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 amalgamation of the existing relevant theories such that both the profit incentives and the welfare perspectives can be taken into account.
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 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 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.
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.
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:
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.
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:
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.
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).
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).
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 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.
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 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).
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:
Conclusion
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.
References
Andriof, J., Waddock, S., Husted, B. and Rahman, S.S., 2017. Unfolding stakeholder thinking: theory, responsibility and engagement. Routledge.
Bakan, J., 2012. The corporation: The pathological pursuit of profit and power. Hachette UK.
Black, D. ed., 2014. Toward a general theory of social control: Fundamentals (Vol. 1). Academic Press.
Boatright, J.R., 2006. What’s wrong—and what’s right—with stakeholder management.Journal of Private Enterprise,21(2), pp.106-130.
Bridoux, F. and Stoelhorst, J.W., 2014. Microfoundations for stakeholder theory: Managing stakeholders with heterogeneous motives. Strategic Management Journal, 35(1), pp.107-125.
Brower, J. and Mahajan, V., 2013. Driven to be good: A stakeholder theory perspective on the drivers of corporate social performance. Journal of business ethics, 117(2), pp.313-331.
Edb.gov.hk (2017). [online] Available at: https://www.edb.gov.hk/attachment/en/curriculum-development/kla/pshe/nss-curriculum/ethics-and-religious-studies/business_ethics_pdf_eng.pdf [Accessed 16 Oct. 2017].
Freeman, R.E., Harrison, J.S. and Wicks, A.C., 2007.Managing for stakeholders: Survival, reputation, and success. Yale University Press
Friedman, M., 2007. The social responsibility of business is to increase its profits. Corporate ethics and corporate governance(pp. 173-178). Springer, Berlin Heidelberg.
Hasnas, J., 2013. Whither stakeholder theory? A guide for the perplexed revisited. Journal of Business Ethics, 112(1), pp.47-57.
Jensen, M.C., 2002. Value maximization, stakeholder theory, and the corporate objective function.Business ethics quarterly,12(02), pp.235-256.
Laczniak, G.R. and Murphy, P.E., 2012. Stakeholder theory and marketing: Moving from a firm-centric to a societal perspective. Journal of Public Policy & Marketing, 31(2), pp.284-292.
Mansell, S., 2013. Shareholder theory and Kant’s ‘duty of beneficence’. Journal of Business Ethics, 117(3), pp.583-599.
Reiser, D.B., 2012. The Next big thing: Flexible purpose corporations. Am. U. Bus. L. Rev., 2, p.55.
Schwartz, M.S. and Saiia, D., 2012. Should firms go “beyond profits”? Milton Friedman versus broad CSR. Business and Society Review, 117(1), pp.1-31.
Skyrms, B., 2014. Evolution of the social contract. Cambridge University Press.
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