The stakeholder model should be implemented in combination with Friedman's shareholder model
In his article, "The Social Responsibility of Business is to Increase its Profits" published in 1970's reputed "The New York Times" Magazine, Friedman debates in favor of precisely what the article's title states. He alleged that corporate social responsibility (CSR) was a diversion from the economic rudiments of business that helps in capitalization of profits and yields to shareholders. In his article, when he raised the description of advocates of CSR he stated, "The businessmen believe that they are defending free enterprise when they declaim that business is not concerned 'merely' with profit but also with promoting desirable 'social' ends; that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary crop of reformers (Kristin, 2009; pg 7)." Most opponents of Friedman's model fail to understand the real logic in his model. This paper sheds light on Friedman's model and assumes a position that both stakeholder and shareholder models are necessary.
Lantos (2001), reasons in contradiction to Friedman's model and proclaims that what Milton Friedman neglected was that a business person's choice within the moral and social responsibility realms will have an impact on various individuals, teams and establishments, which, in turn, will influence the organization's welfare. He also mentioned that the crucial investors in the business are stockholders, proprietors, vendors, and subscribers; taking into consideration the short-term and long-term interest of the corporations. Social contract theorists discern that business pronouncements time and again affect large numbers of entities, teams or organizations, i.e. stakeholders. According to Lantos, (2001) any group of entities, associations or individuals who have been affected by the decision making or have an impact on the organization's activities, guidelines, strategies or decision can be qualified as a stakeholder. That means they have a post on the welfare or the outcome of the business.
Friedman's shareholder concept paved way for the stakeholder model wherein, no individual or entity apart from shareholder can incorporate his assertion on the business. On the other hand the stakeholder's concept explains more than the principle relationship between the agents (who acts on behalf of the shareholder) and explains the incorporation and the significant role played by the third parties to whom the company ethically owes a major non-fiduciary duty. These obligations happens to be because just like stockholders, these alternative stakeholders additionally make considerable investments within the organization; for instance, staff invests their time as well as intellectual capital, customers invest their trust in the continual business, and communities give infrastructure as well as education for future staff and as tax support, and so on so forth.
Lantos (2001) goes on an argues that one needs to understand beyond the profit maximization or the multi-fiduciary in order to understand the stakeholder's concept. In which, management of the organization is held responsible for acquiring the balance between the stakeholders and avoiding any unwanted circumstances (clashes) between the groups or entities. Management also holds responsibility for rectifying any damages caused by the personnel or stakeholders. Besides, in this era of commercialization, the goal of the organization often pays respect in contributing to society; on top of the standard exposure of product marketing, technology and service aspects. (Lantos, 2001)
On the other hand Cosans (2008) states that the Friedman model has been grossly misunderstood and his claims about businesses bearing a duty to seek profits rests partially on a "division of labor" that he fashions in his idea of communal morality. He furthermore adds that in an independent society, there are two different ways in which an individual can invest in a resource for a purpose. According to Cosans they are "The Political Mechanism and "The Market Mechanism." The political mechanism mainly deals with the government and obligations made by the government wherein, the politicians deal with the various issues, problems and address them politically. They in turn receive their feedback from the people through elections. The winner of an election or the politician on the stand creates guidelines, prohibitions and laws for the people, businesses and society and these issues are implemented and addressed by the tax revenues. This helps people in acknowledging their limitations and acknowledging their prohibited areas to avoid unwanted cases, crimes to take place.
Whereas, "The Market Mechanism" offers members of society ways to fix things they trust that might not have enough societal support or demand to ensue in the conception of a government plan. Usually people who has savings opt to invest in shares of the business to become shareholders and earn those extra perks. The organization utilizes those revenues to expand businesses or hire employees to deliver expected or beyond expected services to the customers. The pay plan is laid out in such a way by an organization that consumer pays for all the expense the organization is experiencing and it also includes a profit margin which helps both the organization and the shareholders. The market mechanism provides a devolved way of assigning resources that complements the provisions made by the political mechanism. Even though, Friedman does not name it, all contemporary cultures practice, wherein one can contemplate a hybrid mechanism within which tax incentives push market dynamics to assume activities that politicians see as beneficial to society, that are fully supported by the population at large.
Cosans (2008) also mentions that although the Friedman's concept is viewed as "stockholder theory" as opposed to the "stakeholder's theory" as his analysis is significantly based on the market mechanism and structure. Friedman's theory upholds the interests of both the consumer and the employees, as both are considered as chief "stakeholders." Issues pertinent to the "other stakeholders," who are outside the business transaction, such as those who are affected by the pollution, can be addressed by the Political Mechanism. Wherein, the government takes steps in governing the policies that should be adhered by all businesses. Friedman also adds that the corporate professional neither has the power to address nor acknowledge the other societal issues that need to be addressed even if they want to.
Philips et al. (2003) also shares the similar views with the likes of Cosans in their research and debates against the stakeholder business model. They discovered that the elasticity of the stakeholders as well as the unspecified quantity owed to each and every stakeholder gives the CSR model an ambiguous look when compared to Friedman's model of accountability of senior management to their shareholders. However, the division between the two theories is definitive. Promoters of corporate social accountability to stakeholders are opposed; they find it difficult to press down Friedman's model. The corporation generally ends up thinking they should think beyond the monetary gains. This has become a Herculean task to acknowledge; on which paradigm is the real weight of the shareholders.
The answer, according to Philips et al., lies in being respectful towards the reflecting and competing claims that stakeholders hold. Business is not a philanthropic act or a social act. As a corporate entity you are socially responsible for the best business practice which impacts all the genres and sects of the business operations and helps in building a successful, manageable team which in turn helps in productivity and profitability to an organization. So if the stakeholder paradigm model is similar to that of Friedman's then there is no clash of ethics regarding revenues and other aims. (Philips et al., 2003)
Henry (2006) argues that a crucial component of the traditional notion of public utility law made an organization to be like or act like a monopoly in order to be influenced by public interest and subsequently implement CSR in their business proceedings. In today's era there is no clash between the CSR aims and monetary profits, but it is usually presumed that this is not really required. Henry also adds that every organization, whether it is a giant industry or a small organization, it holds a responsibility towards the society. The business organizations should utilize their resources for public enterprises. This millennium has seen the organizations taking stand for causes such as global warming, environment protection, healthcare, healthy life, awareness about education etc. (Henry 2006).
Henry (2006) also adds that traditionally, people have had a typical mindset about businesses in general, as well as, politicians and society; although change is avid now-a-days there are many who do not like to appreciate success stories of successful transformations. Undeniably, the corporate world does bear the social responsibility which is tied up to the advocates' perception about the idea of justice or concern related to a disaster. The underlying fact is that private corporations should be perceived as "Public-friendly" or a more preferable term "stakeholder-friendly." This pseudo-ownership can be found in every giant brand nowadays and in view of Henry is killing the idea of a free enterprise.
It is the known to many that there's a tension between businesses following profits and being…