• Alyssa Proctor

The Ethics of Business in America

Updated: Jul 8

Why is it necessary to adopt ethical business procedures and guidelines? [1] Since a person's natural desire to succeed may lead them to pick a faster road to success and make unethical judgments in the short term because the rewards appear to be easier to acquire. [2] In the business world, we cannot simply rely on people to always make the most ethical decisions when there is a faster route which includes unethical choices. [3] The subject of what exactly is ethically required of those who choose to conduct business ethically is widely debated, while the question of what acts not to take is frequently answered with relative ease. [4] Setting guidelines and boundaries makes the unethical path more resistant or less appealing, hopefully diverting those on the verge of making an unsatisfactory decision back to a good place of practical reasoning. [5] Profit is frequently used to determine the level of success attained by a corporation or, more specifically, by its employees. [6] In this paper, we will examine the benefits and drawbacks of shareholder theory and stakeholders theory, as well as other ideas of more appropriate corporate governance. [7] It is critical that an operating firm correctly examines itself in order to identify which theory will help their organization function the most efficiently and ethically. [8]

According to stakeholder theory, ownership of a firm is distributed among the various parties who are affected when the firm operates. [9] Employees and customers, for example, are regarded as the consistency groups on which the firm relies; nonetheless, these groups are technically referred to as stakeholders. One of several primary purposes of stakeholder theory is to foster “an enhancement of distributive justice within the confines of a basically capitalist structure . . . .” [10]. There is more of an ode and regard to the overall picture, rather than simply fixing a problem without an open mind. [11] Before any actions are taken, every element and group that will be touched by the choice will be considered, according to stakeholder theory. [12] One of the benefits of stakeholder theory is that it evaluates numerous streams of consequence before a premature decision is made which results in some of the parties being negatively affected by the result. [13] One of the most useful aspects of stakeholder theory is how it prioritizes the greatest group or mass of persons and reasons based on the worst situations as well as optimistic prospects. [14] Power and gain are apportioned and allocated more evenly than in shareholder theory. [15] Stakeholder theory was initially created in hopes of resolving the issues of how to navigate measuring value creation and trade.[16] Secondly, the theory was established in an effort to create the guidelines of how to ethically handle and make decisions about the capital of the operating firm.[17]

Concerning the shareholders' theory, there is no overall picture of various firms that will be impacted. [18] Instead, each individual who has ownership rights in the company or firm, known as a shareholder, owns a specific percentage of the corporation. [19] There are criteria that shareholders must follow in order to maximize the potential of their accessible utilities. [20] Ultimately, the primary purpose of the company functioning is to optimize or increase the value of the shareholders, but profit gain remains the focus and overall priority as well. [21]

If indeed the shareholder's theory is correctly applied, agents are dedicated to achieving the objective set by the principle or shareholder, therefore the principal's primary concern is economically centered, instilling that the firm's objective is to achieve shareholder wealth. [22] Managers, directors, and leaders are considered as paid representatives and fiduciaries of shareholders who represent the principals in the business, and they are accountable for reconstructing decision-making behavior and spending corporate assets in authorized ways for profitability and shareholder financial advantage. [23] In shareholder theory, the aims for the benefit of stakeholders rather than just the proprietors differ, but the core notion of pure shareholder theory promotes long-term cash surpluses building shareholder wealth for the sake of valuing everyone's money involved. [24] As cross-shareholding has reduced, it has focused more emphasis on shareholders, causing shareholder theory to gain favor as the financial market has been more liberalized. [25] When analyzing the distinctions, one can see how shareholders theory is organized quite differently than stakeholder theory, and how the underlying reasons and aims are extremely different. [26]

There are several kinds of theories which a firm can choose between to ethically act and function upon. [27] Firms are not obligated to choose either stakeholder or shareholder theory, as there are many options in the gray section between the black and white of the most common theories.[28] Just as each business has different needs, ways of operation, and managerial methods of supervising employees, each theory is structured slightly differently to match what is needed in the firm.[29] For example, stewardship theory consists of holding the decision makers responsible for making the most of their financial decisions.[30] Since the goal of stewards is to maximize the shareholders’ wealth through firm performance, it promotes the goal of collaboration between shareholders and top management.[31]

The philosophy of shareholder theory is based on the overall goal of using resources within grasp to increase the profit of the firm.[32] Shareholder theory particularly has less environmental and ethical standards than stakeholders theory, which is very particular in directing the guideline to those topics.[33] In order for a business to continue to have a reason to operate, it must demonstrate some sort of gain, so the emphasis on profit is a practical first priority.

Employees, financiers, consumers, employees, and communities are frequently characterized as stakeholders when businesses are overseen with their interests in mind. [34] The corporation's directors have a responsibility to apply reasonable judgment in defining and directing the corporation's activities in line with the Stakeholder Enabling Principle. [35] Stakeholders may file a lawsuit against the directors if they fail to meet their legal obligations. [36]

Because of shareholders theory being less specific and strict when it comes to environmental responsibilities, it is often assumed that the theory is far too laid back and inconsiderate. [37] Although shareholders are not irresponsible and have obligations to the firm, the argument here is essentially that leaders of a corporation are agents who have a duty to the principals, the shareholders as owners, to execute the business operations in line with their objectives. [38] The needed obligations are clearly highlighted in the agreement and contract for what management and shareholders are expected to do. [39]

Stakeholder theory has grown in popularity in recent years as a result of perceived flaws in shareholder theory, and it is increasingly being utilized to influence the business decisions of a wide spectrum of companies.[40] Before choosing to discredit the individuals whom continually criticize and condemn shareholder theory, one should acknowledge that advocates of shareholder theory often highlight the structure of short-term effects.[41]

Accepting and implementing shareholder wealth maximization as the ultimate aim necessitates accepting and implementing multiple levels of conceptual background. [42] Although businesses employing shareholder theory may earn more revenue and exposure by appeasing the media, this is not the factor that ultimately determines corporate decisions. [43] Any organization or business may be susceptible to, The media's impact on corporate activities, although the media cannot compel businesses to do or avoid certain acts, as the government has the ability to do the, as well as a significant direct impact on business behavior due to its power to regulate [44].

How the public views a company is typically hirer prioritized by a firm using stakeholders theory, as they want the public to think of them as an ethical company, which inevitably is a favor to itself as this likens the chances of more consumers.[45] However, we must not overlook how the possible repercussions of public awareness and deliberate misinformation about unethical business practices on company reputations may interfere with such companies' ability to recruit consumers, high-quality staff, and other direct stakeholders. [46]

So, while companies are not always able to please everyone, making the most feasible and sensible business decision for profit is usually at the top of the list of priorities, along with fulfilling rules, laws, and so on. [47] It is undecided and often debated which of the two theories is more effective, although both theories may work effectively to an extent, some of the issues we will cover may be the reason why a corporation would choose shareholder theory to regulate their ethical business practices. Each theory has its own pros and cons.[48]

Stakeholder theory seeks to understand how such stakes should be examined and contrasted, albeit expanding the criteria for created value to encompass personal and social perspectives. [49] Shareholder wealth maximization has long been insulated from moral examination within the study of financial economics and within the corporate culture of America in general. [50] We have observed throughout time that the shareholder model continues to provide the best framework for balancing the competing interests of numerous stakeholders, including both present and future stakeholders when making business decisions. [51] Although wealth maximization, in general, should not be considered unmoral, because in order for any business to survive the must receive profit and investment returns, this does not keep people from often criticizing the reasoning behind the theory.[52] It is indeed possible for a corporation to ethically operate and use shareholder theory, as every business should strive to achieve the highest amount of profit possible without sacrificing their values.[53]

After contemplating which of both theories would most effectively monitor the ethical practices of a business, it is most reasonably concluded that stakeholder’s theory would be the most effective, as its underlying motivations are not based from individual gain.[54] Instead of merely considering the benefit which one party may gain from an action, all parties which will be impacted must be considered.[55] This is more effective in the long run as it takes the big overall picture into consideration, so it is not a short-lived successful venture.[56]

In conclusion, stakeholder theory encompasses all elements involved in a company, whereas shareholder theory optimizes profit by maximizing available resources. [57] Profit is required to keep a business running, but the initial goal of applying an ethical theory was to establish oversight of individual ethics in order to reduce or avoid fraudulent and unlawful behavior, which, if revealed to the public, would jeopardize the firm's integrity and prevent it from operating at its peak efficiency. [58]

Works Cited

[1] Cragg, Wesley. “Business Ethics and Stakeholder Theory.” Business Ethics Quarterly, vol. 12, no. 2, 2002, pp. 113-114. JSTOR, www.jstor.org/stable/3857807. Accessed 7 Feb. 2020.

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[9] Phillips, Robert. Stakeholder theory and organizational ethics. Berrett-Koehler Publishers, 2003.

[10] Kaler, J., 2006, “Evaluating Stakeholder Theory,” Journal of Business Ethics 69 (No.2), 249–268.

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[16] Freeman, R. Edward, et al. Stakeholder theory: The state of the art. Cambridge University Press, 2010. https://books.google.com/books?id=xF8WN1QlIMC&lpg=PR7&ots=ZWCXZ_wz4Q&dq=what%20is%20stakeholder%20theory&lr&pg=PA4#v=onepage&q=what%20is%20stakeholder%20theory&f=false. Last accessed Feb. 27, 2020.

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[19] Fontrodona, Joan, and Alejo José G. Sison. "The nature of the firm, agency theory and shareholder theory: A critique from philosophical anthropology." Journal of Business Ethics 66.1 (2006): 33-42. https://link.springer.com/content/pdf/10.1007/s10551-006-9052-2.pdf. Last accessed Feb. 27, 2019.

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[22] Supra note 16

[23] Rausch, Alexandra. "Reconstruction of decision-making behavior in shareholder and stakeholder theory: implications for management accounting systems." Review of managerial science 5.2-3 (2011): 137-169. https://link.springer.com/content/pdf/10.1007/s11846-010-0053-2.pdf. Accessed Feb. 27, 2020.

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[25] Reinecke, Juliane. "The convergence of the german coporate governance system with the Anglo-American model: does focusing on shareholder value philosophy put an end to the german model?." diponible à http://weber. ucsd. edu/~ vcrawfor/Reinecke04Essay. pdf (2004). Last Accessed Feb. 27, 2020.

[26] Supra note 1

[27] Htay, Sheila Nu Nu, Syed Ahmed Salman, and Ahamed Kameel Mydin Meera. "Let's Move to" Universal Corporate Governance Theory"." Journal of Internet Banking and Commerce 18.2 (2013): 1. https://search.proquest.com/docview/1449791385/fulltextPDF/8CA09C2FE3D24675PQ/1?accountid=14968. Last accessed Feb. 27, 2020.

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[32] Supra note 23

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[34] Freeman, R. Edward. "The politics of stakeholder theory: Some future directions." Business ethics quarterly (1994): 409-421. https://www.jstor.org/stable/pdf/3857340.pdf. Last accessed Feb. 27, 2020.

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[38] Mansell, Samuel. "Shareholder theory and Kant’s ‘duty of beneficence’." Journal of Business Ethics 117.3 (2013): 583-599. https://link.springer.com/content/pdf/10.1007/s10551-012-1542-9.pdf. Last accessed Feb. 27, 2020.

[39] id [40] Fontrodona Supra note 13

[41] Danielson, Morris G. and Heck, Jean L. and Shaffer, David R., Shareholder Theory – How Opponents and Proponents Both Get it Wrong (December 3, 2015). Journal of Applied Finance (Formerly Financial Practice and Education), Vol. 18, No. 2, 2008. Available at SSRN: https://ssrn.com/abstract=2698627

[42] Dobson, John. “Is Shareholder Wealth Maximization Immoral?” Financial Analysts Journal, vol. 55, no. 5, 1999, pp. 69–75. JSTOR, www.jstor.org/stable/4480195. Accessed 10 Feb. 2020.

[43] Supra note 4

[44] Denis, Diane. "The Case for Maximizing Long‐Run Shareholder Value." Journal of Applied Corporate Finance 31.3 (2019). https://onlinelibrary.wiley.com/doi/epdf/10.1111/jacf.12362. Accessed 10 Feb. 2020.

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[49] Stikeleather, James A. "Toward a Systemic Model for Governance and Strategic Management: Evaluating Stakeholder Theory Versus Shareholder Theory Approaches." (2017). https://scholarcommons.usf.edu/cgi/viewcontent.cgi?article=8289&context=etd. Accessed Feb. 10 2020. [50] Supra Dobson, John. “Is Shareholder Wealth Maximization Immoral?” Financial Analysts Journal, vol. 55, no. 5, 1999, pp. 69–75. JSTOR, www.jstor.org/stable/4480195. Accessed 10 Feb. 2020.

[51] Supra note 7

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[54] Freeman, R. Edward. “The Politics of Stakeholder Theory: Some Future Directions.” Business Ethics Quarterly, vol. 4, no. 4, 1994, pp. 409–421. JSTOR, www.jstor.org/stable/3857340. Accessed 27 Feb. 2020.

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