CHAPTER 4

Ethics at the Workplace

Shareholder Theory
and
Stakeholder Theory
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 Objectives

• Distinguish between the shareholder and

stakeholder models.

• Identify a company’s key stakeholders.

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How can a company be more
successful?

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Shareholder Theory and Stakeholder Theory

A fundamental question in business ethics is, What is

the purpose of a corporation supposed to be?

Should the leaders of a company focus solely on

maximising profits or do they have broader
obligations?

This chapter examine two theories that address this

issue.

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(1) Shareholder Model

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 Shareholder ethics
Shareholders own corporations.

They purchase shares of stocks, a financial

instrument used to raise capital for
corporation.

Some investors buy shares of specific

company, such as Apple, Harley-Davidson
and Polo Ralph Lauren
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 Shareholder ethics
When stocks increase in value, investors
have tendency to feel wealthier.

When consumers buy more products and

services, company hire more workers and
unemployment stays low.

Wages tend to increase well when workers

are in demand. Jennifer H J
 Shareholder ethics

When demand for products and

services falls, companies lay off workers
and unemployment rises.

Profitable companies are good for

workers.

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 Shareholder ethics
Are profits, however the only game in
town?

Are corporate leaders responsible only for

profit maximization, or do they have
obligations to people who are not
shareholders?

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 Purpose of a corporation: History
What is the purpose of corporation supposed
to be?

In 1919 lawsuit, Henry Ford was sued by the

Dodge Brothers and other shareholders of
Ford Motor Company.

They were upset because despite the

fabulous profit, Ford essentially paid no
dividends. Jennifer H J
 Purpose of a corporation: History

The shareholders complained about Ford’s use

of company profit for support humanitarian
and charitable works.

The Michigan Supreme Court ruled in favour

of the shareholders because corporation laws
at the time required corporate boards to put
shareholders first.
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 Purpose of a corporation: History
Company were obligated to follow the
shareholder model until the decade after
the close of World War 2—they were legally
required to maximise shareholder wealth.

After the late 1940s and early 1950s, the

attitude of many politicians toward
corporation changed.

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 Purpose of a corporation: History
They wanted corporations to be able to
participate more in society.

In the end it became legally acceptable

for companies to “do good deeds”.

The action was not and is still not

required but it is still allowed.
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 Shareholder Model : Justification
The economist Milton Friedman was
the leading advocate of shareholder
model. Friedman believed that
corporations have two primary
responsibilities.

 First, they must comply to the law.

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 Shareholder Model : Justification
Second, once they have complied with
the law, they must make as much
money as possible for shareholders.

Every executive will treat employees

well if he or she believes that doing so
will lead to increased productivity and
increased profits.
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 Shareholder Model : Justification
Every executive is in favour in donating
money to charity if the donation improves
company’s image and leads to increase
sales that exceed the amount of donation.

However, if the action is considered will not

increase the shareholders’ return in any
certain or measureable way, Shareholder
Model advises , ” Don’t spend the
shareholders’ money”.
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 4.1 Tutorial Question:
1. Describe your reaction to this statement:
The purpose of a corporation is to make
money for the shareholders.
2. Were company leaders permitted to do
‘good deeds’ that fail to maximise
shareholder wealth in 1919? YES//NO
3. Describe Milton Friedman’s two core
beliefs about the purpose of corporation.
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(2) Stakeholder
Model

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 Stakeholder Ethics
In recent decades, many have argued that
corporations should consider more than shareholders
alone their decisions and actions. Company must look
after it’s employees, customers and the communities
in which its operates.

A great many Fortune 500 companies put the

stakeholder model into practice by going beyond legal
requirements and actively considering the needs and
concern of one or more groups described in this
section.
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 A stakeholder is anyone who can
influence or is affected by a change.

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 DIRECT STAKEHOLDERS
Key stakeholders:
1. Employees
2. Customers
3. Business partners: suppliers and
distributors
4. Communities
5. Stockholders
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 Employees
How a business treats its employees tells much
about the values and character of those who run
the company.

Some company treats their employee as little as

the tools to be used up and replaced.

When company treats their employees badly, the

morale of workers suffers.

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 Employees
They do not experience pride in their company
or fulfilment in their job.

As those attitudes becomes pervasive,

employees quit in large numbers and turnover
becomes an expensive problem.

Recruiting, interviewing, hiring and training

new employees can be a very costly process.
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 Customers
Customers provide the income necessary or
companies to pay expenses and make profits.

Pleasing customers and keeping them

satisfied are top priorities for most
companies.

Many large companies employ customers

relations specialist to address the concerns of
buyers. Jennifer H J
 Business Partners:
Suppliers and Distributors
A supplier is a business that provides a
particular service or commodity that other
businesses require.

E.g., a plastic manufacturer needs chemicals

and machines to make it products. It
purchases those items from a number of
different companies.
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 Business Partners:
Suppliers and Distributors
A distributors is a company that sells
product manufactured by others retailers.

The distributor purchases the product at a

wholesale price, a discount offered when a
customer buys goods in large quantities for
the purpose of reselling them to others.

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 Business Partners:
Suppliers and Distributors
Wholesalers and retailers employ many people.
Imagine a company has used the same suppliers
and distributors for many years.
This year its leaders discover they can reduce the
costs and increase profits by changing the
partners.
Does the company have any ethical obligation to
remain loyal to its long-standing suppliers and
distributors?
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 Communities
Organizations operate in the real world, and they
impact the communities in which they build their
factories and office buildings.

Individuals have an ethical duty to be good

neighbours. Similarly, many argued that business shall
be good neighbours as well.

Companies benefit from stable communities. If crime

rates are low, if talented people are available for
hiring and if customers are abundant, companies are
tend to do well. Jennifer H J
 Communities
Business can be good neighbours by showing
consideration for the needs and interest of the
community, taking leadership roles in helping to
resolve community problems, and sharing some of
their wealth with community members who need
help.

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 Communities
Many corporate leaders understand that company
profits can create unique opportunities to improve
quality of life and to assist people in need,

E.g., corporate philanthropy are everywhere.

A local plumbing company sponsors a youth soccer

team. A local shopping mall provides holiday presents
for underprivileged children. A restaurant gives extra
food at the end of every business day to a
neighbourhood shelter.
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 Stockholders
A company’s stockholders include the stockholders
who wager their own money on the business’s
success.

Companies have legal and ethical obligation to try to

produce a profit for their investors.

The stakeholder model does not require a company

to be unprofitable. It merely calls for the needs of
shareholders to be balanced with the needs of the
other stakeholders.
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We make a living by what we get,
but we make a life by
what we give.

-Winston Churchill-

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Indirect or Abstract Stakeholders

The key stakeholders:

1. The environment
2. Society

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 The Environment
All companies must comply with the law. E.g.,
environmental laws.

Companies may demonstrate a concern for the

environment through their decision and actions with
the respect to other stakeholders. The stakeholders
can all be impacted by environment issues.

Many consumers are very aware of which companies

to sound environmental practices. Strong policies can
lead to higher profits and greater corporate success
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 The Environment
What if profits and protecting the
environment, however, do not go hand in
hand?

What if a company could do more to reduce

pollution or waste, but doing so would
mean increasing the cost of the product?

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 Society/ “All Mankind”

What about others who have no direct

relationship with a firm but could be
benefited or harmed by the actions of the
company?

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 How Companies
Ethically Balance
Shareholder & Stakeholder
Interests?

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 Ethical Balance
• An ethical balance is when a company is able
to find a moral compromise between
company and owner, stockholder and
stakeholder interests.

• The shareholder model and the stakeholder

model are the two alternative theories
companies can subscribe to in regards to
creating an ethical atmosphere.
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CAN COMPANY BE SUCCESSFUL
BY ISOLATING THE RIGHTS OF
STAKEHOLDER?

Every stakeholders play an

important roles to the long-term
success of a company.
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 WHAT IS YOUR LIFE PURPOSES?
Every business’s purpose is to gain more money.

Ethics….Good citizen……Successes

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 In conclusion,
• Business is all about money. Purpose?
• Shareholders theory says if a corporation
just focus on FINANCIER (SHAREHOLDER
THEORY), a business or a company may
declining. Create value for others. Corporate
Social Responsibilities?
• Their interests (stakeholders and
shareholders) must go together to create
more values and be more successful.
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 Pick a company with a strong sense of
PURPOSE, you will get a better earnings
over time. Shareholder is not emotionally
engage while stakeholder involve
emotionally everyday in the business.
-anonymous

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 Jack Ma
- One of the most influential business leaders/internet entrepreneur and ONE of the
100 people who most affect our world, according to TIME Magazine.
- He is the FIRST of mainland Chinese entrepreneur to appear on the cover page
of the FORBES magazine and ranks as one of the billionaires in the world.

- ACCORDING TO FORBES MAGAZINE (2016):

#33 Billionaires. $20.5 B.( 2016)

#22 Powerful People. November 2015. $21.8 B.
#2 China Rich List. October 2015. $21.8 B.
#7 Richest In Tech. August 2015. $23.2 B.
#33 Billionaires. $22.7 B.
#1 China Rich List. October 2014. $19.5 B.
#122 Billionaires. March 2014. $10 B.
#8 China Rich List. October 2013. $7.1 B
ANALYSE WHAT KIND OF CULTURE AND BELIEF THIS
CEO / COMPANY HAS.

Jack Ma's Top 10 Rules For Success.mp4

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THANK YOU!!!!!!!!

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