PHL318 Exam 1 Week 4

Who developed the modern Stakeholder Theory of CSR?

Although there have always been business leaders who believed in an obligation to give back to society, the modern stakeholder theory was pioneered in R. Edward Freeman's Strategic Management: A Stakeholder Approach (1984). Freeman's book helped add the concept of stakeholders to management theory, sought to develop an approach to management that was both profitable and socially responsible, and offered various arguments for the claim that a business has moral obligations to all of its stakeholders.

Kenneth Goodpaster writes that "no one can expect of an agent behavior that is less ethically responsible than what he would expect of himself." What point is he making?

An agent is an employee, someone we hire to further our interests. Goodpaster's point is that you cannot hire someone to act in ways that violate your own ethical obligations. For example, if it is unethical for me to poison my neighbor's dog because its barking keeps me awake, then it is also unethical for me to hire someone else to poison the dog.

Compare and contrast the two versions of the stakeholder theory.

Both versions claim that the company has a moral obligation to look out for the interests of all stakeholder groups. However, the strong version doesn't give priority to making profit for stockholders; rather, it puts their needs on a par with those of the other stakeholders. The moderate version requires a company to give top (though not sole) priority to making a healthy (though not necessarily maximum) profit for stockholders.

On page 16, Friedman asks how a manager intent on spending his company's money to help society is to know how to spend it. What point is he making?

Business persons have expertise in making businesses run profitably, not in pursuing social goals such as fighting inflation, helping the poor, establishing social harmony, etc. Requiring business persons to promote social goals gives them a job that they are not trained to handle. (Shaw calls this the "business can't handle it argument." Noggle calls it the "wrong tool for the job" argument

What would the narrow/classical theory of CSR advise the CEO of Zephyr to do?

Eliminate the health benefits (Remember, according to the classical theory, the only moral obligation of the corporation is to follow the law and basic rules of fair play, and to make money for the stockholders.)

Why is limited liability so important to modern business?

Limited liability makes investing in business far less risky—the stockholder risks only her investment (i.e., the price of the stock). This encourages investment.

Thus, Schlossberger argues that, just as stockholders make an investment that is necessary to the business, so too does society make an investment that is necessary to the business. In what ways could society be seen as "investing" in business?

Material and economic infrastructure, a market-based economic system, the accumulated knowledge of the community, a trained work force, and limited liability & other legal protections for businesses and their owners. These things, Schlossberger argues, are investments that are just as important as the capital invested by the stockholders.

Does this mean that the interests of the stockholders should always take a back-seat to the interests of other stakeholders?

No, but it does mean that sometimes a less profitable alternative may be chosen in order to benefit other stakeholders.

According to the Narrow/Classical theory, when should a business corporation engage in charitable giving or community investment?

Only when either (a) doing so will maximize the company's profits, or (b) the owners of the company have specifically given it social or charitable goals. (From here on out, unless I say otherwise, you should assume that we are talking about purely business corporations that have not been given any charitable or social goals).

According to Friedman, what is the significance of the fact that the corporation's managers have a "promisory" (often called a "fiduciary") relationship to the stockholders?

The promissory (fiduciary) obligation that the corporation's managers have a to the stockholders; requires the managers to act in the stockholders' best interests. Using the company's resources in any other way—such as promoting someone else's interests, or trying to help society—is a violation of that obligation.

Freeman also argues that the pursuit of profit by managers on behalf of stockholders must be constrained for two reasons. What are they?

The public goods problem threatens to create bad situations unless businesses look beyond profits to the common good. "Moral hazards" of real-world markets: In non-ideal markets, some transactions won't be subject to competitive forces. Pure profit-seeking will not keep such transactions economically efficient and morally optimal. (E.g., Price gouging, exploitation of uninformed consumers, etc.) Freeman's conclusion: Sound economic reasons support recognizing business's obligation to do more than seek profit.

What reason do proponents of the Moderate Stakeholder theory offer for giving priority to the owners?

The special duties to the stockholders are based on the fact that they are not only stakeholders, but they're also its OWNERS; ownership gives them an "extra" claim to consideration by the company.

Milton Friedman's article sketches three of the most important and influential arguments for the narrow theory of CSR. Friedman's main argument focuses on property rights and "promissory" ("fiduciary") obligations. According to Friedman, what is the moral significance of the stockholders' property rights?

The stockholders OWN the company; therefore, according to Friedman, they have the sole right to the profits generated from its activities. To divert company profits/resources to society may be well-meaning, but it is unethical because it violates the property rights of the owners of the company. (Thus, it is a form of theft).

Freeman writes that "the stakeholder theory does not give primacy to one stakeholder group over another." What is the significance of this statement?

This claim suggests a very STRONG VERSION of the Stakeholder Theory, which claims that corporations should give EQUAL priority to the needs and interest of each stakeholder.

Freeman claims that there has been an erosion in the consensus in favor of "managerial capitalism" (the classical or narrow theory of CSR). What major form of evidence does he present for this claim?

Consumer protection and product liability laws, Labor laws (including health and safety laws, minimum wage laws, and plant closing laws), Environmental laws Freeman argues that these legal developments increasingly indicate that society believes that businesses have obligations to do more than just make money—they have obligations to take care of customers, workers, and the environment. He suggests that this constitutes a new consensus that managers must not give absolute priority to stockholder profit.

What the Narrow/Classical Theory Says

A corporation is the . . . of the owner(s) private property (For publicly traded companies, the owners are the stockholders). Therefore, it should be run . . . . in whatever (legal) way the owners dictate. Because of this, a corporation should have no other purpose than . . . . unless it is explicitly given some other purpose by its owners. to make money for its owners

Why does the strong version of the stakeholder theory seem to have radical implications for business?

Because the Strong Version gives the corporation the exact same duty toward its employees, customers, society, etc., as to its owners, it makes the stockholder's rights no more important than those of anyone else who is affected by the company's actions. Some critics suggest that this version of the stakeholder theory is fundamentally anti-capitalist because it deprives the stockholders of the rights that they should have as owners of the company, and instead relegates them to the status of "just one more stakeholder."

Robert Solomon writes, "stockholders are not homines economici, that is, merely economic self-maximizing beings. They are people with values and virtues who presumably care about something more in life than how their shares are doing." What point is he making?

His point is that many, and maybe even most, stockholders are also members of one or more of the other stakeholder groups. As such, they have interests that go beyond merely maximizing the return on their investment.

How does Goodpaster use that point in his argument for a broad/wide/stakeholder approach to CSR?

If I have obligations to avoid harming those who are affected by my actions, and to contribute to the improvement of society, then it would be wrong for me to hire someone to act in ways that are harmful to others or which ignore the needs of society. So, even if the managers of a corporation work for the stockholders, Goodpaster would argue that this fact does not give the managers the right to ignore the obligations that the stockholders themselves have.

But what if the company was teetering on the brink of failure, and could only survive by eliminating the health benefits?

In a case like this, the stakeholder theory would advise cutting the benefits; although this action would harm some stakeholders, all stakeholders—including the employees—would be harmed even more if the company were to fail.

What would the stakeholder theory advise?

In this situation, the stakeholder theory would almost certainly advise the company to keep the health benefits. After all, the stockholders are already doing well, and, according to stakeholder theory, management has an obligation to all of the company's stakeholders, including the employees.

What conclusion does Solomon draw from his observation that stockholders are people who care about more than just the price of their stocks?

It is often difficult to know WHO the owners of a publicly traded company are, and what, specifically, they want. While it's safe to assume that they want to make SOME money, there's no reason to assume that they want their company to make money at any cost. Therefore, . . . . . . managers should not assume that it is "OK with the stockholders" if they maximize profit at the expense of employees, customers, the community, or society.

According to the Classical/Narrow theory of CSR, . . .

It might be OK for a (purely for-profit) corporation to sponsor a local arts festival, but only if it will gain extensive advertising; it might be OK to invest in in local technical schools but only to ensure a pool of skilled workers. Note that the narrow theory implies that a good manager should carefully "means test" such expenditures to ensure that they are the most profitable uses of company funds.

How does Schlossberger's use this idea of society as an investor in business as an argument for a wide/broad/stakeholder approach to CSR?

Just as a business has an obligation to provide a return on the capital invested by shareholders, Schlossberger's dual investor argument claims that businesses also have an obligation to provide a return to society on its investments.

In response to the radical implications of Freeman's Strong Version of the Stakeholder theory, some business ethics experts, such as Kenneth Goodpaster, have offered more moderate versions of the stakeholder theory. What do Moderate Versions of the Stakeholder Theory say?

Moderate Versions of the Stakeholder theory claim that while corporations have duties to all stakeholders, they have special, or extra duties to the owners of the corporation.

Does this mean that the corporation should do anything to maximize profits?

No. Friedman (like other proponents of the Narrow View) does not think that "anything goes". Friedman is very clear in saying that a business must still obey any relevant laws and established "ethical custom," by which he seems to mean the basic rules of fair play (generally accepted ethical standards). But "ethical custom" as he understands it does not include any ethical duty to "give something back" to society.

According to Moderate Versions of Stakeholder Theory, a company's . . . . duty is to stockholders.

On this version of the theory, the corporation's first moral obligation is to try to make a reasonable profit for the owners. But this is not the corporation's only obligation. It still has an obligation to look out for the interests of other stakeholders. So there is no obligation to maximize profit at the expense of other stakeholders. According to moderate stakeholder theory, managers should look out for the interests of all stakeholders, but the interests of the owners take priority.

What is a stakeholder?

Persons or groups who may be affected by a corporation are called "stakeholders." Such a person or group has a "stake" or interest in what the company does. Give some examples of stakeholders. the stockholders, the workers, customers, business partners, the local community society as a whole

Friedman begins his article by telling a joke (if you can call it that) about a prose-speaking Frenchman. The Frenchman is surprised when he finds out the name for something he's been doing all along. Friedman's point is that there is something that business has been doing all along, although many business persons may not realize that they have been doing this. What is that "something"?

Providing benefits to society.

According to the Stakeholder Theory of CSR, what are the corporation's moral obligations to its stakeholders?

Stakeholder theory says that those who run a company must run it so that it benefits all stakeholders. According to Stakeholder Theory, a corporation's management must . . . the often-competing needs of the corporation's stakeholders when they come into conflict.

What is the Stakeholder (Wide/Broad) Theory of CSR?

The "wide" or "broad" theory of CSR is the idea that business corporations have a moral obligation to "give something back" to society; stakeholder theory is just the newest version of this idea. (Although it is technically just one form of wide/broad theory of CSR, it is now so dominant that most people (including me) now use the term "stakeholder theory" as a synonym for the wide/broad theory of CSR.)

The Question of Corporate Social Responsibility (CSR) is this: Does a corporation have a responsibility to "give something back" to society? If so, what? Two main theories of CSR have been defended. What are they?

The Narrow/Classical view of CSR: Business owes society nothing more than playing by the rules. (This view is also sometimes called "managerial capitalism.") The Wide/Broad/Stakeholder view of CSR: Business has an obligation to do more than just play by the rules; it has an obligation to "give something back" to society.

Who is the most famous defender of the Classical (Narrow) Theory of Corporate Social Responsibility?

The most famous and influential defender of this view is Milton Friedman. His classic defense of the view appears in his book, Capitalism and Freedom. The reading entitled "The Social Responsibility of Business is to Increase its Profits" is based on a chapter of that book. This view has been held and defended by a large number of theorists and practicing business persons, and in some cases by the courts (e.g., Dodge vs. Ford Motor Co. 1919).

Business scholar Keith Davis writes that "one basic proposition is that social responsibility arises from social power." This claim is part of Davis's argument for a wide/broad approach to CSR. What else does his argument rest on?

The observation that corporations—especially large ones—have enormous amounts of power in our society, influencing everything from government policy to the daily lives of citizens.

According to stakeholder theory, when should the management of a corporation NOT maximize profit?

When doing so would harm the interests of other stakeholders.

What is Strategic Stakeholder Theory?

focuses not on a company's ethical duties toward stakeholders, but on how taking care of stakeholders will often pay off purely in business terms. Thus, strategic stakeholder theory claims that taking care of the stakeholders is not only the ethical thing to do, but, in the long run, it may be the most profitable thing to do as well.

Limited Liability

is an important legal protection for businesses and their owners; as such, it is often mentioned in versions of the Dual Investor Argument for CSR. It is also an important concept for understanding the nature of corporations. To make sure that you understand this important idea, I'll tell you . . . A Tale of Two Wienerdog Farms.