The word “corporation” holds immense significance in the global business world. By the term itself, a corporation can be defined as separate legal entity on its own which is distinct from the owners themselves and which can have the privilege of enjoying the rights which a business individual also possess. To carry out all kind of commercial activities in the current day business world, corporation is a necessity. Generally, a corporation is a group of people who legally act as a single entity towards achieving a specific goal or set of goals (Bakan 2012).
The primary concern in the corporation and their activities is the purpose of their existence and the goals towards which they operate. There has been a long going debate over the overall purpose of the corporations in the business world. Though with time the nature, legal framework and dynamics of the corporations and businesses have changed substantially, the debate has remained (Reiser 2012). On one hand where some school of thoughts suggest that the purpose of existence of a corporation is to work towards maximization of the profits of the shareholders of that concerned corporation the other contradicting school of thought asserts that maximizing only the profits of the shareholders should not be the only objective of a corporation. According to this theoretical notion, the corporations should also take into account the broader perspective of maximizing the overall welfare of all the stakeholders who are voluntarily or involuntarily attached to them (Laczniak and Murphy 2012).
Over the years these two conflicting theories have been in existence and many new concepts have emerged regarding the purpose of a corporation. The report tries to take into account this debate and tries to analyze different theoretical frameworks, which exist regarding the purpose of a corporation. It also tries to discuss about the scope of building up a successful amalgamation of the existing relevant theories such that both the profit incentives and the welfare perspectives can be taken into account.
There have been two eminent theories, which shed light on the purpose of a corporation and its reason of being. Extensive studies have been carried out in this aspect and there are substantial literatures and scholarly works regarding the same. The section below reviews few of the relevant literatures in the current times, which tries to explain the relevance and limitations of the existing theories.
Mansell (2013), in his article discusses about one of the primary theories of corporate governance, which is still very much into existence. This is the “shareholder theory”, which was first proposed by the Noble Prize winning scholar, Milton Friedman. Friedman, according to this article, in his theory asserts that the corporations have only one primary purpose and objective of existence, which is to utilize the resources available to them and their methods of operations for maximizing their individual profits, thereby maximizing the profits of their shareholders, that is the those personnel to whom the corporation serves. According to this view, the corporations should only emphasize on the increase in the profit of the same and on building up long-term sustainability and prospects for the firm by competing fairly and openly and without taking resort to fraudulent means of operating.
However, this view has been criticized by many as they assert that only profit maximizing as a purpose of any corporation can make it non-justified when it comes to the welfare maximization issue. In this context Freeman, Harrison and Wicks (2007), in their extensive works, shed light on another theory regarding corporate governance, which is known as the stakeholder theory. This theory is focused mainly on the maximization of overall welfare from a corporation. The authors, supported also by Boatright (2006), argues that the trend of the corporations to focus on only the profit maximization of the shareholders and the owners cannot be beneficial in the long run for the society as a whole and also for the company. Instead, the purpose of the corporations should be to take into account all the stakeholders who are voluntarily as well as involuntarily falls under the purview of the operations of the corporations. The stakeholders not only include the direct players the shareholders, the financers and the owners but also include the employees of the corporation, the customers of the company and also the community, which is affected by the actions of the corporations.
Milton Friedman, in his theory (Friedman 2007) makes his stand clear regarding the primary purpose of existence of any business corporation in any part of the world. According to him, the phrase of “social responsibility of a business” is a highly misunderstood and misinterpreted phrase. He argues that the word responsibility can only be attached to individuals and not to artificial entities like corporations who can at the most have artificial responsibilities. The paper argues that it is in the hand of the corporate executive to decide whether he will fulfil the interests of his employers or whether he will look into bigger social welfare maximization. But it has to be kept in mind that in either way he will have to sacrifice the welfare of one of the conflicting parties and therefore, there is a lack of clarity regarding what his actual “social responsibility” should be.
However, the assertions of the above article, as made by Milton Friedman, has been strongly countered by Jensen (2002), who, in his paper, views the prospects and limitations of both the shareholder theory as well as the stakeholder theory of corporate governance, from an entirely different perspective of value management and value maximization. The author suggests that there should be a comprehensive method of operating on part of the corporations, which should incorporate both the purposes of the companies of maximizing their values as well as keeping in consideration the maximization of the welfare of all the stakeholders who are directly or indirectly associated with the corporation. To do that the author introduces the concept of “Enlightened value maximization” which includes a multi-purpose objective of the corporations and to compare the same with that of the traditional theories, he discusses a balanced scorecard.
A detailed study of the micro-foundation and moral and ethical viability of the stakeholder theory has been taken into account by Bridoux and Stoelhorst (2014). The authors argue that the implications of the stakeholders theory is not as simple as the theoretical framework suggests and there always remains a chance of leaving out one or more of the stakeholders while carrying out the operations on part of a corporation. They suggest that as there always remains a glitch and as there is no such “perfect” way of corporate governance (Hasnas 2013). Therefore, managers should not entirely keep on focusing on the ethical and moral issues only but should also take into account the purpose of revenue generation and value maximization aspects as in the long run this also has implications on the social welfare too.
Benefits of a broader view of firm
In the recent business world, with the incorporation of newer complexities and sufficient changes in the dynamism and variations of the commercial enterprises, the incorporation of the concept of corporate social responsibility in the operations of the corporations. This notion includes the economic, ethical, legal as well as the discretionary expectations, which remains in the society from any organization.
The concept is not same as that of business ethics only as the former is far more inclusive and comprehensive. The concept of a broader and more inclusive view of a firm is relatively a newer concept, which came into existence only in the recent periods after the traditional profit maximizing theories of the enterprises, started showing limitations and negative implications on the welfare of the society as a whole. To maximize the profits and serve to the interests of the shareholders solely, often the commercial organizations employs means of operating which can have negative implications on some of the stakeholders, especially those on the receiving side and on the society as a whole.
From this came the concept of a broader view of a firm and the incorporation of corporate social responsibility, which, if implemented appropriately, is, expected to serve the following benefits for the society as a whole as well as for the firm:
- The incorporation of a broader purpose framework in the operations of the corporations can help in addressing the issues of the ethical viability as well as overall welfare of the society, which can be attributed to the working of the corporations without compromising the profit incentives of the firm.
- The corporations, being a part of the society itself, are also bestowed with the responsibility of contributing to the society as a whole. It becomes a duty of the organizations to address the social issues, especially those that arises due to the operations of the organizations and for this purpose the organizations should also use some of the resources in its disposal. The traditional views of corporate governance do not have the facilities to incorporate these views while the newly developing broader views of firms can do the same.
- As has been extensively discussed in the recent commercial framework, it is not only beneficial for the society but also for the commercial firms themselves to take into account the concept of welfare along with their own profit maximizing. This is because in the modern commercial world, the goodwill and reputation of the firms are of crucial importance as it helps in building up a positive image for the company in the market, which in the long run proves to be beneficial for the company also as it increases its clientele as well as revenue (Schwartz and Saiia 2012).
- The social responsibility of the firms, included in its broader view, also takes into account the benefits of the employees and their overall welfare. This, in its turn, is required to build up a positive and loyal labor force for the firm, which is also beneficial to the firm as a skilled, loyal and happy employee base increases the profitability of the firm.
- If the corporations work with the broader perspective of both individual profit maximization as well as the societal welfare as a whole, then it becomes easier on the part of the governing authorities as well as they do not need to impose stricter and more rigid regulatory mechanisms and intimidating legal frameworks for the operations of the corporations. This in turn helps in actually achieving a free environment of operations, which can empower all the individuals in the society as well as increase the capability, competiveness, efficiency and the productivity of the corporations in the country (Andriof et al. 2017).
Thus, it can be seen that there are several crucial ways in which a society can benefit by implementing the notion of a broader view in which the firms can operate, thereby taking into account both the purpose of profit and overall welfare maximizations.
Analysis of proposed combinations of Corporate Governance Theories
This section of the report tries to analyze the viability and the efficiency of the theories of corporate governance, including the shareholder theory, the stakeholder theory and others. To do the same the different theories of justice and normative morality is taken into account and the credentials of the theories are discussed on the basis of such frameworks:
Social Contract Theory
The Social Contract Theory implies that the society should behave in a collective manner, where each of the individuals should take into account the objective of welfare of the society as a whole and work toward a collective goal, by protecting the rights of one another. For this purpose, they may have to sacrifice several short term individual privileges for the purpose of ensuing the long term collective benefits.
As per the theory, the corporations, being a part of the citizenship should also be considered as a participant and therefore should take into account the aspect of collective welfare maximization of the community under the domain of which they are operating. However, according to the theory the protection of welfare should be done both-ways that is where on one hand the corporations have the responsibilities to protect the rights of the corporations, on other hand the society also have the duty to do the same (Skyrms 2014).
Theory of Justice
This theory mainly believes in operating under the framework of fairness as the indicator of justice. According to this theory, a society is said to be catering justice to the citizens if all the citizens of the society enjoy equal opportunities, rights, rationality and equality. Therefore, in this context, the corporate organizations also have to keep the concept of dissemination of proper justice in the society. Therefore, for this, it is of absolute necessity to take into consideration the maximization of welfare, capacity building and overall improvement of all the stakeholders who are involved in their method of operations and also those who are not involved in their operations but to whom these organizations are answerable for being a part of the same society (Black 2014).
This is one of the most discussed and widely implemented theories in the aspect of efficient and inclusive corporate management. As per this theory, the stakeholders of any organization include all those personnel whose interests are directly or indirectly affected by the methods of operations of the corporate organization, both positively as well as adversely. Therefore, as per the theory, it is one of the most important responsibilities on part of the commercial organizations to take into account the interests of all the stakeholders and not only the shareholders of the organizations. There may often arise conflict of interests among the different group of the stakeholders, which include both the employer, financer and shareholder side and also the employee, consumer and the receiving side. In such cases, it is one of the responsibilities of the corporations to work in such a way that a balance of interests and welfare of both the parties are maintained.
Amalgamation of the theories
While one school of thought suggests the importance of the ethical and the moral considerations by the corporations, there are also existence of views which suggests that the corporations should not stop emphasizing on the profit maximization aspect also as this is the ultimate objective for which a corporation comes into existence. If a corporation is deprived of following the profit maximization purpose, then the corporation, the shareholders, and the financers may lose incentives to use their resources for the purpose of production. This in its turn is expected to hamper the welfare of the stakeholders in the long run as an overall low productivity implies low income, low employment and an overall lower standard of living for the employees.
Therefore, in the recent global commercial framework, a need of designing a comprehensive corporate governance strategic plan is felt, which will incorporate the social, ethical and moral issues of overall welfare in it without sacrificing the goal of private profit maximization and revenue generation for the shareholders of the competition. Many a times evidences have been found that this can possibly be done though in short term this may lead to some sacrifice on part of the firms, in the long run, incorporations of both the theories can actually be beneficial for the firms as well as the society (Brower and Mahajan 2013).
Limitations of these theories
Though the notion of incorporating the concept of social responsibility in the corporations may seem to be attractive both morally as well as ethically, there may be several issues and limitations regarding the implementations and incorporations of such comprehensive theories which take into account the welfare perspectives, in the real case scenario, few of which are discussed as follows:
- The social and moral issues, though are important to be taken into account, however, do not seem to be economically viable as there is no such mechanism or particular mode of operation which has hundred percent success rate. This is mainly because the issues, which arise in different companies, differ in nature, extent and magnitude.
- There may arise discrepancies in the business framework of a place if only few of the working corporations undertake the implementations of a more comprehensive method of corporate governance such that to take into consideration the welfare perspectives of the broader society as a whole, along with their personal profit maximization and if other firms operate traditionally. This may create a gap in the revenue and profit generations of these two types of firms, which may in turn led to loss of incentives of the formers to take into account the ethical issues.
- For dealing with the social issues and ethical problems arising in the society, sufficient resources and proper implementing mechanisms are required which are not present with all the corporations. These can only be done by those organizations who have sufficient resources and have reached to a sustainable production level.
From the above discussion, it is evident that in the contemporary business world, in the global scenario, it is of utmost importance for the enterprises and the corporations to take into account the welfare interests and the overall well-being of all the stakeholders, who are involved in the operation of the corporations as well as the community as a whole. This, however, should be taken into account and the measures should be implemented without sacrificing their profit incentives as this is also required to increase the productivity and the welfare of the company and also the society. There are several problems, which are faced by the corporations like that of economic viabilities, discrepancies in the extent of implementations and others. Therefore, it is of crucial importance to make the implementations more uniform and widespread and develop a comprehensive framework for working of the corporations which has both theoretical support and practical applicability. The bigger and resource rich corporations should take the fore steps in this regard such that the smaller ones get encouraged and follow the path of sustainability.
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