Running head: BUSINESS AND PROFESSIONAL ETHICS Business and Professional Ethics Name of the Student Name of the University Author Note
1 BUSINESS AND PROFESSIONAL ETHICS In the contemporary era, corporations have ceased to be only a legal device that is used merely to carry out private business transactions. There has been a growing controversy with respect to the purpose of a corporation in the modern era. On one hand, several scholars have undertaken extensive research to assert that the sole objective of business corporations is to maximize the wealth of the shareholders of the corporations. On the other hand, there is a growingneedexpressedbythebroadbusinesscommunity,whichincludessocialand environmentalactivists,customers,institutionalshareholders,governmentregulatorsand businesses themselves for the corporations to be accountable for the environment and the community that is affected by the corporations. This gives rise to two corporate theories that are contradictory to each other, namely, the shareholder value theory and the stakeholder value theory. This essay entails critically analyzes the corporate theories that states the purpose of the corporations in light of the arguments and views ofEvan and Freeman, Kenneth Goodpaster and Milton Friedman. The essay shall further discuss about the probable strength and weakness of their respective views and arguments with respect to the moral obligations and social responsibilities of business corporations. As per the shareholder value theory, the business corporations purport to optimize the financial returns for the shareholders of the corporations. This is a dominant economic theory used in business where optimization of shareholder wealth is established as purpose of the firm in the financial, economic and legal theories. According to Nobel Laureate Milton Friedman (1970) argues that a corporation purports to optimize financial return for shareholders. He sternly believes that a corporation is usually operated and owned solely for the advantages of the shareholders. Friedman believes that the sole responsibility of a business corporation is to use its resources and involve in activities that are designed to accelerate in profits provided the
2 BUSINESS AND PROFESSIONAL ETHICS corporation is engaged in activities. Such activities amounts to free and open competition and is debarred of any fraud or deception. Three fundamental assumptions can be adduced in support of the shareholder view of the firm. Firstly, the environmental, social and human expenses that are incurred while carrying on the business operations internalized as per the requirements of law and all the other expenses should be externalized. This shareholder value theory states that the sole purpose for carrying out the business is to increase cash flow for the shareholders and the revenue along with reduction in risk and minimization of cost. He asserted that to enhance the revenue, it is important to sell products that are more expensive to the society than the expenses is incurred in the costs o the products like sport utility vehicles. Secondly, he believes that self-interests are a form of human motivator as it influences humansignificantly.Itisawell-establishedfactthatorganizationsand peopleshallact reasonably as per their own self-interest with the objective to optimize value and efficiency for the community altogether. According to Friedman, the modern economic theory is established on essential assumption that individuals act reasonably for their respective self-interests. According toTricker and Tricker 2015, the arguments and viewpoints of Friedman is similar to that of Adam Smith.However,Carroll (2015) argues that this self-interest acts as human motivator’ may give rise to a conflict between the managers (agents) and the shareholders (principals) in a corporation owned by the public as managers would act as per their self-interest and not as per shareholder’s interest. Thirdly, Friedman argued that corporate firms are primarily‘nexus of contracts’where priority is given to those contracts that tend to have the most significant impact on the
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