Faculty of Business, Economics & Accounting

Department of Business Studies

HELP Bachelor of Business (HONS) Year 2/3

ASSIGNMENT DETAILS
SEMESTER 3, 2013


Subject: Business Ethics & Social Responsibility (MGT 305)

Due Date: 25
th
November 2013

Name: Lai Hoe Yee

ID: B100274




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To the question where it ask to provide an argument for or against the notion
that a corporations obligation to their stockholders come before to the rest of the
society. Frist, we need to understand who stockholder or shareholder is and what they
can do. Stockholder are very different the like of partnerships or sole proprietorships,
where stockholder does not have any personal liable or any other obligation towards
the corporation, in other word, we can say that stockholders have a limited liability. In
addition, stockholder are not playing the important role in the company in term of
running its operation, where they usually run by the company board of directors and
the executive management. However, a stockholder do have some right or role in the
company, for example, voting rights, where the shareholder have right to vote for
major corporate matters like voting for the board of directors and vote for whether the
proposed merger should go through. But not all shareholder have voting right, there
are two type of shareholder, common shareholder and preferred shareholder. Usually,
the common shareholder are the one that have the voting right, where the preferred
shareholder does not have. Stock is a highly liquid investment, if the he company
perform well and the share price increases, the share will benefit from it as they have
the right to sell their shares in the stock exchange market, for example, Kuala Lumpur
Stock Exchange (KLSE). Moreover, shareholder by laws also have right to check the
companys books and records where the shareholder can sue the company if the found
misdeed of the directors. Similarly, if the corporation liquidates id bankrupt, the
shareholders have the right to a share of the proceeds. But, in liquidation, the like of
preferred stockholders, bondholders, and creditors has the priority over common
stockholders. Here is some other rights and obligation that a shareholders has, for
example, they can attend the annual general meeting of the company to get a clearer
picture the companys performance, they can also listen to the meeting via conference
call and vote by proxy through the mail or online. And lastly, the most important one,
when the company declared divided, the shareholders have right to receive a portion
of it.
In my opinion, some cases where the company do have obligation to its
stockholders before its obligation to the rest of society. But, in some other scenario,
the corporation will have its obligation to the rest of the society before its obligation
to their stockholder. There are a few theory from some famous theorist that able
justified my point of view. Sometimes, there are confusion between corporation social
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responsibility and business ethics although there are some relation between the two. It
is important to understand how they are different as well as how they are related to
each other. I will be begin by clarifying what corporate social responsibility is
because this will help to understand how business ethics and corporate social
responsibility are related.
Corporate Social Responsibility (CSR) is a type management concept that use
by a company in their daily business operation as well as interact with their
stakeholders where they concern about the social and environment. In many view, it is
believe that by implementing CSR, it can help the company to achieve a balance in
term if socially, environmentally, and economically, this also known as Triple-
Bottom-Line-Approach, at the same time, it addresses the expectation of both
shareholders and stakeholders. In this sense, it is important to know the differences
between Corporate Social Responsibility which includes charity, strategic business
management, philanthropy or sponsorships. The company also can directly can
become more reputable as well as strengthen their brand as it make a valuable
contribution to poverty reduction. To implement CSR in a Small and Medium
Enterprises (SMEs), it need some approaches that fit to the needs and the capacities of
the company, and must not affect their potential in the economy. However, there is
some few key issue in CSR, for example, eco-efficiency, environment management,
responsible sourcing, labour standards and working condition, stakeholder
engagement, employee and community relations, human rights, gender balance, social
equity, anti-corruption measures, and good governance. With a good integration of
CSR concept to the company, it will bring some competitive advantage to the
company, competitive advantage like increase on sales and profits, enhanced access to
capital and markets, cost saving in operation, improve in human resources efficiency,
improved quality and productivity, improved reputation and brand image, enhanced
customer loyalty, better decision making and risk management processes.
With the concept of corporate social responsibility clear in mind. There are a
few disagreement between theorists about what those obligation include. As a results,
this has raised some questions like do companies have responsibilities to donate to
charities or to give their employees higher wages and customers safer products? Or
are they obligated to maximize profits for their stockholders? In the view of Milton
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Friedman who is an economist, he argue that stockholder are the owner of the
company, and in a free enterprise, private-property system, the executive are the one
that help the owner run the corporation. In other words, the executive is the employee
that employed by the owner of the corporation to operate the company. And as an
employees, they have the responsibility to follow and obey the owners ways or what
the owners desire on running the operation of the company, these desire mostly is
make as much money as possible as well as try to achieve the basic rules of the
society which include those embodied in ethical custom and those embodied in law.
In the view of Friedman, the responsibility of the corporate executive is
ethically and most importantly in a legal way to help the companys owner to earn as
much money as possible, i.e. to maximize the stockholders return. His view can be
call as the shareholder view of corporate social responsibility. The reason Friedman
stand by his view is he think that the shareholder is the owner of the company. Since
the company is theirs according to Friedman, this include the property, it is to say that
only the shareholder have the moral right to decide on how it should be use. The
executive have the moral obligation to obey the instruction and try to achieve what the
owners want and to make as much money as possible for them. This is because the
owner are the one that hire the executive to help them run the company. However, as
Friedman points out that there are a limit in what corporate executive can do to make
shareholder as much money as possible. It is point out that they must run the company
within the rule of society including the rules of ethical custom as well as the rules of
the law.
As claimed by Friedmans shareholder view of corporate social responsibility,
it say that the money to the shareholder and not the manager, so the manager do not
have right to use or give the company to the social, this because it will decrease the
profit of the shareholders. Of course, manager can and should, provide better products
for customers, pay higher wages to employees, or give money to local community
groups or other causes, if doing so, it will have an effect of helping make more profits
for shareholders. For example, increases the wages of the employees can make them
to be more loyal and work harder, as a consequences, the company will have a better
product to sell to their costumer, as a result, it might increase the sell. Similarly, in a
social view, giving to the local community in the way of charity may help decrease in
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taxes as well as the services in the city will be better. But according to the theory, it is
wrong to use the company resources to benefits their employees, customers, or the
community as it will decrease the shareholder profits, and most importantly, the
resources is belong to the shareholders and is the shareholder that decide on how to
use the resources not the manager. In other words, the manager cannot use the
company resources to benefits others at the expense of shareholders.
Even though Friedman does think that the company manager shouldnt use the
company resources to help others in the expense of the companys shareholders, but
he also think that somehow in other the company will benefits the society. He says
that if the goal of the company is to maximize profit, they will try their best to beat
their competitors. Because of this, the company force or other way motivated to use
their resource efficiently as a consequences of competition, not only this, the company
will also force to pay a more competitive wages to their employees, as for customer
concern, the company will try to produce a cheaper, better quality, and safer products
than their competitors. In other words, the society will eventually benefit from the
company, even though the manager ultimate aim is to maximize the company
shareholders.
In the course of time, many has critics on Friedmans view. For example, some does
not agree with his view on the executive or the manager is the employee of the
shareholders. It has point out that in legal way, the true employer is the corporation not the
shareholder, as a consequences, the executives or managers is legally to serve the interest
of the corporation. Some others also criticized Friedman as he point out that not only the
shareholders is the owner of the company, the property of the corporation also own by the
shareholders. All the criticism have point out that the only ownership that the shareholder
have is the stock of the company as well as a few limited rights, such as, the right to vote on
most of major company decisions, the right to elect the board of directors, and the
right to whatever remains after the corporation goes bankrupt and pays off its
creditors. But it also point out that there some other rights for a true owner that a
shareholders does not have, and this make this the shareholders is not the owner of the
corporation. There are also other criticism like the point Friedmans view on the manager
main responsibility is to run the company in the desire that what and how the shareholders
want the company to run. But the truth is in the reality, the manager does not know what
the shareholder really wants and how they want the company to be operated. But in truth
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that, legally, the manger should put in mind they are supposed to aware of other interest on
how to run the company as well, such as their customer interests and their employees
interests but not the shareholders interests. Lastly, some also argued that the society will
not gain from the process of profit maximization of the company, as Friedman say otherwise.
Sometimes, because of the competition face by the company, it will force the company
loose track in a socially beneficial way, this will have a reverse effect, which is harm the
society. For example, For example, the company might want to reduce it cost on
dumping its pollutant legally to stay competitive, as a consequences, the company will
choose to illegal dumping to a neighbourhood top reduce cost.
In another view which originated by Edward Freeman, is the stakeholder
theory. This theory identifies and models the groups which are stakeholders of a
corporation, and both describes and recommends methods by which management can
give due regard to the interests of those groups. In short, it attempts to address the
principle of who or what really counts. The stockholder or the shareholders are the
owner of the company, according to shareholders view which is the traditional view
of the firm, and it is said that the company have to duty to put the desire of the
shareholder in the first place as to increase their value. There is also and input-output
model where used by the company. The concept is very simple, the company convert
the input such supplier, employees and their investor into an usable or saleable output
that their customer will buy, with that, the company will benefit from the returning of
capital. By using this model, the company will only focus on four parties that they
will try to fulfil their wishes and needs, these party are suppliers, employees, investors,
and customers. In contrast, the stakeholder theory argue that beside these four parties,
there is also other important parties as well, which include the governmental bodies,
trade associations, political groups, associated corporations, trade unions, prospective
customers, perspective employees, and the public at large. In addition, according to
this theory, in some situation, their competitors will count in as well. In other words,
the stakeholder theory is an instrumental theory for that a corporation, integrating
both the resource-based view as well as the market-based view, and adding a socio-
political level.
For example, the different level of a car safety features that General Motor
plan to implement will directly impacts their life when accidents happen. Similarly,
the amount of wages will affect the attitude of an employee, shutting down a factory
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plant will influence the living quality of the people live around there, and the impacts
on its stockholders when it increases their dividends. Furthermore, creditors also can
impact General Motors, it can be done by calling back a loan or by increasing the
interest rates, General Motors also can impact by the laws and regulations that set by
the government, the supplier also can influence the company by lowering the quality
of the car part that they supply to General Motors or they also can choose to increase
their prices. In General Motors, there are different type of stakeholders, which
includes employees, customer, stockholders, local communities, suppliers, creditors,
and government. According to this theory, not only stakeholders can influence the
company, the company also can influence the stakeholders, in other words, is an
influences that can go both ways. For example, from above we says that the customers
and employees can impact from company with the like of the safety features and the
wages that give by the company, but according to the theory, they too can influence
the company by not buying General Motors car, for employees, they can perform a
group protest to company. Besides that, other stakeholder sometimes also can
successfully influence the company. For example, it can impact General motor when
the media or an environmental society report that the flaws that the company have.
In contrast to Friedmans view which says that the company should operate in
a way to benefits of the companys shareholders, Stakeholder theory say otherwise
which us to benefit their stakeholders. Based on the stakeholder theory, when making
a decision for the company, the manager must always put the interest of the
shareholder in mind. In addition, the manager should come out a system to balance
the interest of all their stakeholder, so that each and every stakeholder will be able to
gets their fair shares in term of benefits that they can get from the company. In other
words, to be able to serve the interest of the stakeholder, the manager must find a way
to achieve that. According to the stakeholder theory, it did not says that manager
should try to make as much money as possible, in fact, it also did not state that the
manager should maximize profits. However, the theory does says about who can and
should can the profits. If based on the view of Friedman, it is says that the manager
should minimize the benefits to other stakeholder, such as customer, supplier,
employees, and etc.., and only focus on how to maximize the benefits to their
stockholders. On the other hand, the manager should concern about all the stakeholder
where they able to get a fair share of profits. For example, the manager can reduce the
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share of profit of the shareholder if the company plan to benefits other stakeholders,
like invest in improving the working condition for the employees so that they have a
better environment to work in, research in developing safer product for their customer,
as well as work in reducing the pollution in the local community. Based on this, we
can says that the stakeholder theory is against Friedman view where it says that the
company resources should be used only to benefits the shareholders, it also says that
the sources cannot be used to benefit other stakeholders at the expense of shareholders.
Furthermore, there are two argument that are developed to support the
stakeholder view of corporation social responsibility, these arguments are
Instrumental argument and Normative argument. The Instrumental argument has says
that even though it may not be the shareholders best interests, the company should
focus to all their stakeholder as the company best interests. By doing so, it might
bring so benefits to the company. For example, if the company put all the interest of
their shareholder in concern where they able to get a fair share of profits, as a result,
the stakeholder are willing to commit themselves to support the company and their
interest. For example, if the company treat and pay reasonably well, it will have a
psychological effect of turning their employees to become loyal to them. In contrast,
if the company treat them poorly, it will have a reverse effect like shirking or even
destructive behaviour. Likewise, if the company is socially engage, to the society like
environmentalist and other activist, this will lower down the possibilities that these
people will come out some activities that will damage the companys reputation and
image. This is something that the company have to do, even though it will reduce the
shareholders dividend. In other words, these argument claims that benefit that can get
for the business from being responsive to all their stakeholder is far greater then only
responsive to their shareholder, even though it has a cost of reducing their
shareholders dividend.
In other argument, Normative Argument, it claim that all the company has a
moral or ethical obligation to be responsive to all its stakeholders. This argument is
based on the principle of fairness, which is develop by Robert Philips. In this principle,
it says that if a group of people works together to provide some benefits at some cost
to themselves, then anyone who takes advantage of those benefits has an obligation to
contribute his or her share to the group. Because this is based on the principle of
fairness, it can relates to one another. In stakeholders theory, it say that in order to for
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the company to run successfully, all of their stakeholder need to contribution and
work together. For example, employees provides expertise and labour, community
provide the basic need to run the company successfully, and investor provide capital
for the company to invest. Because the stakeholder have done their to commit
themselves and support the company, where the company will benefits from it, as a
consequences, the company have the obligation to contribute some part to the group.
The company will contribute by trying to fulfil the interests and the needs of each of
their stakeholders.
There are two theory that we have learn so far, Friedmans view on
shareholder theory and Freemans view on stakeholder theory. Because this two
theory are in contrast in one another, so person often came a question, which is,
Which theory is better? In the modern business world of today, many companies
accept Freemans view, which is the stakeholder theory. For example, in the United
States, almost all of its 50 states have enforce a law on this that business have
obligation to its many stakeholders even at the expense of stockholder interests.
However, not all companies have to follow this standard, companies have freedom to
one another, as different company have different goals where the company can decide
which theory are more reasonable and make sense.
According to most of the scholars, the company are obligated to be ethical
towards the society, therefore, it is says that nosiness ethics is part of corporate social
responsibility. In todays business, it is very famous among the companies, as it
describe as a must have kind of social responsibility in a company. For example,
Archie Carroll a theorist once said: The social responsibility of business
encompasses the economic, legal, ethical, and discretionary expectation that society
has of the organizations This can say that business ethic a small part of a large
notion, where the large notion is the corporate social responsibility. Besides the
ethical obligation, corporate social responsibility of the company includes those legal
obligations, and those discretionary or philanthropic contribution society expects from
companies. From this, we can see that both the stakeholders and stockholders theory
can accept the definition on what are included on this view of CSR. For example,
Friedman explicitly says that a company should live up to the ethical and legal
expectations of society, that by pursuing shareholder profits it will make the greatest
economic contribution to society, and that it should make whatever other
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discretionary contributions it needs to make so that society will enable it to operate
profitably. Stakeholder theory says that companies should be responsive to all its
stakeholders and that would include making the economic and discretionary
contributions society expects, as well as behaving ethically and legally toward its
stakeholders.
In conclusion, it is not necessary that the corporations obligation to their
stockholders come first before to the rest of the society, or the obligation to the rest of
the society come before their stockholder. As we can see above, we can see that it
vary on situation and the of course the company believe on which theory should they
follow, which is the stockholder theory by Friedman, and stakeholder theory by
Freeman, the company can choose to theory to use by decide which theory are more
reasonable and make sense.















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