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Shareholder Primacy Theory

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Grant Julin

on 13 September 2018

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Transcript of Shareholder Primacy Theory

The Classical/Economic/Free-Market Approach to CSR (Shareholder Primacy Theory/The Friedman Doctrine)
Milton Friedman (1912-2006)
“There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud."
(Friedman, 1970)

Case Study: The Ford Pinto
The Ford Pinto: What would Friedman Do?
Case Study: Merck and River Blindness
"You are obligated to do what the Shareholders tell you do to."
"Following the law is not enough!"
"There is no such thing as a free lunch"
Arguments For
Only people have responsibilities
As agents of the company, executives are required to maximize profits for shareholders
The Utilitarian Argument
the classical model is best for the company and for the economy (being ethical reduces efficiency and wealth generation)
Rights based arguments
using other's money is equivalent to theft
The tax argument
All corporate social responsibility is window-dressing of the classical theory.
Executives and companies are not qualified to solve social problems -- this is the job of government
It's the law (Ford vs. Dodge 1919)

Do businesses have ethical obligations?
If so, what are they and to whom do they extend to?
Who is responsible for fulfilling these ethical obligations? (Executives/managers? Owners? Employees?)

CSR: The Questions
Are free markets adequate as means to the ends of maximally satisfying consumer demand?

Are the ends pursued by free markets appropriate as legitimate ethical goals?

The Philanthropic Model of CSR
The Moral Minimum: The Neo-Classical Approach to CSR
Normal Bowie: the pursuit of profit is constrained by an obligation to obey a moral minimum
This framework distinguishes between
Ethical imperatives to cause no harm*
Ethical imperatives to prevent harm
Ethical imperatives to do good

While it is ethically good for managers to prevent harm or to do some good, their duty to stockholders overrides these concerns
The Moral Minimum
The Moral Minimum: The Pinto
Friedman argues that government should have little control over the free market. In what ways does business influence politics and government?
Stakeholder Theory
The purpose of a business is to create as much value as possible for stakeholders.
Who/What is a Stakeholder?
The Wide Definition: Any group or individual who can affect, or be affected by, a corporation; any group who has a claim or stake in the firm.

The Narrow Definition: Those who are vital to the survival and success of a company
Challenges to The Classical approach to CSR
"On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy...your main constituencies are your employees, your customers and your products"
Jack Welch on the
Classical Approach to CSR
“Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environmental crisis.”

Criticisms of Stakeholder Theory
Is SAS Stakeholder or Shareholder based?
Stakeholder vs. Shareholder
"My ambition is to employ still more men, to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this we are putting the greatest share of our profits back in the business.“ (Henry Ford)

Case Study - SAS
The Utilitarian argument: leads to best consequences for all.
More likely to internalize externalities
Companies less likely to miss “blind spots” associated with the shareholder/owner-based management.
Property rights are not absolute (shareholders cannot use their property to abridge the rights of others)
Creates strong corporate character and purpose.
More profitable in the long run.
An enduring reputation.
Promotes self-regulation as opposed to enforced regulation.
Makes business and ethics compatible and complementary.
It’s how business works

The One for One Model
Over the years, the law has required the companies to take “. .. the claims of customers, suppliers, local communities, and employees into consideration” (Freeman, 2007). One of the major steps to protect other stakeholders has been taken by the National Labor Relations Act, Equal Pay Act, and Title VII of the Civil Rights Act, among others. These various acts protect employees from unfair management practices as well as the right to unionize. Another step the law has taken is the step to protect the community surrounding the business activities by passing environmental rules (Freeman, 2007). These acts have promoted work practices that do not pollute the air and water supplies in the area.
The Laws give stakeholders claims over the owners of companies
"You can't put an infinite value on human life, so you have to put a number on it at some point. What is that value?"
"Managing for Stakeholders"
(Freeman, 2007)
Shareholder Theory is resistant to change
The shareholder model is not consistent with the law.
Shareholder theory is not consistent with basic ethics.
Separation thesis vs. Integration thesis
The Responsibility principle
“Sure, I wish Whole Foods didn’t sell animal products, but the fact of the matter is that the population of vegetarians in America is like 5 percent, and vegans are like 25 or 30 percent of the vegetarians. So if we were to become a vegan store, we’d go out of business, we’d cease to exist. And that wouldn’t be good for the animals, for our customers, our employees, our stockholders, or anybody else. If I were to take Whole Foods in this direction I would be removed as CEO.”
"The differences between John Mackey and me regarding the social responsibility of business are for the most part rhetorical. Strip off the camouflage, and it turns out we are in essential agreement. Moreover, his company, Whole Foods Market, behaves in accordance with the principles I spelled out in my 1970 New York Times Magazine article." (Friedman, 2007)
The only social responsibility of business is to create shareholder wealth
The efficient use of resources will be reduced if businesses are restricted in how they can produce
The pursuit of social goals dilutes businesses’ primary purpose
Government not business should regulate market failures. Business can’t solve global problems like poverty or climate change
Corporate management cannot decide what is in the social interest

Costs will be passed on to consumers
It reduces economic efficiency and profit
Directors have a legal obligation to manage the company in the interest of shareholders – and not for other stakeholders
CSR behavior imposes additional costs which reduce competitiveness
CSR places unwelcome responsibilities on businesses rather than on government or individuals

A benefit corporation (or B corporation) is designed for for-profit entities that want to consider society and the environment in addition to profit in their decision making process.
The purpose of a benefit corporation is to create general public benefit, which is defined as a material positive impact on society and the environment

What affect will this action have upon my character? Will it build and cultivate virtue?
Does this action maximize happiness/utility and minimize suffering/harm?
Is this the right thing to do? Am I respecting human dignity and following the moral law??
Deontology (rights/rule based)
Virtue Ethics
I've made enough money. At this point, I'm just focused on making sure I do the most possible good with what I have. The main way I can help is through Facebook — giving people the power to share and connecting the world. I'm also focusing on my education and health philanthropy work outside of Facebook as well. Too many people die unnecessarily and don't get the opportunities they deserve. There are lots of things in the world that need to get fixed and I'm just lucky to have the chance to work on fixing some of them.
Should we Raise the Minimum Wage?
Ways to Address Excessive Compensation:
Government Regulation (Sabanes-Oxley) and caps
Internal Equity Structure
“No one should make more than five times the income of an ordinary worker” (Plato)
“No leader should make more than 20 times the lowest paid employee.” (Peter Drucker, mgmt. guru, 1980)
Pay for Performance: Google (Schmidt) and Apple (Jobs)
“Clawbacks”: boards can force executives to pay back some of their compensation for wrongdoing
JP Morgan, Bristol-Myers Squibb, Citigroup, Eastman Kodak, General Motors, Interpublic Group, Monsanto
Should CEO Pay be Capped?
“I propose to take an income no greater than $50,000 per annum! Beyond this I need ever earn, make no effort to increase my fortune, but spend the surplus each year for benevolent purposes! … especially those connected with education and improvement of the poorer classes. Man must have an idol and the amassing of wealth is one of the worst species of idolatry! No idol is more debasing than the worship of money! Whatever I engage in I must push inordinately; therefore should I be careful to choose that life which will be the most elevating in its character. To continue much longer overwhelmed by business cares and with most of my thoughts wholly upon the way to make more money in the shortest time, must degrade me beyond hope of permanent recovery.

Carnegie on Executive Compensation
Full transcript