Social Responsibility Perspectives: The Shareholder and Stakeholder Approach

 

An outline of the two perspectives related to corporate social responsibility: the shareholder model and the stakeholder model. The discussion also includes support for each perspective, including that of famous Nobel​ prize winning economist Milton Friedman.

 

It was Milton Friedman, the famous nobel prize winning economist, who once said there is

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one and only one social responsibility of business—to use its resources and engage

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in activities designed to increase its profits so long as it stays within the rules of the

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game.

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Friedman's comments characterize one of two perspectives related to business social responsibility.

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On one hand we know that the primary objective of a business is the attainment of profits.

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But does that mean that profits are the only factor that business managers should consider

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when making decisions?

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Before we go into greater detail on the different perspectives related to social responsibility,

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lets define the term.

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Social responsibility can be defined as a businesses obligation to make decisions that

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ultimately benefit society.

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The issue that I'm sure you're beginning to realize, is how does a business engage in

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actions that benefit everyone?

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This is a very difficult task, however business managers must be able to balance these competing

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interests.

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But lets get back to Friedman and the shareholder model.

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Friedman felt that business social responsibility was pure and unadulterated socialism, and

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even compared businesses that engage in social responsibility efforts to government institutions.

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So why is Friedman so adamantly opposed to social responsibility?

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Well there are in fact a few different reasons.

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First lets take a look at how most large businesses are structured.

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For liability and financing purposes, many large businesses are structured as C-Corporations.

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Now the only thing you need to know about C-Corporations to understand Friedman's argument

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is their composition.

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The key parties of C-Corporations include shareholders, the board of directors, and

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corporate officers.

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The shareholders are those individuals who invest their money in the company in exchange

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for a percentage of ownership and typically voting rights.

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This makes shareholders the actual owners of the company.

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Since shareholders doesn't necessarily have the time or expertise to make company decisions

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they elect the board of directors, who appoint corporate officers to manage the day-to-day

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operations.

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And since shareholders, who again are the owners, can't make the decisions it's the

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responsibility of the corporate officers to make decisions that are in the best interests

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of the shareholders.

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And what is more important to shareholders than profit?

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So it is the responsibility of a corporate executive to make as much money as possible,

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while of course operating within the rules of the game, which refers to established laws.

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Now engaging in what is termed social responsibility is in direct conflict with the shareholder

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model because it diverts resources and energies away from profit maximizing behaviors.

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Take for instance giving to a charitable organization.

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Friedman isn't arguing against donating to your local church, but he is arguing that

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a business is not the appropriate vehicle to do it.

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For one, finding a cause that all of its shareholders agree with would be nothing short of a miracle.

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And secondly, by spending energies and resources on social responsibility the business is giving

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up those alternatives that it may have otherwise engaged in.

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Those alternatives may produce more of a benefit for the business.

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Instead Friedman believed that businesses should pursue profit maximization, essentially

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making as much money for shareholders as possible, and with that extra cash shareholders could

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donate to whatever organization they wish.

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Friedman's views of course represent just one of the two perspectives related to social

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responsibility.

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The second perspective is known as the stakeholder model, and maintains that businesses have

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a responsibility to not only seek profits, but to also satisfy the interests of multiple

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stakeholders.

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These stakeholders represent individuals or groups that have an interest in the actions

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and behavior of the business.

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The idea behind the stakeholder model, is that business managers need to maintain a

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positive relationship with society and their environment if they are to operate effectively.

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Failure to do so can harm a businesses reputation and ultimately affect their ability to operate.

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Now since all stakeholders do not have the same influence on an organization, we commonly

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separate them into two categories: primary stakeholders and secondary stakeholders.

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Primary stakeholders represent those individuals or groups who have a greater influence on

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the organization.

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They include a business's customers, employees, investors, suppliers, government agencies,

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and the local community.

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These groups are of utmost importance because the business relies on them for long-term

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survival.

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Think about the impact on a business if its customers stopped buying products, or investors

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withdrew their investment.

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Under the stakeholder model, business managers top priority should be satisfying the various

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interests of these groups.

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Although secondary stakeholders are not as critical as primary stakeholders, they still

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can influence public perception of the business.

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Common secondary stakeholders include special interest groups and the media.

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These groups don't conduct business regularly with the organization, but what they communicate

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or choose to communicate can have an impact on public perception.

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Just look at the efforts that oil and gas company British Petroleum has gone to in order

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to repair its battered image in the wake of the Deepwater Horizon oil spill.

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Although the criticism was certainly warranted, special interest groups and media played a

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significant role in transmitting information related to BP's decisions that led to the

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explosion and subsequent oil spill.

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Now that we've outlined both the Shareholder and Stakeholder Models, and as we finish up

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this video, I want to leave you with a parting question.

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Should business managers subscribe to the shareholder model or stakeholder model ? Perhaps

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a better question is If you were the business manager making the decisions, which model

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would you follow?

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If profitability is a businesses objective than is it wrong to make decisions with that

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objective in mind?

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Although you could certainly make the case that cutting costs to boost profits in the

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short-term didn't benefit BP in the long run.

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So maybe acting socially responsible is less about being socially responsible and more

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about being profitable.

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It could be that being socially responsible is in fact good for business, and not pure

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and unadulterated socialism as Milton Friedman suggests.

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Even if business managers only consider the interests of stakeholders for the incentive

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of profits, doesn't everyone win?

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Let us know what you think in the comment section below.

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Thanks for watching.