Academic journal article IUP Journal of Corporate Governance

Normative Ethical Theories as Frameworks for Better Corporate Governance: A Practitioner's Perspective

Academic journal article IUP Journal of Corporate Governance

Normative Ethical Theories as Frameworks for Better Corporate Governance: A Practitioner's Perspective

Article excerpt


Modern corporations are no more owned by single individuals. Separation of 'control from ownership' has delegated the residual control rights, i.e., decision-making rights to individuals managing the corporations (Berle and Means, 1932). Managerial libertarianism has redefined the way corporations serve the interests of a multitude of stakeholders. Modern theories of running enterprises are solidly ground in the perpetual dilemma of 'conflict of interests'. Who is the manager supposed to serve-the stockholder (provider of funds and thus the principal) or the stakeholder whose interests lie in the personal benefits that an individual accrues from the business? Who has the primary claims to the organization's resources? Why are there conflicts of interests at all? How should business conduct itself? What is the role of business in society? Is business morally or professionally obligated to serve the interests of a plethora of claimants? How is business to structure itself in the ever-demanding, dynamic marketplace? Should the values of business be consistent with those of the society? Such questions throw ample light on why and how 'ethics' is closely related to business.

The capitalists strongly believe that the primary responsibility of business is maximizing shareholder wealth. Friedman (1970) was an exponent of the shareholder theory; though he does not reject the responsibilities of individuals toward maximizing welfare of other constituents that are affected by business, he argues that, "there is one and only one social responsibility of business-to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud".

The managerial capitalistic view is that though profits are the ends of any business activity, societal welfare is maximized only through distribution and reinvestment of such profits. Profits are a means to building the business and rewarding employees, executives and investors.

Friedman's contention, though contemporary then, is anachronistic now. Complexity in running businesses has today led to stricter laws that aim at eschewing any possible appropriation of corporate resources by individuals that run them. The stricter the laws, the more are the complications in running businesses and the vicious cycle continues. In the process, stakeholders that are part of the business ecosystem are directly or indirectly, positively or negatively impacted.

Corporation - A Social Institution

Modern business is strikingly different from what it was a century ago. Sweeping changes in size, organization structures, governmental regulations, capital needs and professional skills have marked the transformation of business from a slow-treading activity to a fast-paced economic institution. Developments in consumerist movements, growth of stake-claiming societies and the establishment of independent monitoring agencies by states have coerced corporations to become more aware of themselves not only as economic institutions but also as active participants in the larger social ecosystem.

Modern-day corporations are looked upon as social institutions. They exist in societies and intend to serve them as well. As social institutions, they provide an incentive structure to build the economy by maximizing the welfare of all stakeholding groups. Corporations are a center for agglomeration of individuals from the society who come together to serve their own interests in particular, and as also the interests of the society in general. All activities of these individuals are mostly determined by social norms. As an institution, the primary function of the corporation is the upkeep of the norms set out by society.

The role the modern corporations play in society justifies their claim of being social institutions. They provide employment to the labor; cater to consumer demands; offer investors investment opportunities thereby allowing them a share in profits; fuel the business of suppliers and vendors; and deliver value to all their stakeholders. …

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