Business And Professional Ethics Analysis - Myassignmenthelp.Com

Question: Discuss about the Business And Professional Ethics Analysis. Answer: In the contemporary era, corporations have ceased to be only a legal device that is used merely to carry out private business transactions. There has been a growing controversy with respect to the purpose of a corporation in the modern era. On one hand, several scholars have undertaken extensive research to assert that the sole objective of business corporations is to maximize the wealth of the shareholders of the corporations. On the other hand, there is a growing need expressed by the broad business community, which includes social and environmental activists, customers, institutional shareholders, government regulators and businesses themselves for the corporations to be accountable for the environment and the community that is affected by the corporations. This gives rise to two corporate theories that are contradictory to each other, namely, the shareholder value theory and the stakeholder value theory. This essay entails critically analyzes the corporate theories that states th e purpose of the corporations in light of the arguments and views of Evan and Freeman, Kenneth Goodpaster and Milton Friedman. The essay shall further discuss about the probable strength and weakness of their respective views and arguments with respect to the moral obligations and social responsibilities of business corporations. As per the shareholder value theory, the business corporations purport to optimize the financial returns for the shareholders of the corporations. This is a dominant economic theory used in business where optimization of shareholder wealth is established as purpose of the firm in the financial, economic and legal theories. According to Nobel Laureate Milton Friedman (1970) argues that a corporation purports to optimize financial return for shareholders. He sternly believes that a corporation is usually operated and owned solely for the advantages of the shareholders. Friedman believes that the sole responsibility of a business corporation is to use its resources and involve in activities that are designed to accelerate in profits provided the corporation is engaged in activities. Such activities amounts to free and open competition and is debarred of any fraud or deception. Three fundamental assumptions can be adduced in support of the shareholder view of the firm. Firstly, the environmental, social and human expenses that are incurred while carrying on the business operations internalized as per the requirements of law and all the other expenses should be externalized. This shareholder value theory states that the sole purpose for carrying out the business is to increase cash flow for the shareholders and the revenue along with reduction in risk and minimization of cost. He asserted that to enhance the revenue, it is important to sell products that are more expensive to the society than the expenses is incurred in the costs o the products like sport utility vehicles. Secondly, he believes that self-interests are a form of human motivator as it influences human significantly. It is a well-established fact that organizations and people shall act reasonably as per their own self-interest with the objective to optimize value and efficiency for the community altogether. According to Friedman, the modern economic theory is established on essential assumption that individuals act reasonably for their respective self-interests. According to Tricker and Tricker 2015, the arguments and viewpoints of Friedman is similar to that of Adam Smith. However, Carroll (2015) argues that this self-interest acts as human motivator may give rise to a conflict between the managers (agents) and the shareholders (principals) in a corporation owned by the public as managers would act as per their self-interest and not as per shareholders interest. Thirdly, Friedman argued that corporate firms are primarily nexus of contracts where priority is given to those contracts that tend to have the most significant impact on the profitability factor of the firm. This nexus of contracts theory states that shareholder has dominance over the stakeholders. According to stakeholder value theory, it provides an alternative purpose of the firm and is contradictory to the shareholder value theory as it emphasizes on the wider social interests that is beyond economic value creation for the shareholders of the corporations. R. Edward Freeman who believes that managers of an organization are obligated to strike a balance between the interests of all the stakeholders of a corporation has established this stakeholder value theory. According to Evan and Freeman (1933), the purpose of the firm should be refined to be serving as a means to coordinate the interests of all the stakeholders of the company. Weiss 2014 agrees with Freeman that this stakeholder theory depicts that the business corporations rely on the stakeholders for their success as they have a stake in the business organizations. The question who can be termed as a stakeholder is subjected to several controversies. Whether stakeholders include only those individuals that are affected by the corporations as per the broad definition of Freeman or whether they include the constituencies and individuals that contribute to the wealth-creating activities and capacity as per his narrow definition. Stakeholder refers to those individuals who affect the corporations and the profits earned by the same, the shareholder value theory shall supersede the stakeholder value theory and the stakeholder theory shall not be considered as an alternative to such shareholder theory. The stakeholders of a modern corporation depict the owners, employees, suppliers, customers and the community. Weiss 2014 states that owners have financial state in the corporation in the form of bonds, stocks and consequently, they expect some form of financial return. The firm affects the livelihood of the owners if a significant part of the retiremen t income is in bonds or stocks, it shall affect the ability of the owners to care for themselves when they would not be able to work for longer. The livelihood of the employees is at stake and they have their jobs, which might also get affected. Moreover, it often happens that the employees have specialized skills for which there are less appropriate elastic market. In return for their labor, the employees expect some benefits, wages and security and some kind of meaningful work. Since the employees are being used as means to realize the objective of the corporations, they expect participation in decision-making process that might affect their use. Moreover, in return for their loyalty, the corporation is expected to take care of their needs and stand by them during difficult times. The suppliers, as stakeholders of the company play a significant role in the success of the firm, as they supply raw materials that determine the final product and its quality and price. The firm becomes the customer of the supplier, which is essential for the suppliers to survive. Therefore, Freeman states that if the firm treats the suppliers as a valued and essential stakeholder member instead of considering it a mere source of materials, the supplier shall also respond the firm at the time of its need. The customers as a stakeholder exchange resources for the products of the firm and receive benefits of the products in return. Customers are the means of support of a corporation as they enable the firms to earn revenue. Tai, F.M. and Chuang (2014) agree with Freeman that as per the reinvestment of earnings in huge corporations, customers usually pay indirectly for the development of the new services and products. Short et al (2016) asserts that maintaining good relations with customers also leads to success with the other stakeholders. It is evident from the fact that companies that have performed well is usually found to have laid more emphasis on the customers. It is expected from the corporations that it caters to the needs of the customers, addresses the needs of the owners as well as that of the suppliers of the organizations. The community grants a right to the firm to build infrastructures and earn benefits from the tax base and from the social and economic contributions of t he corporations. In return, of such services, the firm is expected to be a good citizen as any person is it artificial and natural. The firm is expected not to expose the community to hazardous circumstances in the form of pollution, etc. Goodpaster designs his theory based on the theory established by Freeman (1984) and categorizes the stakeholder theory into three distinct approaches such as multi-fiduciary, strategic and a synthesis. As per the strategic approach, stakeholders are considered as a source to create profits for the shareholders. The multi-fiduciary approach considers the firm to have a fiduciary duty towards the stakeholders along with the shareholders. Instead of considering one stakeholder to have a dominant impact, the concerns of a wider stakeholder community are taken into consideration. According to the synthesis approach, it combines the two other approaches where the corporation has both an ethical as well as a moral duty towards the stakeholders; however, the shareholders are exclusively accountable to carry out fiduciary responsibilities. He states that normative stakeholder theory considers that the corporation strikes a balance with respect to the interests of the community for the welfare for all. He further believes that the instrumental stakeholder theory describes the managing stakeholders that are essential for the profits of the firm, which almost depicts the perspective of the shareholder value theory. According to the classical approach of Friedman towards corporation, the sole purpose of the corporation is to earn profits for the shareholders. Therefore, the only social responsibility of business is to use its resources and engage in activities that have been designed to enhance the profits of the company ensuring the activities are carried with fraud or deception. On the contrary, the stakeholder theory as advanced by Freeman is a significant alternative as the task of the manager is to safeguard the rights of the stakeholders. His approach depicts the social responsibility of business. He perceived organizations as social institutions whose responsibilities are beyond their fiduciary responsibilities to the shareholders, employees and directors. However, Mason and Simmons (2014) argues that despite this debate over the purpose of the corporations and its approach towards the stakeholders, both the stakeholder and the shareholder perspectives lack pragmatic assessment. It is imperative to understand whether the shareholders would be able to achieve their aims better under a Freeman regime or whether the Friedmans approach would enable the stakeholders to achieve their aims better. The directors are assumed to represent the interests of shareholders that appoint the directors. Consequently, the directors appoint the managers who are responsible for safeguarding the interests of the shareholders. This outlook implies that boards are not entitled to spend the funds of the company beyond the purpose of the company. The shareholder theory advanced by Friedman disregarded social responsibility of the corporations and emphasized on earning of profit as the sole objective of the company. However, Carroll (2015) argued that the neo-classicists accept that corporations do not possess the resources to resolve social issues neither the society should expect the corporation to do the same. On the contrary, the stakeholder theory, Weiss (2014) asserts that the organizations, which strive to be beneficial for the stakeholders, not only face huge competitive disadvantage but also are unmanageable. The stakeholders may not share common commercial purposes where some stakeholders may want the company to grow while some may want the company to maintain the current size of the company. Some stakeholders may want the company to fail or to take over ad merge with other companies. The multi-fiduciary policies adopted by the management frustrates the purpose of the company or at least leads the company to confusio n in terms of its purpose. The stakeholder theory also fails to indicate how stakeholders should be represented or how their interest is to be safeguarded. Nevertheless, the most appropriate approach seems to be that of Freemans, who perceived corporation as a network of relationships that would make it possible to create a social world in which care is given utmost significance. (Leipziger (2017) agreed with this view stating that corporations imply a nexus of contracts which is both implicit and real, in between the equals of the stakeholder groups. The corporate responsibilities of any corporation obligate it to resolve social issues while achieving profits. These responsibilities also include duty of the corporations to express gratitude for the communitys benefits, duty to exercise their power and duties as citizenship as compared to individual citizens. Reference List Blowfield, M. and Murray, A., 2014.Corporate responsibility. Oxford University Press. Carroll, A.B., 2015. Corporate social responsibility.Organizational dynamics,44(2), pp.87-96. Cooper, S., 2017.Corporate social performance: A stakeholder approach. Taylor Francis. 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