The Actions Undertaken by a Corporation in the Pursuit of Shareholder - Justified if They Are Not Illegal - Literature review Example

CORPORATE SOCIAL RESPONSIBILITY By Name Course Instructor Institution City/State Date The Actions Undertaken By a Corporation in the Pursuit of Shareholder Wealth Are Justified, As Long As They Are Not Illegal Introduction In spite of the substantial contribution that capitalist firms have made on the world’s economic development, there is uncertainty about their role within the society. The business enterprise has been weighed down by the widespread fallacies and by academic, religious, and legal theorists seeking to demonstrate that businesses are only looking for egocentric embellishment; that is to say, maximising their profits at the expense of the community, the consumer, as well as the environment. Therefore, the profit notion has become fundamental to the on-going debate about the role that business plays in the society. As it will be evidenced in this paper, the concept of pursuing shareholder wealth has been covered lengthily by the economics’ literature. Scores of economists have seldom explicitly talked about the question on whether it is ethical or not for companies to pursue shareholder wealth. Still, the relationship between the business’ ethical conduct and profit has been studied extensively as evidenced in Vranceanu (2013, p.1) study. This paper seeks to assess the statement “the actions undertaken by a corporation in the pursuit of shareholder wealth are justified, as long as they are not illegal.” Discussion The expectation by the society that business organisations will voluntary exercise corporate social responsibility and act as good corporate citizens appear to be at odds with the boards of directors’ legal requirements. Wilson (2005, p.279) argues that the enormous resources and power that corporation have harnessed in modern society has made CSR a legal requirement. In view of Lee (2005, p.9) study, CSR arguments take two different forms; the pragmatic and the conceptual. In the conceptual argument, pursuing shareholder wealth through profit maximisation is rooted in the belief that as the corporation owners, the shareholders have a right to reap more from their assets. This argument is defended astutely by Milton Friedman, arguing that the business’ social responsibility should involve making more wealth for their stockholders mainly because the corporation is owned by the stakeholders (Lee, 2005, p.10). Still, the debate on pursuing shareholder wealth occurs on a level that is more pragmatic, wherein the focus is whether the power exercised by the corporations’ managers is channelled effectively by enforcing legal duties that only serve the shareholders’ financial interests or by permitting or requiring them to take into account the far-reaching effect of their activity. While supporting the broader duty, it is argued that focusing only on shareholder profit maximisation could harm the interests of the non-shareholders. On the other hand, supporting the narrower duty can result in the replacement of shareholder profit maximisation with a social responsibility goal that is unclear, which can successfully enable the managers to pursue their own interests to the detriment of both shareholders and non-shareholders. Advocates of shareholders profit maximisation argue that firms that pursue shareholder wealth normally act in a responsible manner to the level that the responsibility itself becomes a strategy for improving profits. Then again, caution must be taken for the legal duty’s constraining value not to be not to overstate. Therefore, pursuing wealth for the shareholders can be viewed from two perspectives; the view for the pure profit-making view and that for constrained profit-making. The former was demonstrated by Carr’s (1968) as cited by Branco and Rodrigues (2007, p.6). According to Carr, some level of dishonesty is tolerable in the business world, simply because the moral standards held by business persons is lower than the rest of the society. Thanks to the lower moral standards, Carr argues that business can ‘bluff’, which involves practices such as exaggeration, pertinent facts concealment, or conscious misstatements. Furthermore, Carr asserts that deception is an important strategy component that makes the business successful; therefore, ethics cannot be used to guide business persons. For Carr, it is the legal right of a corporation to shape its strategy by focusing only on its profits, provided that it follows the rules of the game set out legally by law. On the other hand, the view for constrained profit-making is largely evidenced by Friedman, who argues that it is the moral duty of the companies to act in good conscience: specifically, companies should not engage in fraud and deception. According to Friedman, the responsibility of the business is to utilise its resources so as to participate in activities that could increase its increase shareholders wealth provide that the activities are in line with the rules of the game. Branco and Rodrigues (2007, p.6) posit that as shareholders’ agents, it is the responsibility of the managers to conduct business according to shareholders’ interest. Nowadays, the CSR conception as good stewardship of human resources and the economy of society has become more appropriate and reasonable (Lantos, 2001, p.601). It is the obligation of the companies to take into account the society’s long-run wants and needs; therefore, they should engage in activities that are beneficial to the society and negative effects associated with their actions should be minimised. Still, it is the responsibility of the company to remain unbiased while engaging in CSR activities. Rodriguez et al. (2002, p.142) believe that the company’s mission should not only focus on creating wealth for the shareholders but should also facilitate the identification of opportunities that can benefit both the shareholders and the society. The business’ economic responsibility is producing goods and services, which are desired by the society and selling them at a profit. In so doing, businesses achieve their main responsibility as society’s economic units. On the other hand, the business’ legal responsibilities imply the negative and positive obligations put forth by law on the businesses with the focus on the society wherein they operates. In regard to the nature of these obligations, Carroll and Shabana (2010, p.91) argues that the business legal responsibility involves the entirety of the business responsibility towards society. In view of these responsibilities, the motive to create wealth for shareholders depends on numerous cost-cutting initiatives carried out by the company, which involves benefiting shareholders at the cost of other stakeholders, especially the employees. For instance, the quest by U.S. companies to reduce labour costs has resulted in the offshoring of many jobs, which has led to underemployment unemployment as well as declining or stagnant incomes for the majority of middle and lower-class employees (Jones & Felps, 2013, p.210). Therefore, the need to scrutinise companies pursuing shareholder wealth maximisation is increasing with the objective of promoting improved social welfare. According to Sharfman (2014, p.430), corporate law creation, as well as application, involves a long-term struggle of finding an ideal amount of autonomy in decision-making, which must be offered to the company’s board of directors. This optimal point would facilitate the decision-making with regard to maximising the wealth of the shareholders. As opined by Windsor (2011, p.452), the argument that shareholder wealth maximisation should be the main corporate objective is a standard assumption that is prescriptive in the finance as well as economics literature. Basically, oppositions to strict shareholder wealth maximisation are mainly sourced from corporation law and business ethics, stakeholder theory, as well as corporate social responsibility. Windsor (2011, p.452) posits that the corporate objective is clearly comprehended in principle as a constrained maximisation while in practice it is relaxed to searching of constrained wealth. According to deontological ethics, corporations are not allowed to commit any wrongs while from a financial viewpoint, a wrong conduct can be costly to the company in terms of loss of trust and reputation, civil liabilities and fines, as well as high compliance costs induced by integrity erosion. While maximising the economic value of their shareholders’ investments, companies should ensure the economic value is not misappropriated by managers acting as opportunistic agents. Basically, the opportunistic agents can undermine the company’s efforts to meet the legal requirements while pursuing shareholder wealth. Conclusion In conclusion, this paper has demonstrated that the actions undertaken by a corporation in the pursuit of shareholder wealth can be justified provided they follows the rules of the game set out legally by law. As mentioned in this paper, arguing that it is the company’s ethical responsibility to act in a way that is not favourable to the financial wellbeing of the shareholders is both conceptually and logically inconsistent. Considering that the purpose of creating the business is to increase the wealth of the shareholders. Therefore, claiming that the corporation (which is a state’s artificial creation) is prescient in the assessment of social responsibilities is logically inconsistent. When performing activities that are not in line with creating shareholder wealth provides a means for people to divert shareholders’ wealth to others. This normally results in managerial chaos and/or corruption. Therefore, company’s fiduciary responsibility to shareholders is the capitalism bedrock, and without it capitalism would become weak. Maximising shareholder wealth while remaining compliant to the existing laws is challenging, but it is important because it prevents loss of trust and reputation, civil liabilities and fines, in addition to the high compliance costs associated with the erosion of integrity. Importantly, the mission of the business as cited in this paper should serve the interests of both the owners (shareholders) and the society at large. References Branco, M.C. & Rodrigues, L.L., 2007. Positioning Stakeholder Theory within the Debate on Corporate Social Responsibility. Electronic Journal of Business Ethics and Organization Studies, vol. 12, no. 1, pp.5-15. Carroll, A.B. & Shabana, K.M., 2010. The Business Case for Corporate Social Responsibility: A Review of Concepts, Research and Practice. International Journal of Management Reviews, vol. 12, no. 1, pp.85-105. Jones, T.M. & Felps, W., 2013. Shareholder Wealth Maximization and Social Welfare: A Utilitarian Critique. Business Ethics Quarterly, vol. 23, no. 2, pp.207–38. Lantos, G.P., 2001. The boundaries of strategic corporate social responsibility. Journal of Consumer Marketing, vol. 18, no. 7, pp.595-630. Lee, I.B., 2005. Corporate Law, Profit Maximization and the “Responsible” Shareholder. Stanford Journal of Law, Business & Finance, vol. 1, pp.1-35. Rodriguez, M.A., Ricart, J.E. & Sanchez, P., 2002. Sustainable Development and the Sustainability of Competitive Advantage: A Dynamic and Sustainable View of the Firm. Creativity and Innovation Management, vol. 11, no. 3, pp.135–146. Sharfman, B.S., 2014. Shareholder Wealth Maximization and Its Implementation Under Corporate Law. Florida Law Review, vol. 66, no. 1, pp.289-431. Vranceanu, R., 2013. Corporate Profit, Entrepreneurship Theory and Business Ethics. Working Paper. Cergy, France: ESSEC Working Paper. Wilson, T., 2005. The pursuit of profit at all costs: Corporate law as a barrier to corporate social responsibility. Alternative Law Journal, vol. 30, no. 6, pp.278-82. Windsor, D., 2011. Shareholder Wealth Maximization. In Boatright, J.R. Finance Ethics: Critical Issues in Theory and Practice. Hoboken, New Jersey: Wiley. pp.437-55. Read More