealth, which can include customers, suppliers, employers and shareholders. The difference between the two theories is that the stakeholder theory says that the firm is responsible for making sure all rights of the stakeholders are honored whereas the stockholder model only focuses on honoring the shareholders rights. There is clearly a difference in perspectives, Freeman’s theory has a moral perspective that is more accepted by society and therefore should be considered more dominant than the stockholder theory.
Heath's Market failure model discusses the reasons for markets existing. Markets are places where firms have a platform to compete. Competition exists amongst firms, suppliers, laborers and even customers. This theory has some elements of both the stakeholder and stockholder theory. For example, it focuses on maximizing profits and on society. He claims that the higher the profits, the better the conditions of society. This is because in some way money contributes to the welfare of society. Part of this theory reflects the idea of pareto optimal efficiency. Realistically speaking, it is not possible to allocate resources by making someone better off without making someone worse off. Which is what Heath presents in his paper. In my opinion, it is a very realistic view because when resources are limited and so competition is needed in a market. This makes businesses allocate resources efficiently and effectively thereby upholding the market failure model. The market failure model looks to attain the best possible outcome given the market conditions and resources available. Although this theory looks to generate profits and improve social welfare it is still dominated by the Stakeholder model. Firstly, the point of the market failure model is to achieve the best possible outcome in the market whereas the stakeholder model looks to achieve the best outcome for every stakeholder. The difference is that stakeholder model theory takes into account any cost on any stakeholder, for example, the impacts of pollution on society is considered and dealt with. However, the market failure model suggests that resources should be allocated efficiently but does not account for the true cost on the third party. An example is if 2 parties are involved in business, buyer and seller. The business deal may create pollution which disturbs a certain society, the third party. This pollution is the true cost on society and is not ethically right. Although optimal allocation of resources is considered, the true cost on society is not. And for that reason, the moral perspectives shown by the stakeholder model should dominate this model.
Finally, I would like to conclude that stakeholder theory dominates the market failure theory and the stockholder theory. Mainly because this theory expresses multi-fiduciary obligations to customers and other stakeholders. It focuses on doing the right thing for everyone regardless of who is involved. Unlike the stockholder model who focuses on shareholders or the market failure model that fails to account for the true costs to society. Stakeholder model does look at the real world as oppose to an ideal world where there is pollution, there are products with hidden quality defects etc. It also justifies the fact that profit is not a good thing if it benefits some lives at the expense others.