Business Ethics - Stakeholder Theory & Freeman, Martin, Parmar on Stakeholder Capitalism
Shareholder Theory vs. Stakeholder Theory
Introduction to shareholder and stakeholder theories as two main approaches to conducting business.
Examination of Freeman, Martin & Parmar’s paper as an example of stakeholder theory.
Definition of shareholder theory and stakeholder theory as different views defining the purposes of corporate governance.
Both theories address whose interests should guide decision-making in a corporation.
Definitions
Shareholder: An owner of stock in a corporation.
Stakeholder: Anyone with an interest or stake in a corporation.
A stakeholder's interest can be financial.
Shareholders are stakeholders, but not all stakeholders are shareholders.
Not all interests are financial.
Examples
Shareholders of Amazon: Individuals and institutions owning shares, including the CEO, board members, and investment management companies (e.g., Jeff Bezos).
Stakeholders of Amazon: Customers, employees (in offices, call centers, warehouses, delivery), suppliers, local communities, and shareholders.
Guiding Interests
Shareholder theory: Corporate governance is guided by shareholders’ interests, primarily profit-making.
Milton Friedman: Profit-making must occur without "deception or fraud" and within legal limits.
Stakeholder theory: Corporate governance balances various stakeholders’ interests, including working conditions, customer satisfaction, and community outreach.
Stakeholder theory addresses moral duties towards all stakeholders and complex relationships among them.
Goals, strategies, and operations should balance the interests of various stakeholders, not just focus on profit-making.
Conflict of Interests
Shareholders’ interests and the balance of stakeholders’ interests often differ or conflict.
Examples
McDonald’s spying on union activists:
Shareholders' financial interest in discouraging unionization to maintain profits.
The actions taken are illegal and involve invasive surveillance technology.
This action doesn't comply with shareholder theory because it is fraudulent.
Patagonia's good working conditions:
Examples include paid parental leaves and flexible hours.
Stakeholder theory justifies these practices as a balance between profit-making and employees' interests.
Amazon Smile program:
Amazon donates 0.5% of eligible purchases to charity.
0.5\%. of a 30 purchase is only 15 cents.
The interests of customers and communities are used to serve shareholders' interests and profit-making.
Stakeholders are used as means to an end.
Freeman, Martin, and Parmar on Stakeholder Capitalism
Considering all stakeholders, not just shareholders/corporate executives.
Definition of Capitalism
Economic and political system with “private or corporate ownership of capital goods”.
Exchanges of goods are “determined mainly by competition in a free market”.
Associated with private property, profit-making, and can have negative connotations.
Associated with “competition, limited resources, and a winner-take-all mentality”.
Consequences of Capitalism
Socio-economic inequalities within and across nations.
Harmful consequences of profit-making: environmental degradation, inequitable distribution of opportunities, increased tensions between groups, global warming, and global financial crises.
Freeman, Martin, and Parmar: five contemporary narratives of capitalism privilege the rights of one group over others.
Aims of Freeman, Martin, and Parmar
Question problematic assumptions about capitalism to propose a “better version”.
Rethink capitalism in a more ethical way toward a new narrative called stakeholder capitalism.
Stakeholder capitalism: builds in morality and ethics from the foundations and acknowledges stakeholders as essential to value creation and trade.
Diagnosing the Problem
Three problematic assumptions about capitalism:
Market participants have naïve self-interest.
Morality is separate from prosperity.
Competition for limited resources is the dominant mode of prosperity.
Common narratives of capitalism take these assumptions for granted and reinforce them, leading to harmful conclusions.
Five Common Narratives of Capitalism
Labor, government, investor, managerial, and entrepreneurial.
Each group focuses on one stakeholder and neglects others.
1st narrative: Labor capitalism
Marx: capitalism is portrayed as an opposition between labor and capital.
Workers (proletariat) vs. executives/CEOs (bourgeoisie).
Focuses on workers/proletariat.
2nd narrative: Government capitalism
John Keynes: focusing on government intervention as a way of making capitalism ethical.
Welfare state as an example.
Capitalism raises ethical problems, and government is the solution.
Freeman/Martin/Parmar view this as simplistic.
3rd narrative: Investor capitalism
Milton Friedman: free market, less government intervention.
Focuses on shareholders/investors.
Ethics is a side problem. Investors/shareholders should refrain from fraud/deception. Profit-making matters, and social responsibility is an illegitimate tax.
4th narrative: Managerial capitalism
Focusing on management instead of ownership.
5th narrative: Entrepreneurial capitalism
Focuses on entrepreneurs.
Problems Emerging from these Narratives
The three problematic assumptions are at work in each version of capitalism.
Four problems arise from keeping these assumptions unquestioned:
(1) Competition: overlooking cooperation.
(2) Business ethics: situating business outside morality.
(3) The dominant group: focusing on one group of stakeholders.
(4) Business in a liberal democracy: role of the government.
Government resolves conflicts between stakeholders.
The state legislates morality of capitalism.
The state redistributes resources.
Freeman, Martin, & Parmar: these roles of government are temporary fixes.
Stakeholder Capitalism
New vision of capitalism founded on libertarian and pragmatist lines.
Stakeholder capitalism is not based solely on private property, self-interest, competition, and free markets.
Principles of capitalism are worthy goals in and of themselves.
Based on freedom, rights, and the creation by consent of positive obligations.
Acknowledging the important role of ethics and the complex relationships between groups of stakeholders.
Six principles of stakeholder capitalism:
(1) The principle of stakeholder cooperation: business activity is social and enhances value creation.
(2) The principle of stakeholder engagement: a large cast of stakeholders is necessary to sustain value creation.
(3) The principle of stakeholder responsibility: ethics is a necessary part of business.
(4) The principle of complexity: rejects the cardboard view of human nature.
(5) The principle of continuous creation: motivated by incentives other than self-interest.
(6) The principle of emergent competition: competition is not a necessary component of capitalism.
Conclusion
A more fruitful way of thinking of capitalism.
Embracing it and not seeing it as an immutable force or as something intrinsically negative.
Doing justice to how complex and interesting it is and can be.
Here are the key highlights and ideas from the provided text, along with a blend of question types:
Key Highlights and Ideas:
Shareholder vs. Stakeholder Theory: Introduction to two main approaches to corporate governance, focusing on whose interests (shareholders or all stakeholders) should guide decision-making.
Definitions: Understanding the difference between shareholders (stock owners) and stakeholders (anyone with an interest in the corporation).
Guiding Interests: Shareholder theory prioritizes profit-making for shareholders within legal and ethical limits, while stakeholder theory balances the interests of all stakeholders, including employees, customers, and communities.
Conflict of Interests: Recognizing potential conflicts between shareholders' interests and the interests of other stakeholders.
Freeman, Martin, and Parmar on Stakeholder Capitalism: Examination of their paper, which questions problematic assumptions about capitalism and proposes a more ethical approach.
Critique of Capitalism: Identifying harmful consequences of profit-making, such as socio-economic inequalities and environmental degradation.
Five Common Narratives of Capitalism: Analyzing labor, government, investor, managerial, and entrepreneurial narratives and their limitations.
Problems Emerging from these Narratives: Highlighting issues such as overlooking cooperation, situating business outside morality, and focusing on one group of stakeholders.
Stakeholder Capitalism Principles: Introducing six principles of stakeholder capitalism, emphasizing cooperation, engagement, responsibility, complexity, continuous creation, and emergent competition.
Questions:
Multiple Choice:
Which of the following best describes shareholder theory?
a) Balancing the interests of all stakeholders.
b) Prioritizing profit-making for shareholders within legal and ethical limits.
c) Focusing on government intervention in capitalism.
d) Emphasizing cooperation over competition.
Answer: b
Short Answer:
What is the main difference between a shareholder and a stakeholder?
Answer: A shareholder owns stock in a corporation, while a stakeholder is anyone with an interest or stake in the corporation.
Medium-Length Answer:
Explain how Freeman, Martin, and Parmar critique the traditional narratives of capitalism.
Answer: Freeman, Martin, and Parmar critique the traditional narratives of capitalism by arguing that they often privilege the rights of one group over others and take for granted problematic assumptions about capitalism, such as naïve self-interest, the separation of morality from prosperity, and the dominance of competition for limited resources. They believe these narratives lead to harmful consequences like socio-economic inequalities and environmental degradation.
Longer Answer (Application of Ethical Theories to an Ethical Dilemma):
Describe a hypothetical ethical dilemma involving a corporation and its stakeholders. Then, apply both shareholder and stakeholder theories to analyze the dilemma, discussing potential actions the corporation could take and the ethical implications of each theory.
Answer: Ethical Dilemma: A pharmaceutical company discovers that one of its best-selling drugs has severe side effects that were not apparent during initial trials. Withdrawing the drug immediately would protect patients but would also cause a significant financial loss for the company and its shareholders. Shareholder Theory Analysis: According to shareholder theory, the company’s primary duty is to maximize profit for its shareholders within legal and ethical boundaries (avoiding fraud/deception). From this perspective, the company might delay the withdrawal to mitigate financial losses, provided they can avoid legal repercussions and manage public relations effectively. They might disclose the side effects gradually or conduct further studies to downplay the severity. Ethical Implications: This approach prioritizes financial gains over patient safety, potentially causing harm to individuals who continue using the drug without full knowledge of its risks. It could also damage the company’s reputation in the long run if the severe side effects become widely known. Stakeholder Theory Analysis: Stakeholder theory suggests that the company must consider the interests of all stakeholders, including patients, employees, shareholders, and the broader community. From this perspective, the company should prioritize patient safety and transparency. Potential Actions: The company should immediately disclose the severe side effects to the public and regulatory agencies. It should offer a full refund to patients who have experienced adverse effects and work to develop a safer alternative drug. While this may lead to short-term financial losses, it demonstrates a commitment to ethical behavior and social responsibility. Ethical Implications: This approach prioritizes the well-being of patients and aligns with principles of corporate social responsibility. It may enhance the company’s reputation and build trust with stakeholders, potentially leading to long-term benefits despite the initial financial hit.*
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