So when the question was asked, “Which theory of business ethics do you follow” I admit my response was unexpected and certainly not scholarly or academic. My response?
“The theory that keeps you out of federal prison!”
As you might expect from reading the former article – see here – the conversation quickly turned in a different direction. However, the original question was valid. As there are three leading practical theories of business ethics – the Stockholder, the Stakeholder and the Social Contract Theories.
In Part Two – we’ll explore in layman’s terms the Stockholder Theory and look at how it might apply in business today!
If you spent some time reviewing business ethics history (something I am not real fond of – but perhaps a necessary evil), you will note that the Stockholder Theory is the oldest of perceptions or theories related to business ethics. Today, well let’s say that it might be out of favor as this theory is one that would resonate with the 1% not the “Occupy Wall Street” crowd who seem to favor “social responsibility” over capitalism.
Let’s first start with why a business is formed… Businesses (organizations) take many forms – for profit, not-for-profit, associations, education, government, etc. As such the business person’s responsibilities are to manage the business and use business resources to accomplish the businesses mission or purpose. Example – Apple Computer (now the world’s most valuable company) has a mission statement as follows:
Apple designs Macs, the best personal computers in the world, along with OS X, iLife, iWork and professional software. Apple leads the digital music revolution with its iPods and iTunes online store. Apple has reinvented the mobile phone with its revolutionary iPhone and App Store, and is defining the future of mobile media and computing devices with iPad.
Ethically then the employees and management of Apple Computer are obliged to conduct themselves in a way that accomplishes Apple’s objective and business purpose. Let’s see how the Stockholder Theory would apply as it relates to our example – Apple.
THE STOCKHOLDER THEORY
Businesses are created for a purpose and owned by individuals – stockholders (although the ownership form may vary – in other words this would apply to other forms of business ownership – partnership, LLC, etc.) and therefore, the responsibility of those who are hired to run the business are, in a sense, fiduciaries of the owner’s interests. Under this theory, the actions (ethical choices) of those empowered to run the business are limited to expending business resources in ways that meet the stockholders interests or are aligned with the stockholders interests.
If, for example, the stockholders have created the business that is designed to maximize profit for the stockholders – then one might assume that business choices will be focused on maximizing revenue and minimizing costs – even if that includes using cheap labor in a foreign country. On the other hand, if a company is formed with stockholders directing that part of the company mission is to provide local jobs, then ethics would dictate that management choices would favor the objective over the cost minimization. The significant issue under the Stockholder Theory is that the stockholders rule over any other “social responsibility” that might be perceived by outsiders.
Milton Friedman states, “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 or fraud.”
Friedman uses two words that seem to define the boundary of ethics in this stockholder theory – “deception or fraud”. From a practical perspective, in the stockholder theory, management is obligated to advance the business purpose and increase the value of the business for the benefit of the stockholders by using any means short of “deception or fraud.”
A great example that has caught media attention (this is election season – November 2012) is the example of several business owners who are strongly encouraging their employees to be active in the election of the candidate that they feel will provide favorable business conditions for their business. Emails stating attend the rally of a specific candidate “or less” or mandates that require phone calls to be made to encourage a “get out the vote” have come under media scrutiny. The question is – are such actions “unethical”? Using the stockholder theory – if they advance the objective of the stockholder (in this case the advancement of his/her business interests) and they are not deceptive or illegal (fraudulent) then one would conclude that they are ethical.
Keep in mind…this is just a THEORY!
The challenge with the Stockholder Theory is – it is based on the idea of true capitalism – a real free market economy. Nice to write, but non-existent. Today we live in a world where businesses are competing by gaining government subsidies, tax breaks, having state-conferred monopoly status (cable TV franchises are an example) and an environment where governmental regulations dictate the form and format of business enterprise. Management is no longer focused solely on the stockholder’s profit in the pure sense, but rather focused on how to maneuver through the entangled mess of governmental bureaucracy that we find so prevalent today.
Back to Apple. Under the Stockholder Theory if Apple had only the bottom line to consider then hiring cheap labor in China would be ethical and no problem. Yet, we know different. Since there is a concept of social justice (fairly compensating someone for work performed in a humane way) when it comes to employees, Apple had to listen to concerns from the public (consumers) who complained that Apple’s bottom line was not enough. Based on the Stockholder Theory, if enough people were concerned that Apple was not socially responsible, then enough people might elect not to buy Apple’s product, therefore it is in the best interest of the stockholders to add a bit of social responsibility into the mix to preserve and protect Apple’s financial interest from the ultimate power – the purchaser.
Ethics – making the right decision based on all the facts and circumstances – in the case of the Stockholder Theory – to satisfy the needs and demands of the stockholders from whom the business got it’s start and for whom the business ultimately serves.
WHAT ARE YOUR THOUGHTS? YOUR COMMENTS ARE WELCOME!