Over time, there has been an attempt to depict the stakeholderconcept as a rallying cry, which is against the stockholder theory.Economists and financial theorists have conjectured arguments thatendeavor to show that the stakeholder theory is better than thestockholder theory in terms of social responsibility. Just as thestockholder theory, the stakeholder theory can be unpacked into anumber of approaches, all which have a normative principal.Individualistically, they are inextricably linked in a way thatbusiness corporations ought to be governed, and the manner in whichthe managers have to behave. The following conversation is anargument between two individuals, one commenting on the operation,and advantage of the stakeholder theory, and the other commenting onthe process and advantage of the stockholder theory, in reference toWalmart Retailers. Within the conversation, strengths and weaknessesof the two approaches are highlighted.
In this conversation, Smith argues from the stockholder theoryside while Amos argues from the stakeholder theory side.
Smith:From the normative stockholder theory perspective, the aim of theexecutives is to make sure that their right of way is to make moneyfor the stockholders. The theory takes the scope of ensuring that theorganization performs well on certain indicators such as profits andreturn on equity.
Amos:The normative stakeholder theory holds that a company’s executivesought to manage all the organization’s interests with regards tostakeholder satisfaction. That means that the executives who operatewith this theory have to ensure that they do just that, as it is amoral obligation for them.
Smith:As for the matter of Walmart’s social responsibility, they aresocially responsible from the normative stockholder theoryperspective. The stockholder theory is one of the most widely appliedtheory in business today (Donaldson and Preston 66). For instance, inthe contemporary business world, this theory is the one that wouldmost resonate with occupying Wall Street, as most of the businesspeople have a general tendency to favor social responsibility insteadof capitalism. Additionally, let us take into consideration the corereason as to why businesses are formed in the first place. Manybusinesses in the modern day take a number of forms. By forms I meanto be in business for profit, having a non-profit organization,government businesses and so on. As such, the main responsibility ofthe people in business is to manage the business and to ensure thatit delivers the objectives, by using the resources that are withinits reach. For instance, Walmart is a retail company, which is amongthe leading brands in its industry. Ethically speaking, the company’semployees and management are obliged to conduct themselves in amanner that supports the organizational objectivity and purpose ofbusiness.
Fromthe stockholder theory perspective, Walmart is socially responsible.The aim of creating businesses, from the normative stockholder theoryperspective, is for a certain purpose, and individuals own thesebusinesses. A family owns Walmart. This is regardless of the factthat ownership form may vary. However, this would mean that thebusiness takes another form of operation, which is not applicable tothe case of Walmart. Therefore, the responsibility of the employeeswho have been hired by the owners is to run the business on theirbehalf. In other words, the employees are fiduciaries of the owner’sinterests.
Amos:So that means that social responsibility under the normativestockholder theory changes the hands of accountability? According toyour argument, it means that the ethical choices, including socialresponsibility, of those who are given the obligation to run thebusiness, are limited to spending business resources in a way thatthey ensure that the owners (stockholder’s) interests aresatisfied?
Smith.Yes. Additionally, this means that the stockholders have to approveof the actions of the employees. You see Walmart is already amulti-billion low-cost retail organization. Moreover, theorganization’s retail work is unparalleled. Every quarter a year,the company makes about 4 billion dollars in profit. This is becauseit promises its customers “Always low prices. Always”. TheCompany upholds this motto by always ensuring that it provides itscustomers satisfactorily, and this helps it to give a high return oninvestment to the stockholders.
Amos:It is said that one way that Walmart has managed to do this is bymaintaining a competitive edge over its main rivals, who are usingthe same tactic (of low cost prices) by cutting wages and notoffering a lot of company benefits to their workers. According toFriedman, this is the difficulty of exercising social responsibility(Friedman 1). For instance, the company cuts increased its part-timeemployees by up to 20% to avoid having to cater for their healthinsurance.
Smith:However, despite the fact that the company does not provide the bestbenefits to her employees, it still manages to operate as alegitimate business. You cannot fault the management for operatingthat way. Thus is because they are based in a capitalist society. Thecompany ensures that it holds the chief fiduciary obligation, whichis to ensure that the stockholders remain satisfied at all times.Donaldson and Dunfee assert that a business model should be operatingin line with the market dynamics and should not interfere with thefree market (255). This, therefore, means that by operating in a freemarket, the company has a direct responsibility to her primarystockholders. They do not have any accountability to the employees.
Amos:Can you please justify its social responsibility through that model?
Smith:Milon Friedman, a renowned philosopher, said that a company’s onlysocial corporate responsibility is to ensure that it increasesprofits for its stockholders.
Amos:If you consider the utilitarian perspective, this company is actingin a way that it produces the maximum possible equilibrium for doingwell to their stockholders.
Smith:The function of the Walmart management is to ensure that they fulfilltheir fiduciary duties to the customers.
Amos:But we see that Walmart is doing this by avoiding increasing theiremployee’s salaries and instead, assigning that money back to thestockholders. That provides a loophole for ensuring that the companydelivers on social responsibility.
Smith:You see, from the normative perspective, Walmart is doing this tomake those people who invest in the company happy and satisfied atall times. The main argument here is that ethics is considered to bea consequence of an action. In the case of Walmart, the consequencesthat it creates is that it satisfies the people who are the mainstockholders of the business.
Amos:And what is your take about Walmart’s profits and its effects onthe society as in terms of social responsibility? I suppose that thecompany’s mission of making profits does not necessarily result incollective good for the society. This is because there are a numberof small businesses who are in competition with Walmart and have beendeclared bankrupt. The main reason that this takes place is thatcustomers tend to go for lower prices, which are offered at Walmart.
Thereare certain principles of stakeholder management that have to beacknowledged. First, the managers should approve and monitor thestakeholder’s concerns, and take their interests into account. Theyshould also put in place processes for addressing the concerns of thestakeholders. Thirdly, they have to corporate with other entitiesthat may jeopardize elements such as the conflict between thestakeholders and the business operations (The Clarkson Center forBusiness Ethics, 2002).
Smith:However, Walmart has to support its fiduciary responsibility to thestockholders because business ethics calls for the need for a balancebetween ethical behavior and financial performance (Donaldson andDunfee 252). The support of the fiduciary responsibility occursbecause Walmart’s responsibility is ensuring that its operationlead to the realization of profits with the intent of satisfying thestockholders. This means that Walmart’s managers only have a directresponsibility to the organization, and they have to deliver. Bydoing that, they will be within their scope of duty. I have statedbefore that the owners, The Walmart family, are the business’ majorstockholders. If the Walmart family comes to a decision that thecompany has to make the maximum possible profit, all the employees,and management, who are the face of Walmart as business, should honorthat decision and not question its elements. That means that themeans that they will use to maximize the profits have to bedeliberated.
Amos:That is the main problem with the stockholder theory. Does it meanthat the management has a direct responsibility to maximize theprofits, regardless whether or not they decrease costs and increaseprofits?
Smith:Somehow. It does also not matter whether the business’ managementdecides to reduce the employee’s pay and benefits. At the sametime, Friedman raises an argument against the unfair taxation ofstockholders (Friedman 1). He argues “the stockholders or thecustomers or the employees could separately spend their money on theparticular actions if they wished to do so” (1).
Amos:How about taxation.
Smith:Exactly. According to Friedman, taxation is a political issue thatcan be addressed in principle and consequence levels. Politically,taxation is an imposition of the government, and it is provided forby the constitution.
Amos:And how do you use this point to oppose the normative stakeholdertheory perspective?
Smith:According to the argument presented by Friedman, it would be equallyunethical for someone to tax the stockholders to benefit thestakeholders (1). Additionally, it has to be considered that if amanager does something that results in hurting the benefits of areturn to a stockholder, that manager would be considered to beillegally spending the stockholders cash. , it is unethical foranyone to spend the stockholder’s cash in a way that it does notbenefit them, or in a way that they would not wish to spend themoney. Given that stealing is wrong, any social corporateresponsibility activity that would reduce the returns to thestockholders would be considered social irresponsible.
Amos:From the normative stockholder’s theory perspective, Friedman’sposition on profit and ethics can be used to justify the executive’sconduct. That is why some economists equate his argument with thenotion “buyer beware”. This means that the management is notconcerned with the product quality, but truthful information. Manyauthors, including Friedman, have argued that businesses arejustified to go after plans that increase their profits, given thattheir only function is to generate profit for the stockholder (Jamesand Rassekh 662). This means that if the executives are consideringanything else, other than profit generations, they would be workingagainst the wishes of the owners of the business. In this context,the owners of the business are the Walmart family.
Smith: What do you say about the company’s mission, goals, andobjectives? I have given a clear stand on this from the normativestockholder theory perspective.
Amos:Regarding that, Walmart as a corporation has the responsibility ofensuring that it remains loyal to the mission statement and, ingeneral, the corporate values. The company’s mission is to “giveordinary folks a chance to buy the same things as the wealthypeople”.
Smith:You see, most of the company’s employees are of the middle-class.These employees shop at the same retail stores after they havereceived their paychecks. This means that if the company does notmanage to pay their employees enough wages to enable them to shop forthem, then they are not operating in line with their missionstatement.
Amos:Look at it from Friedman’s perspective. He implies that a missionstatement and corporate values do not mean that the company’s mainpurpose is to maximize profits. Therefore, the aim of the company isnot maximizing the profits. It is to provide satisfactory service tothe customers. The company’s employees should not be looked at in adifferent light than other customers when they come to shop.
Smith:And what connection can you make between the stakeholder theory andthe stockholder theory?
Amos:From the normative stakeholder theory perspective, Freemansays that both all business models should ensure that theprofits are realized and that the company maintains its socialresponsibility image (409). That is why economists are not expectedto separate central concepts of business with those of ethics.Instead, they should find a way of creating a connection between thetwo and ensure that while the business is making profits, it isoperating within a certain ethical framework. There are some partiesthat can have a moral claim that is related to the business practiceand the decisions that are made by a corporation’s management.These parties include the suppliers, competitors, and the consumers,amongst a number of others.
Smith:And what is the role or position of the parties you have mentionedabove?
Amos:All the above parties count as the stakeholders in the business.
Smith:Does this mean that the managers of a certain company may be morallyobligated to any of them?
Smith:Then this means the only moral obligation as pertains to socialresponsibility is that they may override certain duties in order tomake a profit for the stockholders.
Amos:That is quite correct. However, this means that there are some toconceptions to be considered. On the wider conception, a stakeholderwill be counted as a person who affects and is affected by thecorporation. Secondly, on a narrower conception, a stakeholder is aperson who is crucial to the company’s survival. By defining thiseffectively, the unity of the corporate body is created (Donaldsonand Preston 65).
Smith:So what do you contemplate the role of the managers as per yourassumptions?
Amos:This means that the managers have a moral obligation to ensure thatthere is an equilibrium of interest to both the stockholders andother stakeholders.
Smith:And why do you think so?
Amos:This is because their ethical responsibilities towards all otherentities are as important as the social responsibilities towards thestockholders. Goodpaster says that there is the need of definingethically responsible management and how corporations can be managedto address ethical concerns, while still operating within theireconomic missions (53).
Smith:From the perspective of social responsibility, it implies that theobligations of the Walmart managers is to ensure that thestockholders benefit accordingly by ensuring that they maximize theprofits. This is so because there will be more than just anobligations, and it will ensure that no detriment will be done to theowners. Additionally, from my point of argument, there has to be acomparison to the classical and neoclassical views of corporateresponsibility. It is through this that the normative stakeholdertheory can be justified in this context.
Amos:Stenberg speaks about the role of the executives as regards to socialresponsibility and corporate governance (5). According to him, thecompany’s executives are supposed to make decisions according tothe law, which benefit the stockholders at the expense of otherstakeholders such as the employees and the customers. The socialresponsibility moral minimum under this context, therefore, is thatWalmart’s executives have to pursue profit within legalconstraints.
Smith:And what about the stakeholder view?
Amos:From the stakeholder view, the company’s executives have theethical responsibilities to ensure that the employees, customers, andall other people are ethically equal to their responsibilities to theshareholders Stenberg (6).
Smith:Would you please expound more from about the other models from thenormative principle?
Amos:Sure. From the normative principle, the classical model isunjustified on both the utilitarian and Kantian grounds (James andRassekh 672). These normative views are also supportive of thestakeholder theory.
Amos:The classical model is unjustified on the utilitarian grounds. First,it claims that the best ways to maximize organizational utility isfor the company’s executives to aim at maximizing profits.
Smith:So this means that from the arguments you have provided, marketfailures would not make this the case.
Amos:Definitely. You see, utilitarianism supports the stakeholder theoryin terms of social responsibility. This is because it ensures thateveryone’s interests are taken into account, and not only thestockholders, as you may argue. Given that this may or may not leadto maximized profits, ethical, social responsibility is put at stake.
Smith:And what about on Kantian grounds?
Amos:It is equally unjustified. According to the Kantian ethics, using thestakeholders, such as the employees and other parties to make aprofit for Walmart is a violation of ethics. This means that theKantian considerations support the stakeholder theory in the contextof social responsibility.
Smith:I would also like to present two counter arguments, which is more ofa criticism of the stakeholder theory in its application to achievingsocial responsibility at Walmart.
Smith:To begin with, as you have theorized it, its substance has somemistakes. The Walmart executives are not supposed to view all thestakeholders as equal to the stockholders. This is because the freemarket view is justified to say that the executives are supposed toaim at maximizing the profits as the utmost priority.
Amos:And what do you base that criticism upon?
Smith:From the utilitarian point of view, the overall utility is a raisedpolicy aimed at maximizing profits. This does not take intoconsideration the stakeholders. As such, Heath points out that thetheory does not consider stakeholders in the demands of maximizingprofits (539). The theory regards stakeholders as part of the profitmachineries, but does not include them as part of the engagement.
Amos:And what is your second criticism?
Smith:The stakeholder theory is vague in terms of justifying a company’ssocial responsibility, and additionally, it does not give enoughguidance to the executives of the corporations. In fact, Heathasserts that the stakeholder theory does not provide a consistent andeffective explanation on a company’s social responsible (540). Inthis regards, the theory does not offer comprehensive assistance toexecutives in the processes of managing an organization.
Amos:In which ways do you consider it to be vague for Walmart’s case?
Smith:The definition is not clear. Heath asserts that the theory gives theexecutives little guidance to identifying what you may callstakeholder interests (549). If we take into consideration the broadconception that you described above, then it means that the Walmart’sexecutives will be under a burden of determining the stakeholders whowill be affected by their decisions. Secondly, if the narrowperception that you described is considered, the risk will beignoring relevant parties, which is unethical. According to what isunderstood by a company being “socially responsible”, theconditions provided by the normative stakeholder theory perspectiveare not satisfactory.
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