Business Ethics An Introduction to Ethical Theory and Business

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Pedavena, 12 Giugno 2010
• Shareholder v. Stakeholder Theory:
Milton Friedman v. Ed Freeman
(Discussing the readings)
Simone de Colle
University of Virginia
sd7ua@virginia.edu
1
Different views on ethics and business…
…are they really incompatible?
“The only Social responsibility of business is
to increase its profits”
Milton Friedman, economist
“Managers shoud balance the multiple-and sometimes
conflicting-claims of their stakeholders”
Ed Freeman, stakeholder theorist
Milton Friedman (1970)
The only Social responsibility of business
is to increase its profits
What is Friedman’s argument, in a nutshell (or 4 steps)?
1. ‘business’ cannot have ‘responsibilities’
(only individuals/managers do)…
2. The managers of the corporation are
the Agents of a Principal (the shareholders)
3. The shareholders want Max profit…
4. CSR is taxation without representation…
Therefore, the only social responsibility
of managers is to maximize profits!
Reading it carefully: Is Milton Friedman really
arguing that there is no ethics in business?
Milton Friedman (1970):
“The only social responsibility of
business is 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”.
4
Ed…reading Milton
(Freeman)
(Friedman)
The Friedman Problem:
Business as Maximizing Shareholder Value
• Milton Friedman’s New York Times Magazine article, “The
Social Responsibility of Business is to increase its profits”
has been long juxtaposed against stakeholder theory
and the ensuing debates have revealed few new or useful insights. In an
attempt to move beyond the narrow supposed stakeholder/stockholder
dichotomy, we spell out our reading of Friedman’s controversial article
we believe to be compatible with Stakeholder
theory—in fact we see Friedman as an early
stakeholder theorist.
which
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
Ed Freeman & Stakeholder Theory
Definition of stakeholder
“In a narrow sense, the stakeholders are all those identifiable
groups or individuals on which the organisation depends for
its survival, sometimes referred to as primary stakeholders:
stockholders, employees, customers, suppliers and key
government agencies.
On a broader level, however, a stakeholder is any identifiable
groups or individual who can affect or is affected by
organisational performance in terms of its products, policies
and work processes. In this sense, public interests groups,
protest groups, local communities, government agencies, trade
associations, competitors, unions, and the press are
organisational stakeholders”.
(R.E. Freeman,1984)
Definitional and Instrumental Stakeholders
Environmentalists
NGOS
Governments
Financiers
Suppliers
Firm
Employees
Critics
Customers
Communities
Others
Media
Ed…reading Milton
(Freeman)
(Friedman)
The Friedman Problem: Business as Maximizing Shareholder Value
•
Friedman writes, “It may be in the long-run interest of a corporation that is a major employer in a small
community to devote resources to providing amenities to that community or to improving its government,”
he goes on to say that it is wrong to call this social responsibility because, “they [the actions] are entirely
justified in its [the corporation’s] self interest”.
• For Friedman supporting stakeholder interests is not about social responsibility; it’s about
capitalism. According to Friedman the purpose of business is 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”.
All this sounds well and good to us. A key difference between our view and Friedman’s is what
makes business successful. Friedman believes that it is maximizing profits. We believe that in order
to maximize profits in the long-run, companies need great products and services that customers want,
solid relations with suppliers that keep operations on the cutting edge, inspired employees who stand for
the company mission and push the company to become better, supportive communities that allow
businesses to flourish.
So in our view Friedman could have written the above quotation as: “Business is about making sure that
products and services actually do what you say they are going to do, doing business with suppliers who
want to make you better, having employees who are engaged in their work, and being good citizens in
the community may well be in the long-run (or even possibly the short run) interest of a corporation”.
Stakeholder management is just good management and will lead to maximizing profits.
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
Freeman reading Friedman (cont.)
• Under this reading Friedman is at least an instrumental stakeholder
theorist...
• There is a difference in the theories about the way the world works.
Friedman may actually believe that if you try to maximize profits you will.
We believe that trying to maximize profits is counterproductive
because it takes attention away from the fundamental drivers of
value – stakeholder relationships. There has been considerable
research that shows that profitable firms have a purpose and values
beyond profit maximization (Collins & Porras, Waddock et al.)
• Both we and Friedman agree that business and capitalism is not
about social responsibility.
• Despite the differences we believe the Friedman’s maximizing
shareholder value view is compatible with stakeholder theory – after
all the only way to maximize value sustainably is to satisfy stakeholder
interests.
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
Freeman on mainstream management theory:
The Separation Fallacy
The Separation Fallacy:
It is useful to believe that sentences like, “x is a business decision” have
no
ethical content or any implicit ethical point of view. And, it is useful to believe that
sentences like “x is an ethical decision, the best thing to do all things considered” have
no content or implicit view about value creation
and trade (business).
This fallacy underlies much of the dominant story about business, as well as in other areas in
society. There are two implications of rejecting the Separation Fallacy. The first is that almost
any business decision has some ethical content. To see that this true one need only ask
whether the following questions make sense for virtually any business decision
The Open Question Argument
(1) If this decision is made for whom in value created and destroyed?
(2) Who is harmed and/or benefited by this decision?
(3) Whose rights are enabled and whose values are realized by this decision
(and whose are not)?
(4) What kind of person will I (we) become if we make this decision?
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
The Reality: We Have a Better Way
• Business is about the creation of value for
stakeholders. Value has economic, social, political,
technological, and other aspects to it.
• Separating “business” from “social” is a mistake.
It marginalizes “social” and gives business and
capitalism a bad name, as “anything goes”.
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
CONCLUSION: Freeman suggests that we
replace “Corporate Social Responsibility”
with “Corporate Stakeholder Responsibility”
• Corporate Stakeholder Responsibility is practical,
and leads to a more robust idea of value creation.
• CStakeholderR is the essence of capitalism as a
system of social cooperation and value creation
• In other words, Managing for stakeholders is about
creating as much value as possible for stakeholders,
without resorting to tradeoffs.
(source: E.R. Freeman, A. Wicks, J. Harrison, B. Parmar and S. de Colle, Stakeholder Theory: The State of The Art,
Cambridge University Press, 2010)
Q
RES
Una definizione di CSR come
governance allargata (Sacconi 2003)
 Chi governa l’impresa ha responsabilità
La CSR
come
modello di
gestione
strategica
d’impresa
che si estendono dall’osservanza dei doveri
fiduciari nei riguardi della proprietà (azionisti)
ad analoghi doveri fiduciari nei riguardi in
generale di tutti gli stakeholder
La CSR è un processo volontario
attraverso il quale l’impresa si
assume dei doveri fiduciari verso
tutti gli stakeholder.
Non è fare beneficienza... (non solo)
È un nuovo modello di governance e
gestione strategica dell’impresa
SHAREHOLDER or
STAKEHOLDER VALUE?
Q
RES
•
Gestire l’impresa secondo il contratto sociale
significa:
–
Cercare un equilibrio equo che implica la soddisfazione
degli interessi di ciascuno STAKEHOLDER, quindi
anche dello SHAREHOLDER
N.B. Questo è vero in un senso ma non nell’altro:
il massimo interesse dello shareholder non coincide
sempre con l’accordo imparziale (sorry, Mr. Friedman!)
Sacconi:
CSR as a
Governance
model
Procedura decisionale:
•
•
•
minimizza le esternalità su soggetti esterni non
partecipanti alle transazioni
calcola tutti gli accordi compatibili con la
massimizzazione degli interessi congiunti, cioè con
l’accordo cooperativo degli stakeholder in senso stretto
entro questo insieme, se esiste più di una decisione
possibile, scegli quella che massimizza il valore degli
SHAREHOLDER
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