Stakeholder Theory and Business Ethics

This assignment delves into the concept of stakeholder theory and its relevance to contemporary business ethics. It examines the various stakeholders involved in a business, their expectations, and the ethical implications of decision-making that considers all stakeholders' interests. The assignment also explores the challenges posed by globalization and its impact on stakeholder relationships and ethical responsibilities.

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Executive Summary
When it comes to making a decision between going forward with the profit
maximization, where the company focuses purely on earning profits, or opting for stakeholder
interests, where only the interests of the stakeholders are given supremacy, be it at a cost of the
profits of the company, a debate is raised. This is because from different point of views, each of
these points has merits and demerits.
In this report, an attempt has been made to highlight the need of integrating between the
two approaches. In this regard, the report would firstly present a literature review, where the
proponents of each of these dissenting views would put forward their need to back a particularly
concept. This would be followed by providing the manner in which the integration of these two
concepts can benefit the society. Once this is done, the ethical theories, particularly presenting
the theories of justness and normative morality would justify this integration. The two theories of
CSR and CSV would also be explained as both of these, support the integration of the two
dissenting concepts. Lastly, the report would end by drawing conclusion and recommendations.

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Table of Contents
Introduction......................................................................................................................................4
Literature Review............................................................................................................................4
Benefit to Society............................................................................................................................7
Theories of Justice and Normative Morality...................................................................................9
Other Theories...............................................................................................................................11
Conclusion and Recommendations................................................................................................13
References......................................................................................................................................14

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Introduction
Ethics denotes the values and morality which is upheld by the people (Dewey, 2016).
When it comes to the ethics of the companies, they are similar to that of the people, but are
amplified, due to the number of stakeholders that are involved. When it comes to the companies,
the application of the race horse metaphor presents contrasting views from the famous scholars
(Grant, 2016). Friedman on one hand provides that the companies should only work on making
the profit for the shareholders; and on the other hand, Freeman has the view that the businesses
need to operate under the ethical basis. In the following parts, an analysis has been undertaken
whereby the need for convergence of these two approaches has been highlighted.
Literature Review
When it comes to business ethics, stakeholder is deemed as a prominent contribution
towards which the entire business revolves (Freeman, 2010). There are dissenting views on
whether the business should be conducted for the stakeholders or whether the same should be
undertaken for the bottom line, i.e., for earning profits. Friedman (1970) presented the view that
the social responsibility of the businesses was only to increase the profits of the company. He
disregarded the notion that the businesses were working towards profits along with promoting
the desirable social ends. He stated that the businesses had only one social conscience and that
was to earn profits, and that when any business was asked to speak the truth, they would clearly
state that they work towards earning profits, instead of reasons like elimination of discrimination,
employment, avoiding pollution and the like, which were just the catchwords of contemporary
times. He further stated that in a free enterprise, the corporate executive was just the business

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owners’ employee and that he had his responsibility directed towards the employers. The
business had to be conducted as per the desires of the owners, which was to make as much
money as possible. And when this was being done, the basic rules of society were cornered,
which included the ones embodied in ethical customs and law.
Friedman (1970) also presented that the different stakeholders could spend their own
money for undertaking a specific action where they wished to do so. A distinctive social
responsibility would be deemed to be exercised by the executive instead of serving as a
stakeholder’s agent when the money would be spent in different manners, instead of the one in
which they want it to be spent. However, when this is done, the executive imposes taxes on one
hand and on the other hand, decides how the tax proceeds have to be spent. As a result of this,
two political questions were raised, which were related to the principle and consequences. The
imposition of taxes was a government function on political principle. And when it came to
consequences, nothing was certain. In other words, there were too many possible results of the
undertaken action, where the questions like the executive being fired by the stockholders was a
possibility. These possibilities presented the difficulty in exercising social responsibility as it
presented that the companies could do good but at their own personal expense. He also stated
that using the cloak of social responsibility, the prestigious and influential businesses harmed the
foundations of a free society, more than they did well for the society.
However, there are a number of scholars who have presented dissenting views from
Friedman. Freeman (2007) presented that the businesses and the executives who undertake the
work of the company and manage the business, actually create value for the different
stakeholders, included in which are the employees, the shareholders, the communities, the
suppliers and the customers. He also stated that the executives had a special role to play when it

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came to the stakeholder responsibility. He also highlighted that during the twentieth century,
ethics has become an integral part of the businesses and that there was a need to uphold ethical
practices when conducting the business of the company. In this regard, he highlighted the
reliance of business on different stakeholders for conducting its operations in an effective
manner. For instance, the businesses require shareholders and the financial institutions for capital
funding, or that the work of the company can only be undertaken through the employees. The
stakeholders being integral part of the business, made it important for the businesses to work for
their interest. He presented certain key arguments for the business to focus on ethics, which
included the argument of consequences, of rights, and of character.
Jensen (2002) highlighted the concept of enlightened value maximization where he
discussed on the relationship between the stakeholder theory and the value maximization. As per
his enlightened value maximization, the structure of the stakeholder theory was used and also
accepted that in the long run, maximization was a major concept for making the relevant trade-
offs between the stakeholders as it specified long term value maximization and sought to attain
the objectives of the firm. Thus, his theory made an attempt to balance out the two contradictory
views where the stakeholders and the profit maximization were both given emphasis. Boatright
(2006) also highlighted on what was right and wrong with stakeholder management, in order to
present the advantages and disadvantages of the concentration upon the stakeholder interests and
the value maximization, thus, highlighting the need of integrating the two concepts, to get the
best combination of the two worlds. In order to do so, he highlighted the points of both
stakeholder management and profit maximization, to show the place where each of the theories
excelled and where each of the theories lacked.

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The majority of scholars have made an attempt to integrate the two concepts where they
have tried to integrate the stakeholder value with profit maximization. Benson and Davidson
(2010) stated that irrespective of the focus of the company on one of the two issues, the
outcomes were irreconcilable. And due to these reasons, there was a need for attaining a
harmony between these two concepts. Though, they also had their focus on Jensen’s (2001)
value maximization theory. Though, for this, they highlighted that there was a need for
accomplishing the objective of the managers, which is earning profits. Smith (2003) highlighted
the examples of WorldCom, Enron, ImClone, Global Crossing and Tyco International scandals
for highlighting the need to focus on this issue. Though, he highlighted that the focus on each of
these theories was wrong as none of these were solely the right one. Argandoña (2011) also
discussed this issue and stated that there was a need to create economic value in a conflict free
manner, where the core relationship at focus was both the stakeholders and the company. Thus,
there was a need to identify the values for stakeholder theory and take it to a higher level by
focusing on this theory in light of value creation. In this regard, Bainbridge (2002) highlighted
that even the directors, who run the business of the company consider the views of the
shareholders and the different stakeholders, before making any business decision. Only after
considering the impact of their business decision on the different stakeholders, is a decision
taken, no matter the magnitude of the profitability of such decision.
Benefit to Society
When it comes to the companies, there are a number of stakeholders who are impacted
due to the proximity of business activities with these stakeholders. The stakeholders include
customers, employees, local communities, shareholder, suppliers, government, and distributors.

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It is a well known fact that the goal of the companies is to earn profits, so as to maximize the
returns for the investors (Lawrence & Weber, 2014). However, in order to truly reach heights of
success, there is a need to focus on the interests of the stakeholders and at the same time,
maximize the value. Where the company decides to focus on the interests of the stakeholders, the
society as a whole is benefited. This can be explained in the perspective of each and every
stakeholder group (Ferrell & Fraedrich, 2015).
When it comes to the customers, they are directly affected by the actions undertaken by
the company. So, where a company decides to use a product which is cheaper in order to reduce
the overall costing of the product, it may result in the product not being as good as before, which
directly affects the person purchasing the product, i.e., the ultimate customer (Martin, 2010). At
times, there are cases brought due to such factors, under the tort of negligence or under the
consumer laws. Hence, in order to safeguard the company from such cases, there is a need to
focus on the interests of the consumer, so that the consumer is not harmed in any manner.
Similarly, where a company decides to dump the toxic waste in abandoned land, not only the
land is harmed, but the people surrounding it are also harmed, i.e., the local community. The
James Hardie scandal is a leading example of this (Comino, 2014). Hence, there is a need to take
into consideration the impact of actions undertaken by the company on the local community as
well.
The suppliers and distributors are also affected by the actions undertaken by the
company. If a company decides to abandon a particular supplier for another, a chain reaction is
caused where the people dependent on such supplier also have to bear the consequences. This
does not mean that a better supplier is not to be chosen. The focus here is not to cause such
unhealthy competition between the suppliers, that no matter which supplier is selected, both are

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harmed (Crane & Matten, 2016). The employees of the company are also directly affected by the
acts of company. So, where the company decides to undertaken a pay cut, without genuine
reasons, the employees and the ones dependant on him, are affected. The shareholders have to
face the consequences of the company undertaking unethical conduct, where the value of shares
held by them is diminished, if not completely gone (Rönnegard & Smith, 2013).
Thus, there is a need for the companies understand that the actions undertaken by the
company affect the primary and secondary shareholders, where not only the direct consumers,
and employees are affected, but the ones who are dependent on them, are affected. As these
stakeholders form the society, by adopting a broader view, the society could be benefitted.
Theories of Justice and Normative Morality
There are a number of ethical theories which support the view that there is a need to
uphold the interests of the stakeholders before giving preference to the profit maximization.
However, there are some perspectives which require the need to focus on the profits of the
company. The theory of utilitarianism is a leading ethical theory as per which, the action which
results in the greater good being achieved, and where the utility of any action can be maximized,
is the right and ethical approach to undertake such activity (Blowfield, 2013; Albee, 2014).
Based on this theory, there is a need for the companies to adopt an ethical approach and work
towards the interests of the different stakeholders, as the needs of the stakeholders would satisfy
a larger audience, in comparison to profit maximization of the company, where only the
company would be beneficial.

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Another leading ethical theory is that of Kantianism, where the rationale thing to be done
is to work with dignity and respect. It is a deontological branch which states that all the actions
differ from each other and the action is to be judged on the basis of morality of such action.
Hence, before ultimate good, there is a need to consider rationality (Beiser, 2014). In this regard,
the companies have to be rationale and this would make them work towards their own profits.
One more reason for working on their profits is that by focusing on the company’s profits, a
chain reaction is caused, where the investors are benefited, along with the employees, the
shareholders, the consumers, the government and the suppliers, as each one gets a share of such
benefit, in a direct or indirect manner. However, where the focus is shifted from company profits
to stakeholder interests, it becomes irrational, as the steps are taken in a different direction in
such case.
Another ethical theory which is actually a part of deontological ethics is virtue ethics,
where there is a need to take into consideration the virtues of mind and character. A virtuous
person needs to show justice, honesty, and integrity. And the best action would be such which
would show that the honest and just action is undertaken (Hooft, 2014). As a virtuous company,
there is a need to show honesty, justness and integrity in their work. So, where the wealth is
distributed in an equal manner, it could be argued that would be availability of more disposable
income in pockets of a number of people, which would in turn result in the growth of economy.
Hence, in sense of justice, there is a need for the companies to focus on value maximization as it
would automatically result in stakeholder interests being upheld. When it comes to the theories
of justice and normative morality, one could argue the stance of duty of care being owed to the
stakeholders. When this stance is mixed with justness, it becomes the duty of the companies to

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discharge the duty of care in a manner that the stakeholder value is maximized, which can be
undertaken by working towards maximizing the profits of the company.
In essence, the combination of the two focuses, based on the different ethical theories,
would help in fulfilling the different ethical theories. This is because in order to fulfil the actions
of the company based on the utilitarian view, there is a need for the stakeholders to be benefitted.
This can be done by adopting the sense of justness, whereby the work of the company is
conducted in a manner where the focus is on the profit earning. This would indirectly result in
greater good being attained as the profits would ultimately be distrusted and change hands. Thus,
the ethical theories align with the theme of this discussion, whereby the stakeholder interest is
merged in the best possible manner with the profit maximization.
Other Theories
There are various other theories where the view of sustainability of the firm and these are
that of the corporate social responsibility (CSR) and creating shared values (CSV) (Gomez &
Gomez, 2012). Corporate social responsibility refers to the responsibility of the companies
whereby they evaluate the impact of their decisions and their activities, on the society and the
environment (Zhao, 2014). It is a strategy of management, whereby the environment, economy
and social benefit towards the stakeholders is combined. It is also referred to as the triple bottom
line as the focus of this concept is on people, planet and profit. It is going beyond the legal
obligations and working towards the society and the environment (Dima, 2016).
By adopting CSR activities, the companies focus on the needs of the society and the
environment and work on improving the same, while at the same time, continues to earn well. In

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some nations, CSR activities have been mandated, so that the companies are forced to work for
the different stakeholders (Crowther, 2008). When company undertaken CSR activities, at the
initial stages, their costs are raised, however, in the long run, it proves to be a beneficial thing as
the company is able to take advantage of the enhanced face value of the company, which results
in increased revenues, which again takes a full circle and is distributed amongst the different
stakeholders in a direct and indirect manner (Crane, 2008).
CSV was introduced in the Harvard Business Review and is a leading business concept
which has been constantly expanded since its formation. As per this concept, the shared value is
mutually dependent upon the competitiveness of a company and on the health of the
communities (Dembek, Singh & Bhakoo, 2011). This concept also states that there is a need to
capitalize on these connections between the economic progress and the societal one, for
unleashing the next wave of worldwide growth and for redefining capitalism. It is stated that a
shared value approach helps in reconnecting the success of the company with the social progress.
Michael Porter, the creator of this concept stated that “Shared value is not social responsibility,
philanthropy, or sustainability, but a new way for companies to achieve economic success”
(Porter & Kramer, 2011).
As per CSV, this can be undertaken in three different manners, i.e., by redefining
productivity in value chain, reconceiving products and markets, and by building supportive
industry clusters at the locations of the company (Nandi & Nandi, 2017). This concept
essentially works towards the integration of the two issues, which were shown to be dissenting
through the literature review. Hence, in order for the companies to excel, they do not have to
keep their focus on of the two options from maximizing value and stakeholder interests, and

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instead, the need was to amalgamate the two in a manner whereby the best result is attained
(Beschorner, 2014).
Conclusion and Recommendations
On the basis of the discussion carried above, one thing becomes very clear that as against
the views of the different scholars, where the concept of shareholder value and the profit
maximization goal of the company were highlighted as two sides of a coin, it is far from the
truth. There is a need for the companies to take these two concepts and merge them in order to
grow and in order to earn higher profits. If the same is not done, the company cannot survive in
the long run. If the focus remains on the profit maximization, the company would come to an
end, as happened in the James Hardie case. And if the company continues its focus upon the
stakeholders, it would run out of proper finances to even support the primary stakeholders, like
the employees. Hence, it is recommended for the companies to adopt an integrated approach and
take the benefit of both the approaches.

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References
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