Society Has Grown Rapidly And Immensely Management Essay

Society Has Grown Rapidly And Immensely Management Essay
Introduction
In the last 200 years, business corporations’ influence on the society has grown rapidly and immensely. Two contending theories are eminent when discussing the purpose of the modern business firm. Both theories present a structure for assessing company’s governance procedures, managerial compensation policies, and the economic and societal performance of a firm. The first, shareholder theory, originates from an economic viewpoint that, the company’s should focus firmly on those who have a monetary portion in the business and that a firm’s only function is to serve the needs and interests of the company’s owners. On the other hand, the stakeholder theory broadens the first view, identifying the relevance of wealth creation in addition to the business’s interactions with its integral groups, shareholders, suppliers, creditors, employees, regulators, customers, and native communities and effect on society as a whole. These stakeholders are those without whose participation the corporation cannot survive (Clarkson, 1995).This paper discuss the foundations of these two theories, provide an overview of some current progress within the theories, and conclude with some suggestions on how the two theories might be used to create a better effective structure for the role of the modern business firm.


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Shareholder Theory
The origins of the ideas shaping shareholder theory are more than 200 years old, with roots in Adam Smith’s (1776), Wealth of Nations. In general, shareholder theory encompasses the idea that the main purpose of business lies in generating profits and increasing shareholder wealth. Shareholder theorists call for restricted government and supervisory interference in business, believing that society will also benefit from markets been regulated through the mechanism of the invisible hand, that is, if all businesses work towards their own self-interest by trying to maximize profits.
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Some advocates of the shareholder view also were of the view that the invisible hand checks unlawful activities, arguing that the market will discipline or punish firms that involve themselves in illegal or unethical behaviour. They were of the view that too much oversight and regulation of firms is needless.

They believed that the state should be responsible for solving social problems. Corporate generosity and other actions not directly connected to creating shareholder wealth are a waste of shareholders’ investments and, possibly, depraved since it amounts to stealing from shareholders. Though this statement seems strong, Friedman conceived that the "business of business" is business; and that firms are formed to make money, not run the social or moral growth of society. According to Friedman, social and moral development is best handled by the government or by a voluntary organization. Wealth is shifted to issues outside the core expertise of their executives if businesses become tangled in public or social policy issues. If wealth is used inefficiently this way, society will be affected negatively in the long run. The negative view of Friedman towards socially involved companies went so far as to announce that such activities seized the role of constitutionally chosen officials.

It should also be noted that, Friedman never advocated firms behaving unlawfully, dishonestly, or unethically. Whilst supporting the corporate aim of make best use of shareholder wealth, he argued that it should be done within the ethical, moral and legal confines of society.

Critics of the Shareholder Theory
The main approach on shareholder value has been extensively critiqued (Aglietta and Rebérioux 2005) principally after the financial crisis that hit the world.

While a emphasising that maximizing shareholder value will bring financially benefit to the owners of a business, it doesn’t offer a clear measure of the involvement of the business in societal concerns like environmental issues, ethical business practices or unemployment problems. Decisions taking by management can lower the well-being of third parties though it might maximize shareholder value while.

Managers of an organization are led by the Board of Directors. These Directors direct how the business is supposed to be run and since they do not acquire profit directly from the objective of shareholder’s wealth maximization except if they own stock, there is occasionally conflict between managers and stockholders. This conflict is referred to as agency problem. Shareholders are been served by managers as agents. Therefore, if there is an agency difficultly amongst the two parties, it causes hitches inside the organisation and can impede performance.

Furthermore, the interim attention on shareholder value may be disadvantageous to its long-term shareholder value; the short-term tactics that temporarily improves the firms stock’s value can have negative effects on its long-term value.

Implications of Shareholder theory to firms
Despite the reason for the reason for maximisation of share prices, the shareholder model is branded by organisational control and because the companies’ management is directly controlled by its shareholders. The principal-agent problems and the arm’s length control involved in the shareholder theory makes it difficult for them to check if the paid directors all the time act in their interests (KAY/SILBERSTONE1995: 86ff).Also, this model is denoted by its short-term orientation.

The view that managers principally have a responsibility of making the best use out of shareholders returns attested for the fall of Enron and various scandals like Imclone, WorldCom and Tyco International. There were various concerns on the freedom of auditors who were charged with the assessing of the financial statements of these companies. There were questions also raised concerning the investor recommendations and incentive schemes at Merill Lynch and Credit Suisse First Boston. These unfolding events and occurrences dampened advocators of the shareholder theory. This also paved way for people to start questioning the evidence of shareholder supremacy.

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Stakeholder Theory
The traditional meaning of a stakeholder is any individual or group who can be affected or affect the attainment of a business goals and objectives (Freeman 1984). Over the years the explanation for a stakeholder, the purpose of a firm and the responsibilities of managers have been very ambiguous and disputed in various literatures. Freeman, who is the father of the stakeholder concept, reformed his definition overtime. In one of his newest definitions Freeman (2004) defines stakeholders as groups whom are important to the continued existence and success of a business. His recent publication Freeman (2004) adds a new standard which reveals a fresh development in stakeholder theory. The new standard advocates for the concern of the views of stakeholders themselves, and that, their undertakings is essential to be taken into account when managing a business. He explains that stakeholders may convey an action against managers for not performing their required responsibility of care (Freeman 2004).

The stated principles and opinions of the stakeholder theory are referred to as normative stakeholder theory in literature. This theory enables stakeholders or managers know how they should act. It also serves as a guide for how they should view the purpose of the business, based on some ethical principle (Friedman 2006). There is also the descriptive stakeholder concept which is another approach to the stakeholder theory.

This theory appears embedded in organizational behaviour literature and designates the behaviour and features of stakeholders involved in a structure and how an firm interacts with them (Brenner and Cochran 1991; Jawahar and McLaughlin 2001).

The third concept, instrumental perspective on stakeholder theory addresses this more openly on the assumption that firms that give attention to their main stakeholders will acquire competitive advantage over those that do not (Clarkson 1995; Jones 1995). This means if managers treat stakeholders in accordance to this concept the organization will be more useful and successful in the long run.

In particular, Carroll A 1979 and Ed Freeman 1984 theorized that a firm could do better if firms take the interests of all their stakeholders into account, that is, they would attain better performance than by merely concentrating on interests of shareholders.

Carroll noted that businesses have four main responsibilities, that is, economic- to maximize shareholder wealth, legal -to conform to set laws and regulations, ethical -to know that the firm is part of a community, and thus has obligations to and an impact on, others, and discretionary- to engage in generosity. However, its responsibility to the economy should be major, that is, "the business of business is business." Likewise, Freeman supports that profit generation should be the product of a firm that is managed well. Unlike Friedman, yet, both Freeman and Carroll had the belief that if a business produces wealth for its stakeholders, it as well affects shareholders. Therefore the stakeholder theorist believe that taking all component groups into account is a better way of increasing overall performance unlike the stakeholder theory which emphasizes a business can only increase value on one dimension.

Implications of Stakeholder theory to firms
The Stakeholder theory challenges small-business owners and leaders of corporations to reconsider their usual ways to running organisations. This theory enable firms move away from the primary concentration of a firm in acquiring profits in the short-run but to focus on the long term success of the business. In this current business world well-defined by advancing globalization, augmented concerns on corporate responsibility and economic insecurity, the stakeholder theory’s core principles can assist as a model for start-ups and succour as a turn-around for waning companies. The stakeholder theory if properly understood will enable firms realize that their business values and it’s relationships with stakeholders are critical to success, inspiring employees, helping managers to make profit and benefiting the society as a whole.

Critics of the Stakeholder theory
Charles Blattberg, the political philosopher critiqued stakeholder theory for supposing that the interests of the several stakeholders can be, at best, compromised or balanced against one another. He claimed that this was a product of its prominence on negotiation as the principal way of discourse for dealing with clashes amongst stakeholder interests. Blattberg recommended that conversation instead, and this leads him to support what he refers to as ‘patriotic’ idea of a firm as a substitute to that related with the stakeholder theory (Blattberg, Charles 2004). There is also limited headway made in respect to the positive link that exists between increased financial performance of a firm and a more inclusive stakeholder management, because of the inherent difficulty of trying to evaluate the effect of corporate engagements on stakeholders other than shareholders. Assessing a business’s efficiency in its dealings with stakeholders outside the capital markets is very difficult to achieve.

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Tirole (2001) took a further negative perspective of the desirability of embracing the stakeholder oriented goal for the business arguing that the welfare of stake-holders cannot be measured reliably.

Political Sphere
The political problem which triggers the debate of the ways for businesses are managed has been existent for only about 150 years; society had observed the arrival and the spreading of businesses during this period of time (Chandler, 1977; Luhmann, 2000). In today’s world, firms are everywhere, making it a ‘society of organizations’ (Etzioni, 1964). Economists have comprehensively been arguing on the two principal questions which businesses pose in the political dialogue since the 1930’s (Knight, 1965; Coase, 1937). Their efforts are targeted at reflecting the "reasons of organizations" regardless of the fact that there are variations in the viewpoints of their research programs (Waldkirch, 2002), the explanations for the appearance and the triumphal rally of firms in today’s world.

In the financial crisis that shook the world, a lot of the executives at that time carried out arrangements that, from all external appearances, were of their personal gains rather than the maximizing of shareholders wealth. An example, CFO Andrew Fastow of Enron Corp, who made a partnership which was bankrolled with the stock of Enron Corp. which populated with very precarious ventures. Though Enron lost money on the deal he made millions quickly, in fees and profits. In fact, Enron entered the state of insolvency and loss more than 500million dollars due those initiatives taken (P. Behr and A. Witt 2002). Likewise, some other CEO’s including Scott Sullivan of WorldCom Inc, Garry Winnick of Global Crossing Holdings Ltd and Kenneth Lay of Enron, were all beneficiaries from stock options and bonuses whilst at that time their shareholders were not happy. In actual fact, that behaviour was inexcusable compared to the shareholder theory as the main idea of the theory is that executives should act only in the shareholders’ interests should be the order of the day not in their own interest.

Economic Sphere
In countries with a market economy it is normally decided they pursue economic profitability. Yet, few people would also disagree that organizations also have other definite social obligations. Profitability and responsibility should and can be joined in an ideal world; though it is clear that they are at slightly conflicting.

Organizations must on one hand be more profitable to survive and businesses must gain higher returns on equity of shareholders than it would be appreciated if the money were to be put in a no-risk bank account. High stock prices reflect profit for investors which create trust for them; it also helps the business achieve it set targets and goals. The profits acquired by firms should not be seen only as an outcome, but as a basis of the company’s competitive health and prosperity.

In this manner, we can thereby say firms are systems of groups and parties functioning together in the direction of a collective aim and not simply 'economic machines'. The economic environments around firms play an important part of the value of any company. In order to motivate people and society to work hard for the welfares of the company, there should be a level of trust built with them. Similarly it is also significant for the development of trust between the firm’s external environment like its customers, interest groups, suppliers, government and the organization itself. This trust can only grow from the supposed safety if interests of every stakeholder are taken into account.

Corporate Governance: Shareholder vs. Stakeholder Approach
The shareholder model presently dictates mainly in the Anglo-American counties as the UK or US whereas the continental Europe -particularly in Germany- or Japan are popular in stakeholder model.

United Kingdom, United States, Australia and Canada are countries with Anglo-Saxon legal tradition, in these countries; corporate governance usually centres primarily on shareholders.

It is considered well enough so long as the organization makes decent profits yearly and increased the dividend due its shareholders (Cassidy J,2002)

Top managers are likely to be checked by ways of market-based compensation and fines in those countries. For example, in US, where compensation is usually associated to the level of profitability, many firms may be tempted to cut back on labour so as to maintain present profitability. It is very tough under this system for employees to trust top management as their conduct is an issue of constant market scrutiny.

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On the other hand countries like Japan and Germany, take primarily stakeholder claims into account when making top management decisions, the core corporate aim is job security. An example is Canon in Japan, has at no time laid off workers in its whole history, in spite of all difficulties which they have faced over the years. Workers in Germany are prominent stakeholders whose well-being is ascribed to a certain level by top managers through co-determination structures of governance, having slight fractions of the company's over-all stock in free-float, and allowing managers' compensation not to be so dedicated towards its present profitability.

The assumption is that a set of mutually reinforcing institutional elements determines corporate governance. These elements include the board of directors, separation of CEO and chair, buyouts, legal systems, transparency, accountability, stock in capital markets, personnel turnover, flexibility of labour markets, unionization etc. Also it is the presence of complementarities amongst structures that decides on the economic outcome of diverse corporate governance engagements at an individual country level.

Debates on Shareholder-Stakeholder theory and how to bridge the gap
A key principle of stakeholder concept unfortunately time and again gets lost in the arguments about its advantages, taking all an organisation’s constituents into account, that is, on some level in the practice of strategy formulation can be financially beneficial for the firm. Time and again, activists of the stakeholder theory often move away from this vital objective, instead concentrating on the significance of non-financial market stakeholders at the detriment of the company’s owners. The good and positive thing about the two theories is that they both detect the significance of a business’s financial success just that they promote different ways to that end. The stakeholder and shareholder theories are both theories the creation of value for the firm. They are also both centred on the notion that businesses should as much as they can create value if it is within the confines of the law. Stakeholder concepts vary from shareholder concepts, nevertheless, in identifying the fact that a business can maximize value by understanding how it is affected by and how it affects all its various constituencies. On the other hand, the shareholder theory is apparently antagonistic toward activities do not directly have any bearing on the organization’s lowest line, whilst the stakeholder theory rotates round the decision-making of humans and, consequently, ethics. Stakeholder theory advocates are of the notion that is to talk about a business without ethics does not make, and vice versa. They are of the idea that it doesn’t make sense to talk about either without talking about the choices we make as humans. Consequently, they cull the normally held separation thesis that ethical and economic matters in organizations are distinct, and offer more inclusive frameworks and justification for using to reflect on the role of organizations in society. Some of the basic questions that stakeholder theorists encourage managers to inquire are: If a decision is made who are value created for or destroyed? Whose privileges will be allowed or not? If I make this decision what kind of person will I be. Friedman was not against none of these. After all, Milton Friedman was of the view that organizations should maximize profits so long as it was within the regulations and that may not or may, include Corporate Social Responsibilities depending on the results produced. The viewpoint is that economists conventionally tend to ignore what they can’t (precisely) measure because have had trouble measuring value outside of the bottom-line. Hence, they are not able to produce close-fitting mathematical models that characterize the loose actual world we find ourselves in.

A well-managed company outcome should be generating stable business and maximizing profits, and stakeholder theory can assist firms reach that goal perhaps very successfully than shareholder theory―by evaluating variables like the quality of products and services, good employees, business repute, reliable suppliers, cooperative financiers and helpful communities. To be brief, stakeholder theory acknowledges that firms have the potential for maximizing profit by creating a vibrant, long-term reputation amid stakeholders and by addressing interests and of real needs of such parties.

It can be said that stakeholder theory is a continuation of the shareholder theory and that its larger structure and understanding of the organizations relations with society at large can really produce better performance for the firm and thus, create more benefits for society at large. It can be sensible to assume that people can be both self-enlightened and self-interested, thereby generating the prospect for the merging of stakeholder and shareholder concept into one suitable theory.

Conclusion
Business firms face an increasingly competitive environment. The development of a world market for investment capital, in particular, increases the importance of competing for investment capital. Such increased competition, we believe, encourages firms to search for sources of organizational advantage that cannot be easily or quickly duplicated in order to continue to attract investment capital. Sustainable organizational advantage may be built with tacit assets that derive from developing relationships with key stakeholders: customers, employees, suppliers and communities where businesses operate. Stakeholder management may be complementary to shareholder value creation and may indeed provide a basis for competitive advantage as important resources and capabilities may be created that differentiate a firm from competitors. On the other hand, participating in social issues may be seen at best as a transactional investment easily copied by competitors. These are problems faced by managers when called upon to serve an expanded role in society. If an activity is directly tied to stakeholders, then investments may benefit not only stakeholders but also result in increased shareholder wealth.
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