Chapter Two The Purpose of the Corporation Ethical Theory and Business 4/21/2017 Ethical Theory and Business, 6th Edition Tom L. Beauchamp & Norman E. Bowie Chapter Two The Purpose of the Corporation

Objectives After studying this chapter the student should be able to: Interpret Milton Friedman's view on the social responsibilities of a corporation. Discuss R. Edward Freeman's stakeholder theory. Explain the concept of stakeholder analysis. Contrast the concepts stakeholder analysis and stakeholder synthesis. Distinguish between strategic stakeholder synthesis and multi-fiduciary stakeholder synthesis.

Objectives, continued Explain Kenneth E. Goodpaster's stakeholder paradox concept. Explain the significance of the court rulings for the Dodge v. Ford Motor Co. and the A. P. Smith Manufacturing Co. v. Barlow cases. State John R. Boatright's view on stakeholders and corporate social responsibility.

Overview Differing views on the social responsibility of a corporation: The Social Responsibility of Business Is to Increase Its Profits - Milton Friedman A Stakeholder Theory of the Modern Corporation - R. Edward Freeman Business Ethics and Stakeholder Analysis - Kenneth E. Goodpaster Fiduciary Duties and the Stakeholder-Management Relation: Or, What's So Special About Stakeholders? - John R. Boatright

Milton Friedman “The Social Responsibility of Business Is to Increase Its Profits” 1976 Nobel Prize Winner in Economics One of the most effective advocates of economic freedoms and free enterprise An advocate of limited government His theory asserts a corporation's primary and perhaps sole purpose is to maximize profits for the stockholder.

Milton Friedman Two main supporting arguments: Stockholders are the owners of the corporation, and hence corporate profits belong to them. Corporate executives are the stockholder's agents and must operate in the interests of their principle (stockholders). This does not allow donations to charity by the corporation (corporate executives) because the income belongs to the stockholders, not the corporate executives. Individual proprietors are different in that if they choose to spend the income generated by their business they are spending their own money, not the money of other people.

Milton Friedman Stockholders are entitled to their profits as a result of a contract among the corporate stakeholders. A stakeholder in this context refers to employees, managers, customers, suppliers, the local community, and the stockholders. Each stakeholder group has a contractual relationship with the firm, since they receive the remuneration they freely agreed to in a pre-established agreement (contract).

R. Edward Freeman “A Stakeholder Theory of the Modern Corporation” Professor of Business Administration & Director of The Olsson Center of Applied Ethics at the University of Virginia His theory views that both the stockholders and stakeholders have a right to demand certain actions from management because all have a vested stake in the corporation.

R. Edward Freeman Two types of stakeholder: Narrow definition - A stakeholder includes those groups who are vital to the survival and success of the organization. Wide definition - A stakeholder includes any group or individual who can affect of is affected by the corporation.

Stakeholder Roles Owners have a financial stake in the corporation and expect a return on their investment. Employees have their jobs and usually their livelihood at stake. Suppliers provide raw materials to the corporation, thus the corporation is vital to the supplier's success.

Stakeholder Roles Customers exchange resources for the products or services of the firm and in return receive the benefits of the products or services. Local community grants the corporation the right to build facilities in their area; in turn, the community benefits from the tax base and economic contributions of the corporation.

Stakeholder Roles Managers must look after the health of the corporation and carefully balance the conflicting claims of all stakeholders.

The Normative Core Each stakeholder theory has a normative core that is comprised of a set of sentences like: Corporations ought to be governed… Managers ought to act to… These sentences contain further narratives which include business and moral terms to complete the sentence. EX: Doctrine of Fair Contracts – Corporations ought to be governed in accordance with the six principles.

Example Normative Core Doctrine of Fair Contracts – Corporations ought to be governed in accordance with the six principles The Principle of Entry and Exit The Principle of Governance The Principle of Externalities The Principle of Contracting Costs The Agency Principle The Principle of Limited Immortality

Example Normative Core Corporation law reform principles The Stakeholder Enabling Principle The Principle of Director Responsibility The Principle of Stakeholder Recourse

Kenneth E. Goodpaster “Business Ethics and Stakeholder Analysis” Ethics Professor, University of St. Thomas The PASCAL Decision Making Process Stakeholder Analysis - A management tool, that includes the perception and analysis steps of the PASCAL decision-making process, used to assist decision-making where various stakeholders have competing interests. Stakeholder needs must be appropriately balanced.

Kenneth E. Goodpaster Stakeholder Synthesis - A process that builds on stakeholder analysis and includes the synthesis, choice, and action steps of the PASCAL decision-making process. Strategic Stakeholder Synthesis - A concept that asserts stakeholders outside the stockholder group are factors that can potentially affect the overall goal of optimizing stockholder wealth and thus deserve consideration for competitive reasons.

Kenneth E. Goodpaster Multi-Fiduciary Stakeholder Synthesis - A concept that asserts all stakeholders are treated by management as having equally important interests, deserving joint maximization. Goodpaster's argument against multi-fiduciary stakeholder synthesis is that the obligations of agents to principles are stronger or different in kind from those of agents to third parties.

Kenneth E. Goodpaster The Stakeholder Paradox - An ethical problem will still exist whether or not management takes a strategic or multi-fiduciary position. "Nemo Dat Principle" - No one can expect of an agent behavior that is ethically less responsible than what the principle would expect of him- or herself.

John R. Boatright “Fiduciary Duties and the Stakeholder-Management Relation: Or, What's So Special About Stakeholders?” Director of the Graduate Certificate in Business Ethics Program, Loyola University of Chicago

John R. Boatright Shareholders As Owners Equity Argument – Managers do not appear to have a special fiduciary responsibility to shareholders because the shareholders already have built-in protections that other stakeholders do not possess. Shareholders are sufficiently protected by the right they have to elect the board of directors, vote on shareholder resolutions, etc.

John R. Boatright Contracts Agency No express contract between management and the stockholders exists Possible implied contract between management and the stockholders Agency Consent to the relation The power to act on another’s behalf The element of control

Legal Perspectives Michigan Supreme Court ruling in the Dodge v. Ford Motor Co. The court ruled that the benefits of higher salaries for Ford workers and the benefits of lower auto prices to consumers must not take priority over stockholder interests.

Legal Perspectives Supreme Court of New Jersey ruling in the A. P. Smith Manufacturing Co. v. Barlow A legal connection between corporate philanthropy and goodwill was acknowledged. Judge Jacobs recognized that "an act that supports the public welfare can also be in the best interest of the corporation itself.“ Increased profit maximization may be realized by the corporation in the long-term for acting in a socially responsible manner.