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Stockholder Theory

Stockholder Theory. Milton Friedman: "The Social Responsibility of Business is to Increase its Profits.". Description. 1) Managers have a primary fiduciary duty to stockholders.

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Stockholder Theory

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  1. Stockholder Theory Milton Friedman: "The Social Responsibility of Business is to Increase its Profits."

  2. Description • 1) Managers have a primary fiduciary duty to stockholders. • "That (fiduciary) responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society. " SRB • "... 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 and fraud" Capitalism and Freedom p. 133.

  3. Description • 2) Profit maximization as highest practical and moral goal Coase: The nature of the firm is to minimize transactions costs. "The Nature of the Firm"

  4. Practical Origins (Profit) • 1) Utility maximization • 1) Economic models of the firm • 2) Homo Economicus: View of man leads to view of the firm and moral duty.

  5. Moral Origins • 2) Property Rights Theories Hume • Conventions for property, trade and contract are a spontaneous order created by the interaction of self-interested individuals. Locke - Natural rights of life, bodily integrity, liberty, and property

  6. Problems • 1) Utility maximization can conflict with property rights. • 2) Smith’s “self-interest” may be utility maximization, but it is not profit maximization. • 3) Rights are a necessary, not sufficient, element of Business Ethics. There is more to ethics than rights.

  7. Stakeholder Theory • Description • Based on "democratic" conception of business: That option is right on which a consensus can be reached. Who gets a moral vote? • Stakeholder: Any group or individual which can affect or is affected by an organization.

  8. Stakeholders • Customers • Suppliers • Employees • Financiers (Includes Stockholders) • Community • Environment

  9. Fair Representation as Moral Goal • Different ethical theories define fairness making for different stakeholder theories • Private Property and Political Liberalism • Doctrine of Fair Contracts, (Rawls veil of Ignorance) • Feminist Standpoint Theory, (Caring and Connection) • Ecological Principles

  10. Economic Origins “Invisible Hand” Doctrine fails because of: • Externalities • Tragedy of the Commons • Free Rider Problems • Moral Hazard • Monopoly

  11. Philosophical Origins • Kant • Political decision making procedures show fundamental moral respect for persons. • Utilitarianism • Political decision making leads to better outcomes, that make more people happier, than current economic methods of decision making.

  12. Problems • Replaces business decision making with political decision making. • Attempt to do ethics without the concept of rights.

  13. Poletown Case • "Most of us believe that management at General Motors owed it to the people of Detroit and to the people of Poletown to take their (non-fiduciary) interests very seriously, to seek creative solutions to the conflict, to do more than use or manipulate them in accordance with GM's needs only." (Goodpaster, "Business Ethics and Stakeholder Analysis", BEQ, 1 January 1991, pp. 53-73) • Kelo v. New London

  14. Conclusion • Stakeholder Theory is an attempt to do Business Ethics without rights. • This is a contradiction. There is no business without rights. • Therefore: Stakeholder Theory is not a theory of business ethics.

  15. The Purpose of Business • Description • The purpose of business is to produce a good or service for trade. • Managerial Stakeholder theory is relevant. • Profit is a measure of success and necessary, but not sufficient, element of business.

  16. Origins • Rights Theories • Importance of individual choice • Aristotle and Flourishing

  17. Applications • Discrimination and BFOQ • What’s wrong with nepotism • Requirements for full/relevant information

  18. Explanatory Power • Housing Bubble and its collapse • Fannie Mae, Freddie Mac, and Fed. Gov. • Is business its brother’s keeper • Enron • Gas and hot air • Tycho • My piggy bank

  19. Conclusion (draft) • I am right.

  20. Conclusion • Stockholder Theory • Stakeholder Theory • The Purpose of Business

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