Stakeholder And Stockholder Theories

 Market Failure Model And CSR

The key issue in business ethics has to do with the nature of firms. The key question, therefore, inquires whether there are any moral obligations that corporate managers or executives possess other than to increase profits for the firm’s stakeholders. To answer this question, theorists have developed a number of theories with the most essential including the stakeholder theory and the stockholder theory (Vaidya, 2008, pp. 63). This essay, therefore, is a critical overview of the works of Freeman and Friedman critiquing the issue of whether corporations have a corporate social responsibility or not. In doing this, the essay will make use if stakeholder, stockholder and market failures models of management of corporate, and argue for one of the three models, and how it rivals the other kinds of models.

Friedman famously pointed out that the key responsibility of any corporate executive is to do anything possible and permissible within the boundaries of local ethical customs and law to increase and maximize profits for the firm’s stockholders. The economist viewed this as the moral responsibility of corporations, in so far as one could talk of firms having moral responsibilities (Vaidya, 2008, pp. 63).

As a worker in a firm, it would be ethically and morally impermissible and wrong for an executive to make use of funds set aside for maximizing profits for activities deemed socially responsible like funding charities, the building of local schools or cleaning of the environment. According to the economist, social responsibility is a function or an obligation of the government, the government has the responsibility to correct recognized social ills by setting aside funds and institutions to deal with such ills. Furthermore, he pointed out that individuals are responsible for voting for the political individuals and leaders with agendas that include the social ills they want to eliminate. On analysis of stakeholders of the moral responsibilities of corporations, executives are employed by the stockholders and, therefore, as employees are needed to work as per the board’s decisions. Friedman argues that corporations are concerned with making profits, and, therefore, since executives are the stockholders’ employees, their key obligation is to increase the profits as per the wishes of their employers (Vaidya, 2008, pp. 63).

There are numerous responses to the stockholder theory by Friedman, but among the best known and common critical response is the one by Freeman and it is summarised under the stakeholder theory. The theory argues that stockholders are but a single group among other groups that has an interest in a corporations’ dealings. This is to mean any individual who has a stake in the firm’s future is a stockholder. Freeman takes the stand that the stockholder theory is inadequate because it does not precisely capture the fact that firms are to be held responsible by groups of interest that do not act as stockholders, like environmental protection agencies and activist groups for animal rights (Vaidya, 2008, pp. 63).

The two arguments present themselves as different accounts of the understanding of a corporation and what its moral responsibilities are. As per the stockholder theory, it seems as if it could never be the case that an executive in a corporate permissibly chooses an action that is socially responsible over an act that purely increases and maximizes profits. For instance, a corporate executive could never choose to spend some money on cleaning up some environment in a community when the same funds could be useful in funding development and research for a project that has an increased chance for increased profits for the firm’s stockholders. On the other hand, it seems as if the stakeholder theory only allows for the chance that a firm executive may permissibly choose to fund a community project because his obligation is not only to the firm’s stockholders, but also the surrounding community (Vaidya, 2008, pp. 64).

Although these two theories are clearly different, one should note the following things. Firstly, it is no stern part of the stockholder concept that an executive in a firm cannot use funds for social responsibility. The reason behind the main argument of the stockholder theory is that the sole responsibility of a firm’s executive is to the firm’s stockholders and not to any other individuals or group. However, for it to be the case that the firm’s executive cannot allocate money for use in community projects, it would also have to be true that a firm’s stakeholders always need their money spent on increasing and maximizing profits (Vaidya, 2008, pp. 64).

If the stockholders of a particular firm needed to use their funds on community projects and not use it for maximizing profits, then nothing in the stockholder concept would stop an executive from using funds for that purpose. Generally, what the stockholder theory argues is that executives are employed by the firm’s stockholders, and are, therefore at their mercies to the level to which they allow the law to govern them. The concept, therefore, does not speak directly to the matter of whether a firm may pursue the increase of socially responsible activities at the cost of maximizing profits (Vaidya, 2008, pp. 64).

Secondly, on the assumption that considering the interests of stakeholders is an excellent guide to increasing profits for the firm’s stockholders, one can see the stakeholder concept as a type of special case of stockholder concept. This is mostly because a firm that ignores the interests of stakeholders grows poorly with time. This means that attempting to and recognizing the interests of the different stakeholders may in itself be a way of increasing and maximizing the profits of a corporation in the long term (Vaidya, 2008, pp. 63).

So do businesses or corporations have social responsibilities? This paper will make use of the stockholder theory to answer this question, using concepts from the stakeholder theory and the market failures models to support the answer by showing the inadequacies of these two theories. Friedman argued that only individuals can have responsibilities and not businesses or firms. To him, a corporation is an artificial individual and in this sense might possess some artificial obligations, but a business or corporation as a whole can never have responsibilities even when viewed under this vague sense. Presumably, to Friedman, the people who are responsible are the business people, which mean corporate executives and individual proprietors. A corporate executive, in this case, is an employee employed by the business owners. He possesses a direct obligation to these employers. That obligation is to carry out business according to the desires of the employers, which in general terms is to make as much profit as possible while conforming to the basic laws and rules stipulated by the society, both those embodies by ethical customs and law. This is to mean that the manager or executive acts as the agent of the firm’s owners and his key responsibility is to them and no one else (Friedman, 2008, pp. 65).

This is not to mean that the rights of the executive as a person have wavered because he is a person, and he might have a number of obligations he might assume voluntarily. But in this case, he acts as a principal and not an agent, he spends his own funds, energy and time and not that of the firm. Therefore, if these are social obligations, they belong to the individuals and not the corporation. To say that a corporate manager or executive has a social obligation is to say that the manager has to operate in a way that does not represent the interests of the firm but his own. In this case, he cannot spend the money of the stockholders or of the customers of the firm’s employees to fulfill his social responsibilities. These individuals could, however, separately spend their funds on certain activities if they wanted to do so. The manager exercises a different social obligation rather than acting as an agent of his employers or of the employees or customers only if he uses the funds in a different manner than they would have. However, if he does this, he is imposing taxes and deciding how the proceeds from taxes will be spent. This, however, results to political questions on two dimensions: consequences and principle (Friedman, 2008, pp. 65).

On the matter of political principle, the imposing of taxes and the use of proceeds from tax are functions of the government. There are elaborate systems to control such functions. To make sure that taxes are imposed in accordance to the desires and preferences of the public. In this case, the business person is to act simultaneously as an executive, legislature and jurist. He decides whom to tax for what purposes and by how much, and he spends the proceeds- all of this guided solely by general exhortations to control inflation, fight poverty, improve the environment, among others (Friedman, 2008, pp. 66).

The whole justification for allowing the executive to be selected by the firm’s stakeholders is that the executive acts as an agent who senses the desires of the firm’s principle. However, this justification disappears when the executive imposes taxes and uses the proceeds for social responsibilities. He becomes a civil servant, a public employee even when he remains in name the employee of a private business. Something that contradicts what civil servants are in essence. This is the main reason why the social responsibility doctrine involves the acceptance of the view of socialists that mechanisms of politics, not of market, are the most excellent methods to decide the allotment of rare and scarce resources to alternative uses (Friedman, 2008, pp. 67).

As compared to the stockholder theory, the stakeholder theory has numerous weaknesses in the position it takes of corporate social responsibility. The fact that executives or managers have moral obligations with respect to employees, customers, and other groups does not necessarily indicate that these responsibilities must take a fiduciary form as the stakeholder theory claims. There is some disadvantage being seduced by this illustration, leading to one to assume that the status of the stakeholders is closer to that of shareholders than it is. Freeman argues that the executive must be like King Solomon, adjudicating the rival claimsof a number of stakeholder groups. However, giving executives the legal freedom and right to balance such claims as they see fit could lead to extraordinary risks (Heath, 2008, pp. 118).

Another weakness in associated with the stand of stakeholder theory on social responsibility has to do with the privilege it tends to give the interests of those who are organized well over those who are organized poorly because well- organized groups can present themselves as a coherent group with common interests, since it focuses more on the relationship between the executive and different groups in the community. To observe this bias, one only needs to see the difference in the way that different theorists of stakeholder theory conceive social responsibility and the way different governments have approached it (Heath, 2008, pp. 119).

A market failure is another model that explains social responsibilities of corporations. However, unlike the stockholder theory, when a firm adopts the market failure model, there is limited reason to assume that a conception of business ethics that keeps on placing key emphasis on the fiduciary responsibility to shareholders cannot deal with the moral and ethical implications that have since been described under the category of corporate social responsibility. This model, therefore, retains the intuitively familiar notion that executives have fiduciary duties to shareholders, and that the key objective of firms is to make profits. Yet, it avoids the charge of laxity in morals often leveled against the model of the shareholder of business ethics, as it imposes stern moral limitations in the number of permissible strategies for maximizing profits (Heath, 2008, pp. 125).

Moral obligations of executives to different groups are never analogous. So while the word stakeholder might be useful, it is also misleading as it creates significant mischief in business ethics, while giving no real conceptual increment.



Friedman, E. (2008). The central debate. In Allhoff, F. & Vaidya, A.J. (Eds).Business in ethical focus. An anthology. Ireland, UK: Broadview Press.

Heath, J. (2008). The central debate. In Allhoff, F. & Vaidya, A.J. (Eds).Business in ethical focus. An anthology. Ireland, UK: Broadview Press.

Vaidya, A. J. (2008). The stakeholder theory. In Ed. Allhoff, F. & Vaidya, A.J. (Eds). Business in ethical focus. An anthology. Ireland, UK: Broadview Press.


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