Stockholder Theory

Milton Friedman: "The Social Responsibility of Business is to

Increase its Profits."

Description

• 1) Managers have a primary fiduciary duty to stockholders.

• "That (fiduciary) responsibility is to conduct the business

in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society. " SRB

• "... there is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception and fraud" Capitalism and Freedom p. 133.

Description

• 2) Profit maximization as highest practical and moral goal

Coase: The nature of the firm is to minimize transactions costs. "The Nature of the Firm"

Practical Origins (Profit)

• 1) Utility maximization

– 1) Economic models of the firm– 2) Homo Economicus: View of man leads to

view of the firm and moral duty.

Moral Origins

• 2) Property Rights TheoriesHume– Conventions for property, trade and contract

are a spontaneous order created by the interaction of self-interested individuals.

Locke- Natural rights of life, bodily integrity, liberty,

and property

Problems• 1) Utility maximization can conflict with

property rights.

• 2) Smith’s “self-interest” may be utility maximization, but it is not profit maximization.

• 3) Rights are a necessary, not sufficient, element of Business Ethics. There is more to ethics than rights.

Stakeholder Theory

• Description– Based on "democratic" conception of

business: That option is right on which a consensus can be reached.

Who gets a moral vote?

– Stakeholder: Any group or individual which can affect or is affected by an organization.

Stakeholders

• Customers

• Suppliers

• Employees

• Financiers (Includes Stockholders)

• Community

• Environment

Fair Representation as Moral Goal

• Different ethical theories define fairness making for different stakeholder theories

– Private Property and Political Liberalism– Doctrine of Fair Contracts, (Rawls veil of

Ignorance)– Feminist Standpoint Theory, (Caring and

Connection) – Ecological Principles

Economic Origins

“Invisible Hand” Doctrine fails because of:

• Externalities• Tragedy of the Commons• Free Rider Problems• Moral Hazard• Monopoly

Philosophical Origins

• Kant– Political decision making procedures show

fundamental moral respect for persons.

• Utilitarianism– Political decision making leads to better

outcomes, that make more people happier, than current economic methods of decision making.

Problems

• Replaces business decision making with political decision making.

• Attempt to do ethics without the concept of rights.

Poletown Case

• "Most of us believe that management at General Motors owed it to the people of Detroit and to the people of Poletown to take their (non-fiduciary) interests very seriously, to seek creative solutions to the conflict, to do more than use or manipulate them in accordance with GM's needs only." (Goodpaster, "Business Ethics and Stakeholder Analysis", BEQ, 1 January 1991, pp. 53-73)

• Kelo v. New London

Conclusion

• Stakeholder Theory is an attempt to do Business Ethics without rights.

• This is a contradiction. There is no business without rights.

• Therefore: Stakeholder Theory is not a theory of business ethics.

The Purpose of Business

• Description– The purpose of business is to produce a good

or service for trade.

– Managerial Stakeholder theory is relevant.

– Profit is a measure of success and necessary, but not sufficient, element of business.

Origins

• Rights Theories

• Importance of individual choice

• Aristotle and Flourishing

Applications

• Discrimination and BFOQ

• What’s wrong with nepotism

• Requirements for full/relevant information

Explanatory Power

• Housing Bubble and its collapse– Fannie Mae, Freddie Mac, and Fed. Gov.– Is business its brother’s keeper

• Enron– Gas and hot air

• Tycho– My piggy bank

Conclusion (draft)

• I am right.

Conclusion

• Stockholder Theory

• Stakeholder Theory

• The Purpose of Business