Theories Of Business Management And The Importance Of Stakeholder Theory

Around 2000 years ago Greek philosophers thought that “goodness” could be explained as a result of understanding the function or purpose of things. A race horse metaphor was then used to exemplify this idea. The purpose of race horses is to win races and therefore a good horse should be one that is speedy, agile and disciplined. If we were to apply a similar approach to corporations, what would it be that makes a corporation a good corporation?

Theories of Business Management

The report here deals with some important theories, which are used in organizations to create business model in order to produce the best services. The theorists, mentioned here, are Milton Friedman, Reverend Freeman, Jon Boatright and Michael Jensen. Their theories are both related and contradictory in nature. Friedman talks about profit making in business. Freeman opposes this theory and says that business depends in ethics, which need to be followed in proper way. Jensen adds the term value maximization to give a detailed view of stakeholder management. Corporate governance is important and Boatright feels its necessity. His theory of corporate governance and economic approach is famous in business management.

The discussion delivers a clear concept of stakeholders and their contributions in firm. Roger Martin’s experiments with customer and their choices support this fact. John Rawls believes that wealth should be distributed equally in society and this helps in the average economic growth. His theory is related to Immanuel Kant’s morality theory where it is stated that people needs not to be treated as mere means. These theories named Corporate Social Responsibility, Creating Shared Value, the Blue Economy, the Circular Economy and most of all the Enlightened Stakeholder View are briefly discussed in this report.

It is necessary to choose one theory over the others and the report concludes by suggesting Freeman’s theory to be applied in business strategy. The entire report makes many debates and similarities in theories and selecting one particular method is justified here.

The purpose of business is always considered as a topic of debate. Many scholars have expressed their views regarding this topic. Some of them believe that the target of an organization should be how to make profit for the stakeholders from the business. In such case, the firm forgets the responsibility towards society. Milton Friedman is one, who believes in this theory. Business, according to him, cannot have its own responsibility. It is up to the persons, who are associated with the business. Businessperson is the man whose judgment and skill result in the best products for an organization (Bowen 2013).

An executive plays this role in a corporation. In most of the cases, he spends the money of stakeholders, employees and customers to show his responsibility towards society. He looks forward to make profits for his organization through all possible aspects. The stakeholders can elect an executive and it is his duty of the executive to serve under the interests of the stakeholders. Social responsibility in a corporation is difficult as it is served in self-interest. In case of individual business, the owner spends his own money for his business purpose and it is not regarded as social responsibility. The theory of Friedman goes against the term “social responsibility” and portrays the fact that the only responsibility of business is to grab the best resources and make the best profits out of them (Friedman 2009).

Milton Friedman

Reverend Freeman in his “Stakeholder Management” opposes the theory of Friedman, where he argues that business must be done through ethics. In order to be successful in business, the manager goes on to fulfill the demands of the owners, employees and customers. Freeman is against such stakeholder related business and asks for change in system. Stakeholder plays a crucial part in evaluation of any program in an organization (Brandon and Fukunaga 2014). Sometimes the interest of the stakeholders becomes more important and the executives treat them as boss. The change in stakeholder value can be effective in such cases. The priority towards stakeholders even above the customers is a negative side of law.

Freeman believes that the stakeholder related business could not be useful in operating a business. He directly opposes Milton’s concept and states that the focus should be on the ethics of business along with stakeholder relationship rather than using ethics as a secondary option (Hörisch, Freeman and Schaltegger 2014). Ethics is the principle that works in the development of business. The responsibility in business is not completed without ethics. A proper business model gives a clear view of value creation, which deals with ethics. Business should follow equality, decency and take care of all the aspects like creating value for people associated with the business. This can be the proper way to make an organization a human institution.

The stakeholder management is important for business ethics and Jon Boatright researches lot to give a clear view of it. Stakeholder management is often contrasted with corporate governance. This model is based on economic approach, which deals with the employees, suppliers, customers and other groups as well. The financial return of an organization depends on the skills, materials and money. Cooperation within the sector produces better than depending on a particular one. Corporate governance deals with an organized business structure and the benefit can only be achieved by delivering an essential product in a proper strategy. Freeman says that the managers create good wealth in business and the economic value can be made by cooperation of all the volunteers. Boatright gives emphasis on Freeman’s theory and expresses that economic approach is related to the benefit of any firm (Boatright 2006).

Michael Jensen, an American Economist, presents his valuable theory on the relation between value maximization and stakeholder management. Value maximization allows the managers to make the decision in order to increase the market value of a firm, whereas the theory of stakeholder depicts that the managers should take care of the interests of the stakeholders (Harrison and Wicks 2013). Jensen supports the stakeholder theory by Freeman and gives a deep view of it. Most of the time, the managers go for self-interest even by reducing the social interest.

Reverend Freeman

Political power is also responsible for the limitation of the role of mangers. Conflict between family and market plays a crucial role in creating stakeholder theory (Jensen 2002). The rights to private property create changes in market throughout many years. This has brought increment in welfare and their freedom. Many operate this market and most of the common people are not aware of it. Stakeholder theory helps to understand this problem and Jensen believes in enlightened stakeholder theory, which specifies that the role of a firm is to increase total market value.

The theories, offered by the Economists, are contradictory in many aspects. Friedman gives the view of stakeholder theory and it is opposed by Freeman (Hörisch, Freeman and Schaltegger 2014). Friedman (2009) emphasizes on the profit making theory of the managers in place of social responsibilities, whereas Freeman believes it is the ethic that makes business more profitable. Corporate governance is a system that operates a company (Tricker and Tricker 2015). Jon Boatright offers the model of stakeholder theory based on economic approach and corporate governance. He supports Freeman and adds his own approach towards the theory. Jensen, another famous Economist, gives importance to value maximization and its relation to stakeholder management. He believes in balanced scoreboard to make equivalence in stakeholder theory.

All the Economists give their own opinions regarding stakeholder theory and these theories clear the general conception of stakeholder. There can be controversies and debates among the theories but all the theorists conclude that stakeholder theory is the crucial implement in case of business and it should be applied in proper way to make the best use of it. Profit earning is the prime importance for an organization and it depends on the management to work in collaboration with employees, customers and suppliers (Ma and Leader 2015). Importance needs to be given to all sectors and this is the only way to take an organization to its top reach in order to compete in market.

Stakeholders play an important role in business management. The term stakeholder refers to those persons, who affect, or are affected by the decisions, taken by a firm (Lawrence and Weber 2014). Stakeholders in a firm may include groups of employees, customers, stockholders, suppliers, trade associations and also nongovernmental organizations. In most cases, the market stakeholders remain engaged with the firm in money transactions. Managers are many times bound to serve for the sake of stakeholders and it turns the pointer from social welfare to the individual interest. Theorists have described their views regarding stakeholders and their growing importance in a firm (Bowen 2013).

Jon Boatright

The stakeholders are connected to resource management and environmental planning (Voinov et al. 2016.). Employees, as stakeholders, are part of success in a firm. Most of the stakeholders play the role of investors for a company. They can help company in earning profit as well as reducing it by focusing on the most profitable product. Roger Martin, an author of business books, does not believe in the fact that the stakeholders have displaced the managers to remain at the center of business (Hbr.org, 2017). The stakeholders earn 5.9% in a year from 1977-2008, which is less than previous years.

Martin believes that shareholder value depends on customer satisfaction. They are part of firm’s earnings and their share value depends on the flow of future cash flow. It indicates that the shareholder value is nothing to do with the present condition. Stakeholders go for profits and the managers run after it. Customer satisfaction should be the prime importance for any company. The customers, suppliers, employees all are part of the existing society. Narayana Murthy, the founder of Infosys, once said that shareholder value can0.not run long if the customers, stakeholders, employees, investors all are not valued equally as they all create a society (Ma and Leader 2015).

It is necessary for society to have a broader view of firm, which deals with social welfare. A business firm produces products for society and this production should be done in an organized way (Hörisch, Freeman and Schaltegger 2014). A firm consists of employees, suppliers, shareholders, who give their best to make more profit every year. The profit of a firm is very much depended upon the skill and continuous engagement of the employees. They deliver their best to reach at the top of profit level. The stockholders are those who invest the capital, without which a firm cannot run. They can provide essential advice to the management to make the quality better.

The role of customer is critical and their feedback is crucial for the firm to improve accordingly (Lawrence and Weber 2014). In order to make the best products, a firm depends on the material, supplied by the vendors. They often produce applicable solutions, which may prove effective for the firm. In case of social responsibility, all these primary stakeholders should work accordingly in a firm and such cooperation in internal structure helps the firm to gain profit along with securing good position in trade market.

Michael Jensen

Immanuel Kant, a German Philosopher, created theory based on human rights. Kant believes in the term ‘maxim’, It is a principle, by which other superficial aspects of action are guided (O’Neill 2013). In according to Kant, people can be treated as means or ends in any corporate organization. In case of any governmental work, government uses many private agencies to complete the work. Those, who participate in the transaction, collaborate with each other and work together.

People may be trapped under false agreements or policies and treated as mere tool under the scheme. In banking industry, the employees are under control procession from other financial industries and it reduces their honesty norms many times (Cohn, Fehr and Maréchal 2014). Sometimes, people work as means under fear as they cannot avoid it. Rich businessperson often uses his power to keep control over his employees, suppliers or other parties, associated with his firm. Maxim should be used in such conditions so that people are not forced to be means in business or other financial sectors.

Kant talks about justice here. People can be treated as end in themselves rather than as means. He says that one should treat human, whether he is your own or not, as an end and not simply as means (White 2013). Treating people in such way means to treat them as individual beings with own maxims. A person cannot be a complete one, who can perform any action under any c circumstances. Such inability may not always come from physical unfitness but from other dependencies. In work place, it is necessary to understand and treat one another as means. It requires much support from one another. People can be failed in their purposes if they do not get essential share and support from other party.

Kant, in this point, advises all to act in justified manner to avoid adverse situations. The development in any employer-employee relationship offers reinforcement process and it helps the employer to earn the most effective performance by the employees (Zhang et al.2014). It is necessary for a firm to earn more profit and secure its position in trade market. A company is build up with its owners, employees, suppliers, investors, stockholders and so many. A good communication within them is needed and this can be happened only when they will cooperate with each other in every step. An employee or a supplier should not be treated as means rather as pillars of the firm. Kant speaks for morality and it will only earn by treating others as beings (O’Neill 2013).

Stakeholder Theory

John Laws generalizes the theory of Immanuel Kant in a higher level. Laws believes in social equality and rights, which he described in his Theory of Justice. In according to Laws, economic inequality is a barrier to development of society and it needs to be arranged properly. In a society, each people should have equal advantages. This principle talks about the equal distribution of wealth and income among society and it needs to be equal (Csus.edu, 2017). It can be applied by avoiding biases in society. Each person needs to be benefited from the basic structure of society.

Society creates position for everyone and their expectations rely on the distribution of social rights and duties. Income and wealth are two prime concerns for people. All can achieve same rights if these primary goods are equally distributed. Income inequality may cause economic inequality in a broader way and many non-income factors limit the economic freedom (Silber 2012). Proper distribution of wealth among people decides the economic changes in society. The ratio of income and expenditure may remain same if people get more money in hand. Changes in distribution procedure may increase the power of consumption and this definitely results in economic growth. Government may help in such position by implementing better opportunities in job field along with introducing economic policies for the lower section to own better education and offers. The theory of Laws may prove efficient if it is applied well in society.

There are many views and theories, which aim to reconcile the views stated in the previous sections. Corporate Social Responsibility is a concept, which is used in management to create social issues and deal with the stakeholders in business operations (Unido.org, 2017). CSR helps in balancing economic and social aspects in a company along with fulfilling the expectations of stakeholders. A clear concept of CSR may bring various advantages in a company like increment in sales and profits, improvement in quality of products. In Denmark and Europe, the notion of CSR has gone forward and the employees, customers and stakeholders become more aware of social and economic issues (Thomsen 2017).

Creating Shared Value or CSV is also a part, which is created to give a proper shape to capitalism and its connection to society. It is regarded as a wave in production growth as it requires human resources more to serve the quality products in global market (Hbr.org, 2017). CSV offer both the benefits in social and business perspective. Many well-known companies across the world have felt the necessity of implementing Creating Shared Value in opportunity growth.

Importance of Stakeholder Theory

The Blue Economy theory is very relevant in this discussion. This theory clears the conception about oceans and seas as ‘Development Spaces’ which include reservation, extraction of oil and mineral, production of energy and marine transport (Mofa.gov.bd, 2017). Each country has its own resources and it is their duty to protect and use them in economic development. In coastal areas, trade, shipping, fishery and most of all tourism can be developed in many sectors. These activities can improve the livelihood of many people and the economic development may improve as a result.

The system of Circular Economy is an innovative one and it redefines products by reducing negative impacts (Ellenmacarthurfoundation.org, 2017). It ensures an updated flow of goods in any firm. This system offers importance to global transformation. In agricultural system, the farmers are the beneficiaries as the percentage of waste is reducing and they are increasing profits in their work. Farmers are getting information through internet resources and this helps the small and medium businesses as well to flourish in market.

Enlightened Stakeholder Value or ESV is a principle, which contributes in corporate governance. This value has been emerged in the previous century and introduced as legal form in UK in recent times (Keay 2012). In ESV, a company should follow the shareholder money in long-run and it needs basic growth and profit depending on stakeholders interest. ESV has realized that the firms have different groups of stakeholders like employees, investors, customers, who have contributions equally in the firm and as a result, it emphasizes their importance to the directors and mangers. All the theories are related to the theory of business approach and deal with the sustainability view of firms.

Recommendation and Conclusion

Theory of Freeman is always acceptable. It not only talks about stakeholder management but stresses on the basic ethics, which a firm should follow in long-run. An organization is created with its employees, customers, suppliers, investors and they all need equal importance. Freeman does not believe the fact the main purpose of business is only to make profits rather than follow the ethics. The executives need to think of social responsibility first. A firm must think of both the internal and external factors to work accordingly and following this process is essential.

Stakeholder management cannot be a dominant factor if changes are made in internal environment. Business is about collaboration and Freeman believes in managing stakeholders to get better result. Managers, who control the system in business needs to be more cautious while dealing with the stakeholders. It is essential fact that the purpose of any business is not only related to self interest but social interest. A firm can compete only when the executives keep balance in dealing with the stakeholders. Freeman deals with the subject and gives a transparent view to all.

Conclusion

Conclusion

It is clearly from the above discussion that business management is combination of different factors, which deal internally and externally to make the quality of production the b est. Friedman emphasizes on stakeholder theory by describing that the managers mostly take care of the stakeholder’s interest whereas Freeman opposes this by giving stress on the ethics of business. Jensen speaks of value maximization and its relation to stakeholder management. Boatright talks about corporate governance and economic approach in business. The report deals with other literary theories regarding Immanuel Kant, John Laws, who donate a lot in this field by discussing morality and justice in society. The Blue Economy, Corporate Social Responsibility, Circular Economy all these are discussed here in order to show the usage of such famous theories. The report concludes by recommending the Theory of freeman over all the theories to make applicable for any firm and it is justified.

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