Business Studies Paper on Corporate Social Responsibility

Corporate Social Responsibility

No single business entity/organization exists in a vacuum; there is interdependence between the organization and its external and internal environments. The two environments affect the organization in different ways, provide customers to the organization as well as the workforce needed to achieve the organizations objectives. Seeing an organization as part of the environment, and therefore the need to establish and maintain a mutual relationship denotes the stakeholder theory (Roberts & Mahoney, 2004). On the other hand, others may argue that the purpose of an organization is to earn profit within the stipulated rules of engagement. The stance is the basic principle of the stockholder theory. It is thus necessary to explore the two theories, with a view of establishing whether the shareholder model of management protects the stakeholders’ interests.

Fronted by Freeman and developed by others, the stakeholder theory essentially explains the relationship between an organization and its stakeholders. The stakeholder theory defines the relationship between the two (organization and stakeholders), essentially stating that the organization is not a standalone entity, but rather a group of stakeholders. According Friedman and Miles (2006), given the relationship, the organization should therefore strive to cater to the interests, needs and the viewpoints of the stakeholders. Catering to the interests of the stakeholders, according to the theory, also involves creation of value for the stakeholders who include shareholders (financiers), customers, suppliers, employees and the communities within which the organization operates.

At the center of the stakeholder theory is the management, which has to play double roles in safeguarding the interests of the stakeholders and the shareholders. The theory suggests that while the management works to ensure the organization proffers benefit to the stakeholders by ensuring they enjoy their rights and that they participate in the decision-making process of the organization, it must also act as the shareholders’ agent ensuring the posterity of the organization. The double responsibility given to the management demands that it (management) keeps the interests of both the shareholders and stakeholders aligned (Friedman &Miles, 2006; Roberts & Mahoney, 2004).

Stakeholder management takes two forms, both of which are important for the management. Internal stakeholder management largely entails the management of people and departments within the organization. It is the responsibility of the management to ensure that it caters to the needs and aspirations of the internal stakeholders for the success of the entire organization, given the vital role they play towards the achievement of organizational objectives. Internal stakeholder management is the second form of stakeholder management, which involves the management of people and organizations outside the organization. Managing external stakeholders involves catering to the needs of the stakeholders given the interest and effect of any decision made by the management.

While it means well in including the entire community within which an organization operates, stakeholder theory goes wrong in a number of aspects. Ambler and Wilson (1995) point out that stakeholder theory essentially diverts attention from the creation of success within the organization to the sharing of the fruit. Concern is especially on how the theory holds that any individual that holds a stake in the organization’s activities shares similar consideration as the shareholder (Ambler &Wilson, 1995). The theory put the manager to task, viewing organizations as social institutions rather than business out to make profit, burdening the manager with the responsibility beyond the fiduciary responsibility he/she has to the shareholders, directors and employees (Ambler &Wilson, 1995).

Stakeholder theory additionally puts the organization at crossroads in definition of its success. Given the theory’s inclusion of the society, it is especially difficult to point the criteria on which to measure the success of the organization. Stakeholder theory largely points to the society rather than the organization in determining what constitutes success. Such stipulations are especially frustrating to the management, as most of the time societal definition of success may not necessarily align with the organization’s purpose and definition of success.

A competing theory to stakeholder theory is the stockholder theory, which unlike the stakeholder theory, gives priority to the owners and investors in the organization (Smith, 2003). The theory essentially suggests that the management has obligation to the investors and company owners to maximize their returns and grow their wealth. Fronted by Friedman, stockholder theory of corporate governance argues that the sole purpose of running an organization/business is maximizing profits. The theory further argues that given this sole purpose, the management’s social responsibility is to use the organization’s resources and engage in activities whose end result would be increased profits to the organization. Even as the organization engages in the activities, the theory warns that these should be within the stipulated laws and established rules of the game without any engagement in fraud or deception (Smith, 2003).

At the center of stockholder theory of corporate governance is maximization of value to the stockholder. The theory lauds efficiency and minimization of costs as ways of maximizing stockholder value. At the same time, the theory demands minimization of risks by the management, and in some cases, drives managers to make decisions that while harmful to the environment such as greenhouse gas emissions, increase profits to the organization.

The fact that shareholders have a stake in the organization means that they take part in the daily governance of the corporation. The stockholder theory suggests that the purpose of the organization is to create value in profits for the stockholders, thus necessitating their involvement in corporate governance. In governing the corporation therefore, stockholders have a right to information, which they can access, scrutinize and raise any issues they find with the information provided (Fox & Lorsch, 2012). Through such information, stockholders can also suggest changes within the management structure of the organization, which eventually take effect.

Stockholders additionally govern organization through the election of directors and other important personnel that make important decisions on the fate of the organization such as the CEO. To sit in the board of directors, stockholders must vote, and the candidate must receive majority votes. Aside from voting, stockholders approve important changes to the organization. Changes such as mergers, acquisitions, sale of assets, and dissolution must get approval from the stockholders before they take effect.  Moreover, stockholders can make proposals on some specific actions taken by the organization (Fox & Lorsch, 2012).

Of concern, however, is whether stakeholder interests are protected by shareholder model of management. Fox and Lorsch (2012) argue that most organizations’ interests are on the shareholders rather than the stakeholders. Essentially, organizations tend to take care of the shareholders’ interests first at the expense of the stakeholders. The call for more involvement and commitment by big corporations to environmental sustainability, suicide and attempted suicides in electronic factories in China, as well as sweatshops that employ minors are all pointers to the lack of stakeholder interests in shareholder model of management.

 

 

 

References

Ambler, T. & Wilson, A. (1995). Problems of stakeholder theory. Business Ethics: A European Review, 4(1), 30-35

Fox, J. & Lorsch, J., W. (2012). What good are shareholders? Harvard Business Review. Retrieved from https://hbr.org/2012/07/what-good-are-shareholders.

Friedman, A.L. & Miles, S. (2006). Stakeholders: Theory and Practice. Oxford University Press

Roberts, R., & Mahoney, L. (2004). Stakeholder Conceptions of the Corporation: Their Meaning and Influence in Accounting Research. Business Ethics Quarterly, 14(3), 399-431. doi:10.5840/beq200414326.

Smith, H., J. (2003). The shareholders vs. stakeholders debate. MIT Sloan Management Review. Retrieved from https://sloanreview.mit.edu/article/the-shareholders-vs-stakeholders-debate/.