Ethics Theory
and
Business Practice
10.1 The Responsibilities of Business
Executives – Part One
Shareholder Theory Rationales
aims
• to explain how shareholder theory and
normative stakeholder theory offer
contrasting approaches to executive
responsibilities
• to outline Milton Friedman’s agency, freemarket and usurpation arguments in support
of shareholder theory
• to highlight some characteristics of
shareholder theory rationales
executives
• people who hold senior positions in
companies and who are usually their primary
decision makers
• often also act as directors
• are usually separate from owners
• carry an onerous ethical responsibility
• but to whom are they responsible: in whose
interests should they run their company?
two contrasting perspectives
shareholder theory: business executives’ prime
responsibility is to their shareholders
normative stakeholder theory: business
executives have responsibilities to all the
stakeholders who are associated with their
company
shareholders (USA: stockholders)
• may be individual entrepreneurs, who
founded and still own a company
• may be families or groups of private investors,
who jointly own a company
• more often thought of as people and
institutions, who hold shares in publicly
quoted companies and who are able to buy
and sell those shares on stock markets
the primacy of shareholders
• traditional expectation in Anglo-American
firms that shareholder-value maximization will
be pursued above all else
• international convergence towards the AngloAmerican model
• supported by law in many nations
Milton Friedman
• a staunch advocate of shareholder theory
• ‘The Social Responsibility of Business is to
Increase its Profits’ (Friedman, 1970)
Friedman: some supporting rationales
for shareholder theory
1. agency argument
2. a free-market argument
3. usurpation argument
1. agency argument
• separation of ownership and control
• acting as a principal and acting as an agent
• business executives act as the agents of
shareholders
• shareholders wish to maximize the value of
their investment
• business executive therefore have an ethical
responsibility to maximize share value
theory in practice
energy company executives: guilty of ‘coldblooded profiteering’ or fulfilling responsibilities
as shareholders’ agents?
agency argument and the primacy of
property rights
• if I own something I have a right to do whatever I want
with that thing, as long as I do not break the law
• implies that any other ethical obligations on my part to
use that property in a considerate manner take second
place to my right to use my property as I choose
• moreover, if I give my property to someone else to look
after, that person has an overriding obligation to do
with it as I ask
• since that person is acting as my agent, they also
should not feel constrained by any other ethical
obligations to use that property in a considerate
manner
2. a free-market argument
• economic activity as voluntary exchanges
involving various stakeholders who act of their
own free will
• executives should not interfere with these
voluntary exchanges
• they should let market forces determine
economic activity
• without imposing their personal ethical
agendas
free-market argument and the primacy
of property rights
• economic transactions are essentially exchanges
of property
• for executives to allow considerations of social
and environmental responsibility to shape
economic activity would be to interfere with the
exercise of these vitally important property rights
• corporate social responsibility is therefore a
‘fundamentally subversive doctrine’ (Friedman,
1970) which strikes at the heart of a free society
www.youtube.com/watch?v=KNKzYIs28pI&list=PLv
WoMVGdsAKawOFs58r9Xo6oD6eccdqd0
3. usurpation argument
usurpation: the act of taking up a position or a
role that rightfully belongs to somebody else
• social and environmental spending constitutes
a form of taxation
• only the government has the right to impose
and spend taxes
• therefore, in directing corporate resources to
social and environmental agendas executives
would be usurping the right of government
usurpation argument and rights
• a rights-based rationale
• which highlights the right of government to
levy taxes and decide how they are to be
spent
• and the democratic right of citizens to choose
governments based on their taxation and
public-spending policies
theory in practice
making the world a better place while making
money from selling healthcare products
summarizing shareholder rationales
• conceive of business activity in terms of
transactions between independent, rightsbearing individuals
• executives should define their responsibilities
in relation to the rights of distinct sets of
stakeholders
• property rights occupy an especially privileged
position in this rights-oriented evaluation
key points
• shareholder theory and normative stakeholder
theory offer contrasting accounts of executive
ethical responsibilities
• shareholder theory proposes that executives’
prime responsibility is to maximize share value,
which they will do by focusing their attention of
building long-term profit
• Milton Friedman offers some compelling
arguments to support shareholder theory
• these arguments place a great deal of emphasis
on rights; particularly on property rights
references
Friedman, M. (1970) ‘The Social Responsibility
of Business is to Increase its Profits’, The New
York Times Magazine, September 13.