Stakeholder Theory and Business Ethics

This assignment delves into the principles of stakeholder theory and its implications for ethical business practices. It examines various perspectives on corporate social responsibility, considering the influence of stakeholders beyond shareholders. The document analyzes the tensions between profit maximization and fulfilling stakeholder expectations, proposing strategies for businesses to adopt a more sustainable and ethical approach.

Running head: CORPORATE GOVERNANCE
Corporate Governance
Name of the Student
Name of the University
Author Note

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Executive Summary
In the contemporary commercial world, the working of the corporations have implications not
only on the organization itself but also have significant implications on the stakeholders who are
directly as well as indirectly involved with the organization and the community as a whole in the
domain of which the corporation operates. The purpose of the existence of these corporations,
thus, become an important issue as the purpose can be for maximizing the profits of the
shareholders or the increase in the welfare of the stakeholders. The report discussed the various
theories and assertions which are present in this aspect in the framework of normative and justice
theories and tries to analyze the feasibility and practical applicability of amalgamations of both
the theories which satisfies the profit as well as the welfare objectives of the corporations and the
society.

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Table of Contents
Introduction......................................................................................................................................3
Literature Review............................................................................................................................4
Benefits of a broader view of firm...................................................................................................6
Analysis of proposed combinations of Corporate Governance Theories........................................9
a) Social Contract Theory............................................................................................................9
b) Theory of Justice...................................................................................................................10
c) Stakeholders Theory..............................................................................................................10
d) Amalgamation of the theories...............................................................................................11
Limitations of these theories..........................................................................................................12
Conclusion and Recommendations................................................................................................13
References......................................................................................................................................14

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Introduction
The word “corporation” holds immense significance in the global business world. By the
term itself, a corporation can be defined as separate legal entity on its own which is distinct from
the owners themselves and which can have the privilege of enjoying the rights which a business
individual also possess. To carry out all kind of commercial activities in the current day business
world, corporation is a necessity. Generally, a corporation is a group of people who legally act as
a single entity towards achieving a specific goal or set of goals (Bakan 2012).
The primary concern in the corporation and their activities is the purpose of their
existence and the goals towards which they operate. There has been a long going debate over the
overall purpose of the corporations in the business world. Though with time the nature, legal
framework and dynamics of the corporations and businesses have changed substantially, the
debate has remained (Reiser 2012). On one hand where some school of thoughts suggest that the
purpose of existence of a corporation is to work towards maximization of the profits of the
shareholders of that concerned corporation the other contradicting school of thought asserts that
maximizing only the profits of the shareholders should not be the only objective of a corporation.
According to this theoretical notion, the corporations should also take into account the broader
perspective of maximizing the overall welfare of all the stakeholders who are voluntarily or
involuntarily attached to them (Laczniak and Murphy 2012).
Over the years these two conflicting theories have been in existence and many new
concepts have emerged regarding the purpose of a corporation. The report tries to take into
account this debate and tries to analyze different theoretical frameworks, which exist regarding
the purpose of a corporation. It also tries to discuss about the scope of building up a successful

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amalgamation of the existing relevant theories such that both the profit incentives and the
welfare perspectives can be taken into account.
Literature Review
There have been two eminent theories, which shed light on the purpose of a corporation
and its reason of being. Extensive studies have been carried out in this aspect and there are
substantial literatures and scholarly works regarding the same. The section below reviews few of
the relevant literatures in the current times, which tries to explain the relevance and limitations of
the existing theories.
Mansell (2013), in his article discusses about one of the primary theories of corporate
governance, which is still very much into existence. This is the “shareholder theory”, which was
first proposed by the Noble Prize winning scholar, Milton Friedman. Friedman, according to this
article, in his theory asserts that the corporations have only one primary purpose and objective of
existence, which is to utilize the resources available to them and their methods of operations for
maximizing their individual profits, thereby maximizing the profits of their shareholders, that is
the those personnel to whom the corporation serves. According to this view, the corporations
should only emphasize on the increase in the profit of the same and on building up long-term
sustainability and prospects for the firm by competing fairly and openly and without taking resort
to fraudulent means of operating.
However, this view has been criticized by many as they assert that only profit
maximizing as a purpose of any corporation can make it non-justified when it comes to the
welfare maximization issue. In this context Freeman, Harrison and Wicks (2007), in their
extensive works, shed light on another theory regarding corporate governance, which is known

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as the stakeholder theory. This theory is focused mainly on the maximization of overall welfare
from a corporation. The authors, supported also by Boatright (2006), argues that the trend of the
corporations to focus on only the profit maximization of the shareholders and the owners cannot
be beneficial in the long run for the society as a whole and also for the company. Instead, the
purpose of the corporations should be to take into account all the stakeholders who are
voluntarily as well as involuntarily falls under the purview of the operations of the corporations.
The stakeholders not only include the direct players the shareholders, the financers and the
owners but also include the employees of the corporation, the customers of the company and also
the community, which is affected by the actions of the corporations.
Milton Friedman, in his theory (Friedman 2007) makes his stand clear regarding the
primary purpose of existence of any business corporation in any part of the world. According to
him, the phrase of “social responsibility of a business” is a highly misunderstood and
misinterpreted phrase. He argues that the word responsibility can only be attached to individuals
and not to artificial entities like corporations who can at the most have artificial responsibilities.
The paper argues that it is in the hand of the corporate executive to decide whether he will fulfil
the interests of his employers or whether he will look into bigger social welfare maximization.
But it has to be kept in mind that in either way he will have to sacrifice the welfare of one of the
conflicting parties and therefore, there is a lack of clarity regarding what his actual “social
responsibility” should be.
However, the assertions of the above article, as made by Milton Friedman, has been
strongly countered by Jensen (2002), who, in his paper, views the prospects and limitations of
both the shareholder theory as well as the stakeholder theory of corporate governance, from an
entirely different perspective of value management and value maximization. The author suggests

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that there should be a comprehensive method of operating on part of the corporations, which
should incorporate both the purposes of the companies of maximizing their values as well as
keeping in consideration the maximization of the welfare of all the stakeholders who are directly
or indirectly associated with the corporation. To do that the author introduces the concept of
“Enlightened value maximization” which includes a multi-purpose objective of the corporations
and to compare the same with that of the traditional theories, he discusses a balanced scorecard.
A detailed study of the micro-foundation and moral and ethical viability of the
stakeholder theory has been taken into account by Bridoux and Stoelhorst (2014). The authors
argue that the implications of the stakeholders theory is not as simple as the theoretical
framework suggests and there always remains a chance of leaving out one or more of the
stakeholders while carrying out the operations on part of a corporation. They suggest that as
there always remains a glitch and as there is no such “perfect” way of corporate governance
(Hasnas 2013). Therefore, managers should not entirely keep on focusing on the ethical and
moral issues only but should also take into account the purpose of revenue generation and value
maximization aspects as in the long run this also has implications on the social welfare too.
Benefits of a broader view of firm
In the recent business world, with the incorporation of newer complexities and sufficient
changes in the dynamism and variations of the commercial enterprises, the incorporation of the
concept of corporate social responsibility in the operations of the corporations. This notion
includes the economic, ethical, legal as well as the discretionary expectations, which remains in
the society from any organization.

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The concept is not same as that of business ethics only as the former is far more inclusive
and comprehensive. The concept of a broader and more inclusive view of a firm is relatively a
newer concept, which came into existence only in the recent periods after the traditional profit
maximizing theories of the enterprises, started showing limitations and negative implications on
the welfare of the society as a whole. To maximize the profits and serve to the interests of the
shareholders solely, often the commercial organizations employs means of operating which can
have negative implications on some of the stakeholders, especially those on the receiving side
and on the society as a whole.
From this came the concept of a broader view of a firm and the incorporation of corporate
social responsibility, which, if implemented appropriately, is, expected to serve the following
benefits for the society as a whole as well as for the firm:
 The incorporation of a broader purpose framework in the operations of the corporations
can help in addressing the issues of the ethical viability as well as overall welfare of the
society, which can be attributed to the working of the corporations without compromising
the profit incentives of the firm.
 The corporations, being a part of the society itself, are also bestowed with the
responsibility of contributing to the society as a whole. It becomes a duty of the
organizations to address the social issues, especially those that arises due to the
operations of the organizations and for this purpose the organizations should also use
some of the resources in its disposal. The traditional views of corporate governance do
not have the facilities to incorporate these views while the newly developing broader
views of firms can do the same.

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 As has been extensively discussed in the recent commercial framework, it is not only
beneficial for the society but also for the commercial firms themselves to take into
account the concept of welfare along with their own profit maximizing. This is because in
the modern commercial world, the goodwill and reputation of the firms are of crucial
importance as it helps in building up a positive image for the company in the market,
which in the long run proves to be beneficial for the company also as it increases its
clientele as well as revenue (Schwartz and Saiia 2012).
 The social responsibility of the firms, included in its broader view, also takes into account
the benefits of the employees and their overall welfare. This, in its turn, is required to
build up a positive and loyal labor force for the firm, which is also beneficial to the firm
as a skilled, loyal and happy employee base increases the profitability of the firm.
 If the corporations work with the broader perspective of both individual profit
maximization as well as the societal welfare as a whole, then it becomes easier on the
part of the governing authorities as well as they do not need to impose stricter and more
rigid regulatory mechanisms and intimidating legal frameworks for the operations of the
corporations. This in turn helps in actually achieving a free environment of operations,
which can empower all the individuals in the society as well as increase the capability,
competiveness, efficiency and the productivity of the corporations in the country
(Andriof et al. 2017).
Thus, it can be seen that there are several crucial ways in which a society can benefit by
implementing the notion of a broader view in which the firms can operate, thereby taking into
account both the purpose of profit and overall welfare maximizations.

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Analysis of proposed combinations of Corporate Governance Theories
This section of the report tries to analyze the viability and the efficiency of the theories of
corporate governance, including the shareholder theory, the stakeholder theory and others. To do
the same the different theories of justice and normative morality is taken into account and the
credentials of the theories are discussed on the basis of such frameworks:
a) Social Contract Theory
The Social Contract Theory implies that the society should behave in a collective manner,
where each of the individuals should take into account the objective of welfare of the society as a
whole and work toward a collective goal, by protecting the rights of one another. For this
purpose, they may have to sacrifice several short term individual privileges for the purpose of
ensuing the long term collective benefits.
Figure 1: Social Contract Theory
(Source: Edb.gov.hk, 2017)

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As per the theory, the corporations, being a part of the citizenship should also be
considered as a participant and therefore should take into account the aspect of collective welfare
maximization of the community under the domain of which they are operating. However,
according to the theory the protection of welfare should be done both-ways that is where on one
hand the corporations have the responsibilities to protect the rights of the corporations, on other
hand the society also have the duty to do the same (Skyrms 2014).
b) Theory of Justice
This theory mainly believes in operating under the framework of fairness as the indicator
of justice. According to this theory, a society is said to be catering justice to the citizens if all the
citizens of the society enjoy equal opportunities, rights, rationality and equality. Therefore, in
this context, the corporate organizations also have to keep the concept of dissemination of proper
justice in the society. Therefore, for this, it is of absolute necessity to take into consideration the
maximization of welfare, capacity building and overall improvement of all the stakeholders who
are involved in their method of operations and also those who are not involved in their operations
but to whom these organizations are answerable for being a part of the same society (Black
2014).
c) Stakeholders Theory
This is one of the most discussed and widely implemented theories in the aspect of
efficient and inclusive corporate management. As per this theory, the stakeholders of any
organization include all those personnel whose interests are directly or indirectly affected by the

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methods of operations of the corporate organization, both positively as well as adversely.
Therefore, as per the theory, it is one of the most important responsibilities on part of the
commercial organizations to take into account the interests of all the stakeholders and not only
the shareholders of the organizations. There may often arise conflict of interests among the
different group of the stakeholders, which include both the employer, financer and shareholder
side and also the employee, consumer and the receiving side. In such cases, it is one of the
responsibilities of the corporations to work in such a way that a balance of interests and welfare
of both the parties are maintained.
d) Amalgamation of the theories
While one school of thought suggests the importance of the ethical and the moral
considerations by the corporations, there are also existence of views which suggests that the
corporations should not stop emphasizing on the profit maximization aspect also as this is the
ultimate objective for which a corporation comes into existence. If a corporation is deprived of
following the profit maximization purpose, then the corporation, the shareholders, and the
financers may lose incentives to use their resources for the purpose of production. This in its turn
is expected to hamper the welfare of the stakeholders in the long run as an overall low
productivity implies low income, low employment and an overall lower standard of living for the
employees.
Therefore, in the recent global commercial framework, a need of designing a
comprehensive corporate governance strategic plan is felt, which will incorporate the social,
ethical and moral issues of overall welfare in it without sacrificing the goal of private profit

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maximization and revenue generation for the shareholders of the competition. Many a times
evidences have been found that this can possibly be done though in short term this may lead to
some sacrifice on part of the firms, in the long run, incorporations of both the theories can
actually be beneficial for the firms as well as the society (Brower and Mahajan 2013).
Limitations of these theories
Though the notion of incorporating the concept of social responsibility in the
corporations may seem to be attractive both morally as well as ethically, there may be several
issues and limitations regarding the implementations and incorporations of such comprehensive
theories which take into account the welfare perspectives, in the real case scenario, few of which
are discussed as follows:
 The social and moral issues, though are important to be taken into account, however, do
not seem to be economically viable as there is no such mechanism or particular mode of
operation which has hundred percent success rate. This is mainly because the issues,
which arise in different companies, differ in nature, extent and magnitude.
 There may arise discrepancies in the business framework of a place if only few of the
working corporations undertake the implementations of a more comprehensive method of
corporate governance such that to take into consideration the welfare perspectives of the
broader society as a whole, along with their personal profit maximization and if other
firms operate traditionally. This may create a gap in the revenue and profit generations of
these two types of firms, which may in turn led to loss of incentives of the formers to take
into account the ethical issues.

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 For dealing with the social issues and ethical problems arising in the society, sufficient
resources and proper implementing mechanisms are required which are not present with
all the corporations. These can only be done by those organizations who have sufficient
resources and have reached to a sustainable production level.
Conclusion and Recommendations
From the above discussion, it is evident that in the contemporary business world, in the
global scenario, it is of utmost importance for the enterprises and the corporations to take into
account the welfare interests and the overall well-being of all the stakeholders, who are involved
in the operation of the corporations as well as the community as a whole. This, however, should
be taken into account and the measures should be implemented without sacrificing their profit
incentives as this is also required to increase the productivity and the welfare of the company and
also the society. There are several problems, which are faced by the corporations like that of
economic viabilities, discrepancies in the extent of implementations and others. Therefore, it is
of crucial importance to make the implementations more uniform and widespread and develop a
comprehensive framework for working of the corporations which has both theoretical support
and practical applicability. The bigger and resource rich corporations should take the fore steps
in this regard such that the smaller ones get encouraged and follow the path of sustainability.

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References
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theory, responsibility and engagement. Routledge.
Bakan, J., 2012. The corporation: The pathological pursuit of profit and power. Hachette UK.
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of Private Enterprise,21(2), pp.106-130.
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drivers of corporate social performance. Journal of business ethics, 117(2), pp.313-331.
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