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The Triple Bottom Line as the answer to the primary responsibility of the manager

Term Paper 2011 9 Pages

Business economics - Business Management, Corporate Governance

Excerpt

Introduction

What is the primary responsibility of a manager? This question is an old one. However, in the light of several incidents in recent years - some examples are the financial crisis, the BP oil spill and the Enron scandal - it seems to be a more a present-day problem than ever before. The traditional answer to it is also mirrored in business law and states that managers are agents of the stockholders and work solely for their benefit. This view is commonly referred to as the stockholder view. The contrary position to this is the stakeholder view. It asserts that in addition to stockholders, managers have also a fiduciary duty to employees, customers and other stakeholders, including the stockholders. In this paper, arguments both for and against each view will be presented. It will also be claimed that acting in strict accordance to one of the theories is an inappropriate way of managing a company, for ethical and practical reasons. Rather, the opposing views do not necessarily exclude each other. A synthesis of the two contrasts is not impossible, as it can be seen in the recently developed concept of the Triple Bottom Line.

The Stockholder Theory

The Nobel laureate Milton Friedman is a strong advocate of the stockholder view. Answering to people who claim that companies have to care about social and environmental issues while doing business, he wrote:

There is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits as long as it stays within the rules of the game, which is to say, engages in free and open competition without deception of fraud [1].

Corporate Social Responsibility (CSR) is a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis [2]. According to Friedman, such a responsibility does not exist. The only thing a manager has to do is caring for the bottom line, increasing shareholder wealth. Any opposing effort leads in a slippery slope directly to socialism. Pursuing social or environmental agendas is the government’s job, not the business’. Whenever conflicts arise between the interests of stockholders and that of any other stakeholder, it has to be resolved in favor of the stockholders. Conflicts of interest for the manager himself therefore cannot exist.

These are very clear statements about the manager’s duties. In the past, they gave rise a lot of harsh criticism of Friedman’s views. While some points of criticism are certainly justified, it is definitely not justified to say that Friedman demands and fosters a behavior of maximizing profits, regardless whether that is done in ethical or unethical ways. Business should not include “deception or fraud”[1]. The reason for this is that free competition and free markets are paramount for him. In Friedman’s view, a good society consists of free markets and a free political system. Deception and fraud would stand in sharp contrast to his request of free markets. So managers ought to abide to the law and follow ethical customs.

So what are advantages and arguments in favor of stockholder management? First of all, it does not exclude caring for the other stakeholders. But this can only be done if it helps to increase profits. Studies have shown that treating employees well increases their loyalty and motivation, which has positive effects on a company’s profitability. Treating customers with honesty and respect may improve customer loyalty and increase revenues. Caring for the environment (“going green”) may create a more positive image in customers’ minds and increase profits as well. So in the end, stockholder management may benefit the other stakeholders as well.

A second argument for stockholder management is an economic one. Capital supply is by definition short and is always invested, where it yields the highest returns. Companies compete for short capital on the capital markets. Because of the globalization, this competition has become even harder because the playing field was expanded significantly. However, steady supply of capital is vital to the survival of a company. So in order ensure sufficient liquidity at all points of time in the short run and enough financial power for the future development of the company, it is very important to be attractive for investors. Attractiveness means high returns on investment through high effectiveness and a strong orientation on investors’ needs.

The perhaps strongest argument in favor of stockholder management is that it is impossible for a manager to face conflicts of interest. He has a very clear and simple obligation, to do everything to maximize profits and to work in the best interest of the company’s owners. “Simple” does not mean that it is an easy task to maximize profits. Simple is the decision rule, which is applied to all questions arising in day-to-day business. That way the manager is not occupied with balancing conflicting interests, but can focus entirely on his actual job.

As mentioned earlier, the sole focus on stockholder interests has been subject to a lot of criticism. One point of criticism is that the group of stockholders is often divided. While long-term investors are interested in a substantial and sustainable growth of a company, short-term arbitrageurs only want the highest possible return in the shortest possible time. So in fact, a conflict of interest for the manager does exist. Which group of investors should he give preference? This objection, however, is not really an argument against the theory of stockholder management, because the division of investors is not part of the theory. The question can easily be solved by stating that long-term investors should be given preferential treatment.

Another point is that in Friedman’s system, stockholder orientation is an integral part and necessary condition for free markets and the prevention of socialism. That any step away from pure stockholder management is a slippery slope argument. This kind of arguments is often used to defend radical positions and leaves no room for compromises. A rational basis for this slippery slope, however, is not recognizable. Empirical evidence rather suggests the opposite. Many examples in Europe show that free and open societies can exist, even though more weight is put on other stakeholders’ interest.

A third argument is the question of the purpose of a company. It is a precondition of the stockholder view that the sole purpose of a company is profits. It is clear that profits are a necessary condition for a company, because without profits it would not survive. But is this condition sufficient? A lot of people would argue that there are other purposes of a company, too, for example satisfying needs of consumers or providing the employees the opportunity to make a living. Those opinions are very convincing. If the precondition of profits as the only reason for the company’s existence is not accepted, though, the theory of stockholder management loses its ground, because it is too simplistic.

The strongest argument against profit maximization as the only duty of managers is about the inherent distinction between role morality and general morality. Role morality means that different moral rules apply when people are in certain rules. This negates a universal morality that is applicable in all situations. In terms of the stockholder theory actions are justified as long as they support the goal of higher profits. Whether these actions are morally right or not is not important. This argumentation is utilitarian. Utilitarianism is a philosophical theory that is based on the idea that the morality of an action is determined by its effect on maximizing utility. More commonly, it is often described by the term “The end justifies the means.” However, a reasonable explanation of why the utilitarian approach would be right could not have been found yet. The same counts for the issue of role morality. Therefore moral standards that are valid in all other circumstances should also be applied on problems in the business world.

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Details

Pages
9
Year
2011
ISBN (eBook)
9783656250920
ISBN (Book)
9783656253907
File size
515 KB
Language
English
Catalog Number
v198659
Institution / College
Union Graduate College
Grade
A
Tags
Ethics Management Ethics Business Ethics Triple Bottom Line Kant Milton Friedman

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Title: The Triple Bottom Line as the answer to the primary responsibility of the manager