Ethics and a Manager's Obligations under Stakeholder Theory

By Phillips, Robert | Ivey Business Journal Online, March/April 2004 | Go to article overview

Ethics and a Manager's Obligations under Stakeholder Theory

Phillips, Robert, Ivey Business Journal Online

When it comes to ethics in business, many accept that standards can not only be different from, but even lower than, ethics in everyday life. That should definitely not be so, argues this author. In fact, he says, a corporation's obligations to its stakeholders bind it to those stakeholders, in turn creating new and specific moral obligations.

As businesses emerge as some of the most powerful institutions in the world, business ethics have never been more important, and given very recent history, more open to question. Corporations are relative newcomers to power, and for evidence of this we can look to Europe, where the oldest, largest, most elaborate buildings are the churches and cathedrals. For thousands of years, the church and its leaders were arguably the most powerful institution, but as the liberal notions of the Enlightenment supplanted church orthodoxy, the state supplanted religion as the more powerful institution. But at the dawn of the third millennium, the newest, grandest buildings are the corporate headquarters and facilities, an architectural phenomenon that neatly illustrates the transfer of power through history.

It is not clear, however, that the business community has lived up to its obligations and responsibilities in proportion to its rapid increase in power. Witness the number of organizations and executives that are being exposed for immoral and fraudulent conduct. This is why the time is ripe for an in-depth examination of ethics in business. In this article, I will apply the principles of stakeholder theory to discuss questions that are central to the business ethics debate, specifically:

* Why should managers pay attention to stakeholders?

* Who are an organization's stakeholders and what is the basis for their legitimacy?

* What do stakeholders want?

* How should managers prioritize among stakeholders?

* Are the ethics of business different from everyday ethics? If so, how and why?

Why pay attention to stakeholders?

Any convincing justification for maximizing shareholder wealth must, at its core, be a moral argument. The most convincing case is the property rights argument popularized by Milton Friedman. Briefly, this posits that shareholders own a firm by virtue of owning equity shares, and, moreover, that they wish to maximize the value of those shares. Managers who fail to maximize shareholder wealth are violating a moral property right by spending-if not stealingshareholders' money.

In my opinion, equating share ownership with firm ownership is unjustified because the firm is an independent entity that is not "owned" by anyone. By way of comparison, selected individuals are responsible for administering churches, universities and even nations, but there is not a compelling need to discern who "owns" these institutions. Why should business organizations be any different? And without the concept of ownership, maximizing shareholder wealth becomes less defensible as the primary, or sole, function of the firm.

If organizations are entities unto themselves, capable of bearing legal obligations, then they are also capable of bearing moral obligations. One such obligation is stakeholder fairness-that is, organizations become obligated to their contributors when they accept the benefits of mutual co-operation, although only a small portion of this obligation is codified in laws. Shareholders are significant contributors to organizations, and from this perspective they are owed a significant obligation. Typically, this obligation takes the form of dividends and/or an increase in the market value of shareholders' equity. However, there is no special (e.g., fiduciary) obligation due to shareholders that supercedes the firm's obligations to lesser (e.g., nonfiduciary) stakeholders. Company executives are responsible for administering the affairs of the organization, including the moral obligations entailed in stakeholder fairness. …

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