A business is an entity, operation or activity created and engaged in for providing goods and/or services at profit. Most familiarly businesses are part of the Capitalist economy but they can be socially owned and run by the state, or by intermediary entities created by it for the purpose of avoiding direct political control. From an ethical point of view there are three sorts of issues raised by the existence, operations and conduct of business. The first concerns their place within society as a whole and relates to their ownership and control. For example, those extracting natural resources and those providing utilities such as power, communications, and transport have a direct impact on the environment and on the lives of individuals and groups. This raises questions of proper ownership, responsibility, and regulations. Second, the goods, services, and purposes with which a business is concerned may be problematic. The pornography industry in the USA is valued at about $12 billion and worldwide it reaches towards $100 billion. It responds to a demand, though it also increases it, and many regard its ‘product’ as exploitative, degrading and corrupting. On the other hand, many businesses contribute to the welfare of their employees and customers, bringing work, goods and services, and innovations and improvements, where they might not otherwise exist. Third, beyond the societal role of businesses, and the character of their products and services, there are ethical questions concerning their operations and practices. Advertising, terms and conditions of employment, competitive practice, pricing and so on may all have moral aspects, and this as well as consumer and other criticisms has led in this areas as in others to codes of ethical practice.From an ethical point of view there are three sorts of issues raised by the existence, operations and conduct of business. The first concerns their place within society as a whole and relates to their ownership and control. For example, those extracting natural resources and those providing utilities such as power, communications, and transport have a direct impact on the environment and on the lives of individuals and groups. This raises questions of proper ownership, responsibility, and regulations. Second, the goods, services, and purposes with which a business is concerned may be problematic. The pornography industry in the USA is valued at about $12 billion and worldwide it reaches towards $100 billion. It responds to a demand, though it also increases it, and many regard its ‘product’ as exploitative, degrading and corrupting. On the other hand, many businesses contribute to the welfare of their employees and customers, bringing work, goods and services, and innovations and improvements, where they might not otherwise exist. Third, beyond the societal role of businesses, and the character of their products and services, there are ethical questions concerning their operations and practices. Advertising, terms and conditions of employment, competitive practice, pricing and so on may all have moral aspects, and this as well as consumer and other criticisms has led in this areas as in others to codes of ethical practice.
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— 38 Stakeholder Theory of the Modern Corporation R. EDWARD FREEMAN INTRODUCTION Corporations have ceased to be merely legal devices through which the private business transactions of individuals may be carried on. Though still much used for this purpose, the corporate form has acquired a larger significance. The cor- poration has, in fact, become both a method of property tenure and a means of organizing economic life. Grown to tremendous proportions, there may be said to have evolved a "corporate system"-which has attracted to itself a com- bination of attributes and powers, and has attained a degree of prominence en- titling it to be dealt with as a major social institution.¹ Despite these prophetic words of Berle and Means (1932), scholars and managers alike continue to hold sacred the view that managers bear a spe- cial relationship to the stockholders in the firm. Since stockholders own shares in the firm, they have certain rights and privileges, which must be granted to them by management, as well as by others. Sanctions, in the form of "the law of corporations," and other protective mechanisms in the form of social custom, accepted management practice, myth, and ritual, are thought to reinforce the assumption of the primacy of the stockholder. The purpose of this article is to pose several challenges to this assump- tion, from within the framework of managerial capitalism, and to suggest the bare bones of an alternative theory, a stakeholder theory of the modern cor- R. Edward Freeman, "Stakeholder Theory of the Modern Corporation." Reprinted by per- mission of the author. 39 poration. I do not seek the demise of the modern corporation, either intellectually or in fact. Rather, I seek its transformation. In the words of Neurath, we shall attempt to "rebuild the ship, plank by plank, while it re- mains afloat."2 My thesis is that I can revitalize the concept of managerial capitalism by replacing the notion that managers have a duty to stockholders with the concept that managers bear a fiduciary relationship to stakeholders. Stakeholders are those groups who have a stake in or claim on the firm. Specifically I include suppliers, customers, employees, stockholders, and the local community, as well as management in its role as agent for these groups. I argue that the legal, economic, political, and moral challenges to the currently received theory of the firm, as a nexus of contracts among the owners of the factors of production and customers, require us to revise this concept. That is, each of these stakeholder groups has a right not to be treated as a means to some end, and therefore must par- ticipate in determining the future direction of the firm in which they have a stake. The crux of my argument is that we must reconceptualize the firm around the following question: For whose benefit and at whose expense should the firm be managed? I shall set forth such a reconceptualiza- tion in the form of a stakeholder theory of the firm. I shall then critically examine the stakeholder view and its implication for the future of the cap- italist system. THE ATTACK ON MANAGERIAL CAPITALISM The Legal Argument The basic idea of managerial capitalism is that in return for controlling the firm, management vigorously pursues the interests of stockholders. Central to the managerial view of the firm is the idea that management can pursue market transactions with suppliers and customers in an uncon- strained manner. The law of corporations gives a less clearcut answer to the question: In whose interest and for whose benefit should the modern corporation be governed? While it says that the corporation should be run primarily in the interests of the stockholders in the firm, it says further that the corporation exists "in contemplation of the law" and has personality as a "legal person," limited liability for its actions, and immortality, since its existence transcends that of its members. Therefore, directors and other officers of the firm have a fiduciary obligation to stockholders in the sense that the "affairs of the corporation" must be conducted in the interest of the stockholders. And stockholders can theoretically bring suit against those directors and man- agers for doing otherwise. But since the corporation is a legal person, ex- isting in contemplation of the law, managers of the corporation are constrained by law. Until recently, this was no constraint at all. In this century, however, the law has evolved to effectively constrain the pursuit of stockholder interests at the expense of other claimants on the firm. It has, in effect, required that the claims of customers, suppliers, local communities, and employees be 40 GENERAL ISSUES IN BUSINESS ETHICS taken into consideration, though in general they are subordinated to the claims of stockholders. For instance, the doctrine of "privity of contract," as articulated in Win- terbottom v. Wright in 1842, has been eroded by recent developments in prod- ucts liability law. Indeed, Greenman v. Yuba Power gives the manufacturer strict liability for damage caused by its products, even though the seller has exer- cised all possible care in the preparation and sale of the product and the consumer has not bought the product from nor entered into any contractual arrangement with the manufacturer. Caveat emptor has been replaced, in large part, with caveat venditor.³ The Consumer Product Safety Commission has the power to enact product recalls, and in 1980 one U.S. automobile company recalled more cars than it built. Some industries are required to provide information to customers about a product's ingredients, whether or not the customers want and are willing to pay for this information.4 The same argument is applicable to management's dealings with em- ployees. The National Labor Relations Act gave employees the right to unionize and to bargain in good faith. It set up the National Labor Rela- tions Board to enforce these rights with management. The Equal Pay Act of 1963 and Title VII of the Civil Rights Act of 1964 constrain manage- ment from discrimination in hiring practices; these have been followed with the Age Discrimination in Employment Act of 1967.5 The emergence of a body of administrative case law arising from labor-management dis- putes and the historic settling of discrimination claims with large employ- ers such as AT&T have caused the emergence of a body of practice in the corporation that is consistent with the legal guarantee of the rights of the employees. The law has protected the due process rights of those employ- ees who enter into collective bargaining agreements with management. As of the present, however, only 30 percent of the labor force are participat- ing in such agreements; this has prompted one labor law scholar to pro- pose a statutory law prohibiting dismissals of the 70 percent of the work force not protected.6 The law has also protected the interests of local communities. The Clean Air Act and Clean Water Act have constrained management from "spoiling the commons.” In an historic case, Marsh v. Alabama, the Supreme Court ruled that a company-owned town was subject to the provisions of the U.S. Constitution, thereby guaranteeing the rights of local citizens and negating the “property rights" of the firm. Some states and municipalities have gone further and passed laws preventing firms from moving plants or limiting when and how plants can be closed. In sum, there is much cur- rent legal activity in this area to constrain management's pursuit of stock- holders' interests at the expense of the local communities in which the firm operates. I have argued that the result of such changes in the legal system can be viewed as giving some rights to those groups that have a claim on the firm, for example, customers, suppliers, employees, local communities, stock- holders, and management. It raises the question, at the core of a theory of the firm: In whose interest and for whose benefit should the firm be managed? The answer proposed by managerial capitalism is clearly "the stockholders,” but I have argued that the law has been progressively cir- cumscribing this answer. Business Ethics: Ine CoTuroversy 41 The Economic Argument In its pure ideological form managerial capitalism seeks to maximize the interests of stockholders. In its perennial criticism of government regula- tion, management espouses the "invisible hand" doctrine. It contends that it creates the greatest good for the greatest number, and therefore govern- ment need not intervene. However, we know that externalities, moral haz- ards, and monopoly power exist in fact, whether or not they exist in theory. Further, some of the legal apparatus mentioned above has evolved to deal with just these issues. The problem of the "tragedy of the commons" or the free-rider problem pervades the concept of public goods such as water and air. No one has an incentive to incur the cost of clean-up or the cost of nonpollution, since the marginal gain of one firm's action is small. Every firm reasons this way, and the result is pollution of water and air. Since the industrial revolution, firms have sought to internalize the benefits and externalize the costs of their ac- tions. The cost must be borne by all, through taxation and regulation; hence we have the emergence of the environmental regulations of the 1970s. Similarly, moral hazards arise when the purchaser of a good or service can pass along the cost of that good. There is no incentive to economize, on the part of either the producer or the consumer, and there is excessive use of the resources involved. The institutionalized practice of third-party payment in health care is a prime example. Finally, we see the avoidance of competitive behavior on the part of firms, each seeking to monopolize a small portion of the market and not compete with one another. In a number of industries, oligopolies have emerged, and while there is questionable evidence that oligopolies are not the most efficient corporate form in some industries, suffice it to say that the potential for abuse of market power has again led to regulation of man- agerial activity. In the classic case, AT&T, arguably one of the great techno- logical and managerial achievements of the century, was broken up into eight separate companies to prevent its abuse of monopoly power. Externalities, moral hazards, and monopoly power have led to more ex- ternal control on managerial capitalism. There are de facto constraints, due to these economic facts of life, on the ability of management to act in the interests of stockholders. A STAKEHOLDER THEORY OF THE FIRM The Stakeholder Concept Corporations have stakeholders, that is, groups and individuals who ben- efit from or are harmed by, and whose rights are violated or respected by, corporate actions. The concept of stakeholders is a generalization of the no- tion of stockholders, who themselves have some special claim on the firm. Just as stockholders have a right to demand certain actions by management, so do other stakeholders have a right to make claims. The exact nature of these claims is a difficult question that I shall address, but the logic is iden- tical to that of the stockholder theory. Stakes require action of a certain sort, and conflicting stakes require methods of resolution. 42 GENERAL ISSUES IN BUSINESS ETHICS Freeman and Reed (1983)7 distinguish two senses of stakeholder. The "narrow definition" includes those groups who are vital to the survival and success of the corporation. The "wide-definition" includes any group or in- dividual who can affect or is affected by the corporation. I shall begin with a modest aim: to articulate a stakeholder theory using the narrow definition. Stakeholders in the Modern Corporation Figure 1 depicts the stakeholders in a typical large corporation. The stakes of each are reciprocal, since each can affect the other in terms of harms and benefits as well as rights and duties. The stakes of each are not univocal and would vary by particular corporation. I merely set forth some general notions that seem to be common to many large firms. Owners have financial stake in the corporation in the form of stocks, bonds, and so on, and they expect some kind of financial return from them. Either they have given money directly to the firm, or they have some historical claim made through a series of morally justified ex- changes. The firm affects their livelihood or, if a substantial portion of their retirement income is in stocks or bonds, their ability to care for themselves when they can no longer work. Of course, the stakes of own- ers will differ by type of owner, preferences for money, moral preferences, and so on, as well as by type of firm. The owners of AT&T are quite dif- ferent from the owners of Ford Motor Company, with stock of the former company being widely dispersed among 3 million stockholders and that of the latter being held by a small family group as well as by a large group of public stockholders. Employees have their jobs and usually their livelihood at stake; they often have specialized skills for which there is usually no perfectly elastic market. In return for their labor, they expect security, wages, benefits, and meaningful work. In return for their loyalty, the corporation is expected to provide for them and carry them through difficult times. Employees are ex- pected to follow the instructions of management most of the time, to speak favorably about the company, and to be responsible citizens in the local communities in which the company operates. Where they are used as means to an end, they must participate in decisions affecting such use. The evi- dence that such policies and values as described here lead to productive company-employee relationships is compelling. It is equally compelling to realize that the opportunities for “bad faith" on the part of both manage- ment and employees are enormous. "Mock participation” in quality circles, Owners Suppliers Management The Corporation Employees Local Community Customers FIGURE 1. A Stakeholder Model of the Corporation. AS 16
— Business is a calling, even a vocation. It is, to be sure, a way of making a living, sometimes a . . . .
— Any professor using a popular professional ethics textbook in their class is likely secularizing the moral thinking of their students. To help you understand why that is the case, I...
— "The regulation of economic life, whether through law or politics, has been a fixture of daily life from time immemorial. Formal regulation occurs through a variety of formal devices, the efficacy of which is argued about by legal scholars, economists, policymakers, legislators and governments. Even expressions like "to regulate" or "to deregulate" carry a range of political and even moral connotations, depending on who is using the phrase and how they are deploying it. Different historical periods are marked by greater and lesser degrees of regulation. Much of Adam Smith's Wealth of Nations amounts to a critique of the extensive regulation of trade and commerce that was part and parcel of the mercantile system. The nineteenth century witnessed efforts to diminish regulations and broader laws in many Western countries that had allowed the hundreds, if not thousands of guilds to control the entry of individuals into various professions, the prices charged to customers by those in different occupations etc., for several hundred years. Re-regulation of considerable portions of economic life had, however, began by the beginning of the twentieth century and accelerated after World War I and the Great Depression. From the mid-1970s, a significant amount of deregulation occurred in many Western economies. Following the Great Recession of 2008, there was a swing back towards regulation, especially with regard to the financial sector"--
— Dr. Andrew Abela, Dean, Busch School of Business at The Catholic University of America. #DemocraticSocialism #Business #Economics #Politics #Law 2019 Napa Institute Conference
— In this conversation, Acton's Dr. Samuel Gregg is joined by Amelia Miazad, founding director of the Business in Society Institute at Berkley Law, and Will Anderson, senior director for policy at the Business Roundtable, as they present three different views on the purpose of business. Moderated by Dr. James Otteson, professor of business ethics at the University of Notre Dame, this discussion provides alternating perspectives on topics like stakeholder capitalism: the idea that corporations should orientate themselves to serve all their stakeholders (customers, employees, partners), not just shareholders. In addition, all three speakers provide valuable insight into a question that undergirds all discussion on business ethics: what is the purpose of business in the first place? ===== The Acton Institute is a think-tank whose mission is to promote a free and virtuous society characterized by individual liberty and sustained by religious principles. This direction recognizes the benefits of a limited government, but also the beneficent consequences of a free market. It embraces an objective framework of moral values, but also recognizes and appreciates the subjective nature of economic value. It views justice as a duty of all to give the one his due but, more importantly, as an individual obligation to serve the common good and not just his own needs and wants. In order to promote a more profound understanding of the coming together of faith and liberty, Acton involves members of religious, business, and academic spheres in its various seminars, publications, and academic activities. It is our hope that by demonstrating the compatibility of faith, liberty, and free economic activity, religious leaders and entrepreneurs can contribute by helping to shape a society that is secure, free, and virtuous. Visit our website: https://www.acton.org/ Subscribe to the Acton Line Podcast: https://www.acton.org/acton-line/ Visit the Acton Bookshop: https://shop.acton.org/ Follow Acton on Facebook: https://www.facebook.com/ActonInstitute/ Follow Acton on Twitter: https://twitter.com/ActonInstitute/ Follow Acton on Instagram: https://www.instagram.com/acton_institute/
— The Woke Corporation is one more example in American history of disordering and misallocating the good that business does. What is needed to respond to this distorted view of business? A clarification of the goods of the modern corporation, i.e. “good work”, “good goods”, and “good wealth”. This talk will principally speak about “good work” and why the Woke corporation is eroding its possibility. Dr. Michael J. Naughton, Director of the Center for Catholic Studies, University of St. Thomas #Wokeism #Business #Economics #Law #Catholic
— The phenomenon of woke capitalism reflects deep confusion about the purpose of business and how commerce serves the common good. The alternative to woke capitalism is not amoral utilitarianism but business that acts morally. Dr. Samuel Gregg, Research Director, Acton Institute #Capitalism #Wokeism #Business #Catholic
— VI wrote Octagesima Adveniens ("A Call to Action") on the eightieth, in 1971. Pope John ... have been made, for example ...
A business is an entity, operation or activity created and engaged in for providing goods and/or services at profit. Most familiarly businesses are part of the Capitalist economy but they can be socially owned and run by the state, or by intermediary entities created by it for the purpose of avoiding direct political control. From an ethical point of view there are three sorts of issues raised by the existence, operations and conduct of business. The first concerns their place within society as a whole and relates to their ownership and control. For example, those extracting natural resources and those providing utilities such as power, communications, and transport have a direct impact on the environment and on the lives of individuals and groups. This raises questions of proper ownership, responsibility, and regulations. Second, the goods, services, and purposes with which a business is concerned may be problematic. The pornography industry in the USA is valued at about $12 billion and worldwide it reaches towards $100 billion. It responds to a demand, though it also increases it, and many regard its ‘product’ as exploitative, degrading and corrupting. On the other hand, many businesses contribute to the welfare of their employees and customers, bringing work, goods and services, and innovations and improvements, where they might not otherwise exist. Third, beyond the societal role of businesses, and the character of their products and services, there are ethical questions concerning their operations and practices. Advertising, terms and conditions of employment, competitive practice, pricing and so on may all have moral aspects, and this as well as consumer and other criticisms has led in this areas as in others to codes of ethical practice.From an ethical point of view there are three sorts of issues raised by the existence, operations and conduct of business. The first concerns their place within society as a whole and relates to their ownership and control. For example, those extracting natural resources and those providing utilities such as power, communications, and transport have a direct impact on the environment and on the lives of individuals and groups. This raises questions of proper ownership, responsibility, and regulations. Second, the goods, services, and purposes with which a business is concerned may be problematic. The pornography industry in the USA is valued at about $12 billion and worldwide it reaches towards $100 billion. It responds to a demand, though it also increases it, and many regard its ‘product’ as exploitative, degrading and corrupting. On the other hand, many businesses contribute to the welfare of their employees and customers, bringing work, goods and services, and innovations and improvements, where they might not otherwise exist. Third, beyond the societal role of businesses, and the character of their products and services, there are ethical questions concerning their operations and practices. Advertising, terms and conditions of employment, competitive practice, pricing and so on may all have moral aspects, and this as well as consumer and other criticisms has led in this areas as in others to codes of ethical practice.