Corporation Should Be the Purpose

¶ … corporation should be the Purpose of the Corporation

One of the most discussed matters in nowadays global economic environment refers to the purpose for which a corporation, or a smaller sized company, is created. There seems to be quite serious disagreement regarding this topic, although for some theoreticians, on the one hand, and practitioners, on the other hand, things stand pretty clearly. Opinions on the subject are quite various, oscillating between classic theories, like the shareholder theory of management or the opposed stakeholder theory of management, and modern approaches to the subject, which combine these classic theories or which bring new aspects to the matter that must be taken into consideration.

However, most theorists agree upon the fact that a corporation's sole purpose is to generate profit and to provide a significant return on investment for shareholders. Therefore, shareholders are considered to be the main beneficiaries of the corporation's activity. One of the most fervent supporters of this approach is Milton Friedman who acknowledges the maximization of profit as the objective that any corporation must attain.

Friedman focuses his opinion on this matter on two main arguments. One of the arguments states that the corporation is owned by shareholders, which obviously leads to the assumption that all the profits generated by the corporation should belong to shareholders, as a recompense for their financial effort made for the corporation. As an explanation for the fact that corporations should only focus on generating profits for their shareholders and should not focus on the situation of stakeholders or on the situation of the community in which the corporation activates, is the fact that corporate executives and their subordinates are working for the shareholders' interests. In addition to this, charity financed through the corporation's profits by its employees is not considered to be a normal action, as all the profits belong to shareholders only.

The other argument that Friedman uses in support of his theory is the fact that shareholders are the only entitled party to the profits generated by the corporation due to contracts among the corporation's stakeholders. Given their degree of importance for the corporation and their degree of involvement in the corporation's activity, the most important categories of stakeholders for a corporation are: employees, shareholders, investors, communities, and the government. These stakeholders are vital for the corporation's well-functioning and for its future development. Other categories of stakeholders involved in the corporation's activity are: suppliers, labor unions, industry trade groups, professional associations, competitors, prospective employees, prospective customers, the public, and others. Friedman considers that these stakeholders should not be included in the corporation's purpose, given the fact that their relationship with the corporation is contractual and remunerated. This seems to be a fair point-of-view on the matter, but such a condition is not enough in today's global economy for a corporation to be considered a successful one.

Friedman has a very strong stand regarding the corporation's social responsibility also. In his opinion, a corporation is not able to have a social responsibility, since only people can have responsibilities. He practically tries to destroy the idea that corporations should play some kind of part in the social life of communities by stating that "businessman who talk this way are unwitting puppets of the intellectual forces that have been undermining the basis of a free society these past decades" (Friedman, 1970).

In Friedman's opinion, individuals like proprietors or corporate executives have responsibilities. And not even so, because they are not in authority to make changes like refraining from increasing prices of products in order to help keep inflation under control or to employ unsuitable employees in order to help reduce unemployment. This would mean using someone else's money in order to perform certain social-oriented actions. Also in support of his statement, Friedman argues that "the stockholders or the customers or the employees could separately spend their own money on the particular action if they wished to do so. The executive is exercising a distinct social responsibility, rather than serving as an agent of the stockholders or the customers or the employees, only if he spends the money in a different way than they would have spent it" (Friedman, 1970). This explanation bares common-sense, but this view seems a little over passed by modern developments in the global environment of corporations nowadays. The situation of individual proprietors is slightly different from that of corporation executives, as Friedman considers. In his opinion, individual proprietors, as sole and direct beneficiaries of their businesses' profits, are entitled to perform any social actions that they consider to be necessary. However, if one compares the financial dimension of individual proprietors, on the one hand, and the financial dimension of corporations, one can observe that the effect of social initiatives conducted by individual proprietors has little significance on making a difference in the desired direction.

Another argument that Friedman relies on when stating that corporations should not involve in the social life of he communities in which they activate is the political principle of unanimity that underlines the market mechanism. In such a free market that is based on private property and on voluntary cooperation, Friedman considers that there are no values and no social responsibility aside from the shared values and responsibilities on individuals.

A different and more modern theory on corporate responsibility was issued by Edward Freeman, which is known as the stakeholder theory of management. Freeman's theory is based on the fact that both shareholders and stakeholders have the right to certain benefits from the corporation's activity, given their degree of importance and their degree of involvement in the corporation's activity.

Freeman categorized all the stakeholders after their importance and observed heir roles and effects on the corporation's well-functioning. For example, shareholders, or owners, have the right to be rewarded with a good return on their investment, given their financial efforts. Aside from the financial resource, the human resource is vital for any corporation, no matter the domain it activates in. Current management theories and practices acknowledge the importance of the human resource and pay more and more attention to certain methods and techniques designed to develop employees' activity. Therefore, employees, as stakeholders play a key role in the corporation's activity. In addition to this, employees have their jobs or even their livelihood at stake, and must therefore, receive suitable recognition for this. The third category of stakeholders after their importance is represented by suppliers. Their importance resides in the fact that they provide the corporation with the raw materials required for production. Basically, from this point-of-view, the entire production and the well-functioning of a corporation rely on these suppliers. Customers also play an important role in a corporation's success, and their importance can be observed in the attention paid by corporations for their satisfaction. As one can observe, these four categories of stakeholders are vital for any corporation's existence. All of these stakeholders are sin e qua non-conditions for the corporation's success and sometimes survival. Another important stakeholder, but with less direct influence on the corporation's activity is represented by the community in which the corporation activates. Over the past decades, community has started to be paid more and more attention. As a consequence, most corporations have initiated all sorts of social actions regarding certain that the community in which they activate confronts with.

Freeman bases his theory partly on the relationship between the corporation and legal requirements, like certain laws that protect the interests of local communities. For example, the Clean Air Act and the Clear Water act have constrained corporations from harming the environment of such communities. The social responsibility recommendation made by Freeman regarding the relationship between the corporation and the community argued that "the local community grants the firm the right to build facilities and, in turn, it benefits from the tax base and economic and social contributions of the firm. In return for the provision of local services, the firm is expected to be a good citizen" (Freeman, 1994).

In other words, both the corporation and the community benefit from the corporation's activity. The corporation uses resources provided by the community. The community is rewarded with certain benefits from the corporation. In addition to this, the corporation must not take actions that affect the community in a negative manner. In such cases, the contractual relationship between the corporation and the community is not respected. This would further lead to punitive measures taken against the corporation.

In Freeman's opinion, the stakeholder theory can be divided into several stakeholder theories, each of them having a normative core that makes recommendations on the manner in which corporations should activate. These normative cores are based on pragmatic liberalism, characterized by the idea of fairness and of basic equality among stakeholders. In other words, these stakeholder theories compose a corporate governance conduct code. The principles in accordance to which corporations ought to be governed are: the Principle of Entry and Exit, the Principle of Governance, the Principle of Externalities, the Principle of Contracting Costs, the Agency Principle, and the Principle of Limited Immortality. Other principles include: the Stakeholder Enabling Principle, the Principle of Director Responsibility, and the Principle of Stakeholder Recourse.

For some specialists in the field Friedman's shareholder theory holds water more, while for others, Freeman's stakeholder theory seems to be more suitable for modern times. John Hasnas has studied both theories and stated several interesting findings. For example, he stated that "the stockholder theory is not as obviously flawed as it is sometimes supposed to be and that several of the objections conventionally raised against it are misdirected" (Hasnas, 1998). Hasnas's opinion on Freeman's stakeholder theory is quite different, as he considers the arguments supporting this theory to be significantly flawed. Even more, Hasnas considers that the stakeholder theory benefits from a great deal of undeserved confidence.

However, Hasnas does not consider himself of being in favor of the shareholder theory instead. Furthermore, Hasnas advices the readers to focus on the characteristic common to both theories: the explicit or implicit recognition of the preeminent value of individual consent. As a conclusion, Hasnas considers that "an adequate normative theory of business ethics must capture the ethical obligations generated when an individual voluntarily enters the complex web of contractual agreements that constitutes a business" (Hasnas, 1998).