Corporate Governance & Ethics Assignment

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Corporate Governance & Ethics
Report
19-Oct-17
(Student Details: )

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Executive Summary
Stakeholders form an important part of any company and contribute in one or another way
towards the success of the company. This is the reason why a number of scholars support the
notion that the business of the company has to be undertaken based on the interests of the
stakeholder groups. However, there are some scholars who support the notion that the
businesses only need to be conducted for earning profits and not for undertaking social work.
However, both these approaches are quite stringent and even extreme. Hence, there is a need
to take a middle route, where these two approaches are adopted in a harmony.
Through this report, the different views of scholars in this aspect, has been highlighted, with a
particular reference to the work of Friedman and Freeman, apart from more unified
approaches of Jensen and Boatright. This has been covered in the literature review segment,
following which, the ethical theories, apart from the theories of CSR and CSV have been
elucidated, where again, a unified approach proves to be the best option for both the business
and its stakeholders.

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Contents
Introduction...................................................................................................................................4
Literature Review...........................................................................................................................4
Benefits to the Society...................................................................................................................7
Justice and Normative Morality Theories....................................................................................10
CSR and CSV Theories.................................................................................................................. 12
Conclusion and Recommendations..............................................................................................13

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Introduction
There is a growing move of the business entities towards ethics, which are deemed as the
values and morality of the organization and of the people held by it (Dewey, 2016). The ethics
of the company are created from the people who work towards the company and where the
ethical policies are drawn keeping in mind, the interests of the stakeholders (Grant, 2016). The
race horse metaphor is often applied to the companies, which had resulted in different views
being garnered from the academician. There is Friedman on one side, and he provides that the
businesses do and should only work towards earning profits for the shareholders. And then
there is Freeman on the other side, where he states that the business has to operate in a
manner which has ethics at its foundations. The following report covers an analysis of the need
for adopting a unified approach of these contrasting views.
Literature Review
Freeman (2010) provides that in the matter of business ethics, the stakeholders are considered
as being the prominent contributor in the manner in which the business evolves. However,
there are different views which are adopted by different scholars, where one set states that the
businesses should only focus on wealth creation and the other supports the stakeholder
interests. Friedman (1970) supports the former view where he deems the social reasonability of
the company as only working towards increase in company profits. The idea that the business
has to work towards promotion of desirable social ends has been discarded by him. He further
puts forward that the business only has a social conscience which relates to earning profits. This
is supported by the hardcore truth of the businesses only working towards profit earning
motive. Hence, as per him, the work of company is not undertaken for eliminating
discrimination, for avoiding pollution, for increasing employment opportunities, which are just
some fancy terms used in the modern era. Friedman also stated that when it comes to a free
enterprise, the corporate executive, who performs the functions of the company, was merely
an employee of the owners of business and his only responsibility is directed towards his/ her
employer, instead of social or environmental causes. And so, the business is conducted in a

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manner where the wishes of the owners are given the centre stage, which at the end of the
day, is to make profits. By focusing upon the profit motives, the needs of the society which are
embedded in the laws and the ethical customs are sidelined.
Friedman went on to state that the stakeholders which are impacted due to the business, could
easily spend the money in order to undertake a task or an act, which they want to, by their self.
A differentiated social responsibility is undertaken by the corporate executive and he does not
act as an agent of the stakeholder where the money could be used in differentiated ways,
instead of a single one in which the stakeholder wants it to be used. Though, when such an
activity is undertaken, there is an imposition of tariff by the executive on one side, and on the
other side, the executives make the decision on the manner in which there tariff proceeds have
to be utilized. Due to these, Friedman raised two questions regarding principle and
consequence. He stated that the application of these tariffs was a function of government
based on the political principle. But, when it came to consequences, nothing could be stated
with absolute certainty. And so, there becomes a possibility of too many results being a
possibility due to the actions which were undertaken as the questions of removing or
dismissing an executive by the stockholders was a possible occurrence. As a result of these
difficulties, the social responsibility being exercised becomes a difficult task, as it could be put
forward that the good could only be undertaken by the company at its personal cost. He also
highlighted that through the use of this very cloak of social responsibility, the influential and the
prestigious businesses are able to harm the very core of the free society, instead of working in
true essence for the society.
Though, a stark difference from this view is that of Freeman (2007), who has stated that the
executives undertake the business of the company and also manage the same, in such a
manner that there is value creation for the different stakeholders which are involved in the
business. This includes both direct and indirect stakeholders, in terms of employees,
environment, shareholders, customers, and suppliers being direct stakeholders; and the
dependants of the direct stakeholders being the indirect stakeholders. In Freeman’s views,
there was a special role to be played by the corporate executives with regards to the
stakeholder responsibility. He focused on the 20th century, where the ethics became a crucial

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aspect of each and every business and that these businesses continue to be required to uphold
the ethical practices, when the business of the company is undertaken. One could not forget
that the businesses were completely reliant on the different stakeholder groups in order to do
any aspect of their business in a proper way. Taking an example, the business needs the
banking institutions and the shareholders for the contribution to capital; the employees of the
company carry out the though process of the top management; the environment gives the
basic necessities of the business; the customers purchase the products, resulting in the
revenues for the company. Hence, there was a need to consider the interests of these
stakeholders and to focus on the ethics, when it came to the rights, character and consequence
arguments.
Jensen (2002) also presented his views in this matter where he has stated that enlightened
value maximization was an amalgamation of the wealth/ value maximization and the
stakeholder theory. The stakeholder theory, in broad terms, requires the needs of the
stakeholders to be given supremacy; whereas the value maximization requires the profits of the
company to be enhanced as much as possible. Jensen provides that enlightened value
maximization was the best mix of these two, where the stakeholder theory structure had to be
used and in the long run, the value maximization also had to be applied in order to undertake
the tradeoffs in between the stakeholders and for attaining the objectives of the company in
addition to creation of value maximization. Hence, Jenson, through his enlightened value
maximization theory tried to achieve equilibrium between the contradictory views of Friedman
and Freeman. In terms of Boatright (2006) presented the views on the wrongs and rights of
stakeholder management for putting forward the merits and demerits on having the focus over
value maximization and stakeholder interests for showing that when these two concepts were
balanced out in equal manner, best results were attained. And for doing so, Boatright focus on
these two dissenting views showing how each side was beneficial and where each of these
theories required work to be done.
Hence, most of the academicians, instead of taking sides, have emphasized upon integrating
the two differentiated concepts. It has been stated that where the company focused only on
shareholder interest or that on the value maximization, the outcomes would be such which

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cannot be reconciled with, due to the inherent limitations. As a result of this, there was a need
to attain harmony between these two views (Benson and Davidson, 2010). The focus of Benson
and Davidson (2010) was on Jensen’s approach, who presented the value maximization theory.
However, at the same time, they stated that there was also a need of fulfilling the manager’s
goals, which was earning revenues. In order to show the focus on the stakeholder interests,
Smith (2003) quoted the examples of different scandals, included in which were that of Enron
and WorldCom. Though, at the same time, he stated that focusing on only one of the two
concepts was not the right approach. Bainbridge (2002) discussed that the directors of the
company work for the different stakeholders, while working on making profits, which shows the
integration of the two approaches. Argandoña (2011) provided that an economic value was
created in a conflict free manner when there was a core relationship at focus for the company
and for the stakeholders as well. Hence, there was a need for identifying the values under the
stakeholder theory and taking it higher by focusing on this theory with regards to the concept
of value creation.
Benefits to the Society
It is a very commonly known fact that the companies have different stakeholders, who are
directly or indirectly affected by the work undertaken by the companies. The different
stakeholder groups, as stated earlier, includes the shareholders, the consumers, the
environment, the customers, the local communities and the employees amongst the different
groups. The basic goal of the company is to maximize profits in order to maximize the investor
returns (Lawrence and Weber, 2014). Though, for attaining success in a true sense, the
stakeholder interests had to be properly focused upon, while maximizing the value for the
business. Where a decision is made by the company to focus on the stakeholder interests, the
society is benefited overall (Ferrell and Fraedrich, 2015). And this can be easily established on
the basis of each stakeholder group.
For instance, when it comes to the environment, the company obtains different resources from
it. When it pollutes this very environment, not only these environments are degraded, but the
local communities which are dependent upon the environment, are impacted, particularly the

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aboriginal or the native people. The consumers are the ultimate consumers and the businesses
are hugely dependant on the consumer, for their revenues (Martin, 2010).
From the undertaken actions of the company, the employees are affected directly, as they not
only get pay cuts, but are at times even removed from the job. This in turn affects the people
who depend on the employees, particularly their families, for whom the employee earns the
bread (Rönnegard and Smith, 2013). The company also has to take care of the other
stakeholders, in particular is the supplier. Often the companies resort to such measures where
they create an unhealthy competition between the competitors in such a manner that the
competitors offer such terms which proves to be more devastating for themselves, than the
supplier who did not get supplying contract (Crane and Matten, 2016).
Where the needs of the consumers are not met, they have the power of shaking the very roots
of the company. They can make legal claim against the company for negligent behaviour or for
the consumer related norms. So, there is a need for the companies to focus on the interests of
the consumers and that of the environment and to ensure that these are not harmed in any
manner. The scandal of James Hardie where asbestos related claims were made against the
company, which even led to the directors being criminally charged, is a leading example of such
claims (Comino, 2014). So, the companies have to consider the result of their acts on the
different stakeholders. The companies have to understand the magnitude of their acts in matter
of both the direct and indirect stakeholders, which are affected due to the actions undertaken
by the companies. Hence, when working towards the profits, by keeping in the backdrop the
interests of the different stakeholders, the broader view of the company can help in benefitting
the society as a whole.
Justice and Normative Morality Theories
In the field of ethics, there are different ethical theories which make a particular action ethical
or unethical. These theories can also be applied in context of the supremacy of stakeholder
interest before profit maximization. Though, there have been certain viewpoints based on
which there is a need to put the focus on the company’s profits. In this regard, the utilitarianism

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is a leading example which deems such actions as ethical through which the greater good is
attained (Albee, 2014). This theory makes such actions ethical, taking which, the utility of an
action can be enhanced and maximized (Blowfield, 2013). On the basis of utilitarianism
approach, the companies are required to undertake an approach where ethics are given
supremacy and the work is undertaken by considering the interests of the stakeholders as this
allows a larger audience to be satisfied when compared to the profit maximization, in which
only a certain groups attain benefits.
Kantianism is another major ethical theory in which the reasonable thing which is to be
undertaken is that work which covers respect and dignity. It is considered as the deontological
branch of ethics where the actions are deeded ethical on the basis of the particular
circumstances and on the basis of the morality of each action. So, Kantianism provides that
before the ultimate good is given consideration, there is a need to give consideration to
rationality (Beiser, 2014). This theory requires the companies to undertake rationale decisions
and a rationale decision for businesses is to make profits. Hence, this theory supports the value
creation theory. A rationale point which is raised under this theory is that when the company
earns profits, it is able to support a number of stakeholders. To put it in better words, the
profits of the company are distributed as dividends, which make the investors richer, the
employees get hike in their salary, and the government gets increased revenues, the suppliers
get bigger orders and the consumer gets better products. Thus, by undertaking a rationale
approach, the good of stakeholders is anyways attained.
A part of deontological ethics is the virtue ethics where the ethics of an action are judged on
the basis of morality and justice. An ethical action is such were the person shows qualities like
integrity and honesty, along with justness. Hence, the best action is such that are based on
justness and honesty (Hooft, 2014). Even the companies are required to be virtuous in their
actions by upholding these qualities. When there is an equal distribution of wealth, this would
mean that there is more of disposable income available with the company which ultimately
translates into the economy’s growth. So, when it comes to the sense of justness, the
companies have to keep their focus over the maximization of value since the same results in the
interests of the stakeholder being upheld in an automatic manner. The theories of normative

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morality and justice support the view of company owing a duty of care towards its
stakeholders, whereby the businesses have to discharge this obligation in such a manner that
the value of the stakeholders is maximized and which also maximizes the company profits.
CSR and CSV Theories
Apart from the literature and the theories stated above, there are other theories which have to
be applied to this debate and the prominent ones in this regard is the corporate social
responsibility and creating shared values (Gomez and Crowther, 2012). CSR refers to the
companies’ responsibility of evaluating the consequences of their decisions on environment,
people and society (Dima, 2016). It is a management strategy in which the societal, the
economic and the environmental benefit towards the stakeholder, is merged. It focuses on
people, planet and profit, which is the triple bottom line, and goes on beyond mere legal
obligations (Zhao, 2014).
The needs of the society is to be the focus of the companies when it comes to the adopting of
CSR activities, apart from the environment, and works on improving these aspects, and at the
same time, earns profits for the company. Some nations even mandate CSR activities where the
companies are required to work towards the different stakeholder interests (Crowther, 2008).
When some CSR activity is undertaken by the company, the costs for the company are raised at
the starting, though, in the long run, the same reaps benefits for the companies as the
stakeholders want to be associated with the ethical companies, particularly when their
interests are enhanced (Crane, 2008).
Creating shared values is a new concept in comparison to the corporate social responsibility
and was introduced in the Harvard Business Review. Under the CSR theory, the competitiveness
of company and the communities’ health is mutually dependent and this is the shared value
(Dembek, Singh and Bhakoo, 2011). Based on this concept, the connections have to be
capitalized which are present between the societal progress and economic progress, in order to
unleash the next wave of growth across the globe and in order to redefine capitalism. Thus, it
can be provided that shared value approach assists the company in reconnecting to it success,

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while attaining a social progress. The famous management writer, Michael Porter provided that
shared value was a new manner of the companies to attain economic success instead of being
social responsibility, sustainability or philanthropy (Porter and Kramer, 2011). Nanadi and Nandi
(2017) provided that this activity can be undertaken by redefining the productivity in value
chain, by building supportive industry clusters and by reconceiving the products and markets.
So, there is a need to obtain a mix of the two theories in order to maximize the benefits, where
CSR and CSV already focus, i.e., to earn profits in a manner where the interests of the
shareholders are given due consideration (Beschorner, 2014).
Conclusion and Recommendations
The different viewpoints highlighted in the preceding discussion clarifies that instead of being
divided on choosing between the interests of the shareholders and between the profit
maximization approach, there is a need to integrate the two approaches in a manner where
both the objectives are met and which could contribute in the long run of the company. Hence,
it is recommended for the company to earn profits but at the same time, by indulging in
theories of CSR and CSV, there is a need to consider the shareholder interests. This is because
simply focusing on one approach would either result in stakeholder aversion, thus ending the
company, or coming running out of money to work for stakeholder interest, thus again, ending
the company. In short, instead of supporting Friedman or Freeman, there is a need to integrate
the approaches of the two scholars.

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