Introduction
Business administrators and scholars often debate about the goals that managers have to achieve. It is often believed that these professionals should be mostly concerned with the wealth of owners and shareholders.
Such an assumption can seem quite plausible, because every company will cease to exist provided that it does not bring revenues to its investors. However, it also has to create the value for customers, community and employees.
Without it, the very sustainability of this organization can be put under threat. Moreover, a manager who thinks only about financial benefits, can compromise his/her ethical principles.
This paper is aimed at showing that maximization of profits can be possible only if the management of a company strives to follow both ethical and legal rules. Their main goal is to create value for customers, employees, and the society in general.
They should not focus only on the needs of owners or stockholders. This is the main thesis that should be discussed. The first section of this paper will analyze theoretical origins of the belief that the primary objective of management is to maximize the wealth of owners.
In particular, it is necessary to focus on the works of Milton Friedman and the way in which his ideas could be misinterpreted. Moreover, this section will show that long-term profitability of businesses is impossible without ethics and social responsibility.
The second section will identify the benefits of creating value for various stakeholders. Finally, the third section will examine the dangers of thinking only about financial performance and profitability.
Profits as a core objective of management
The idea that wealth maximization should be the top priority for managers has been discussed in the works of many economists. One of them was Milton Friedman who argued that businesses had to concentrate on their profitability (Friedman as cited in Cosans 2009, p. 391).
This argument could be very appealing to many corporate executives because by adopting this approach they could resolve or even dismiss many ethical dilemmas and problems. Moreover, many business administrators assumed that a company could do whatever it deemed necessary provided that these actions did not contradict the law (Cosans 2009, p. 392).
Therefore, this business philosophy frees an organization and its managers from many restrictions and obligations that can be related to the rules of ethics. This is why it enjoyed popularity for a long time. Even now many business administrators apply this principle, even though they can speak about corporate social responsibility of their companies.
Unfortunately, many business administrators and even scholars simplify the ideas of Milton Friedman. In fact, he did not exclude ethics from the functioning of companies. He said that the activities of a profit organization “should be conforming to the basic rules of society” (Friedman as cited Cosans 2009, p. 393).
Overall, he placed emphasis on such issues as compliance with the law, unacceptability of deception, and openness of the company (Friedman as cited Cosans 2009, p. 396). This entity was not allowed to disregard the needs of other stakeholders such as customers or workers.
This is why ethics and profit seeking should not be separated from another. Thus, even if managers believe that their main task is to increase the wealth of owners and stockholders, they should not try to achieve this objective at any cost.
Business administrators or corporate executives have to reconcile the needs of an organization with legal and ethical standards; otherwise their work can hardly be viewed as successful.
Thus, those managers pursuing profits at any cost should not suppose that many scholars support this approach. There is no way in which one can reject the restrictions of business ethics.
Ethical aspects of businesses continue to attract the attention of many scholars and many of them believe that ethics and responsibility are necessary for successful functioning of markets or even entire economies.
For instance, William Shaw (2009) admits that businesses are driven by self-interest, yet, he also points out that by following only economic players can achieve long-term benefits only if they follow a certain set of rules (p. 568).
To a great extent, the situation reminds the so-called prisoner’s dilemma in which a player has to sacrifice some of his/her interests in order to succeed (Shaw 2009, p. 567).
For instance, car manufacturers have to place much emphasis on the safety of their customers, even though they have to incur extra expenses and even recall many cars. Provided that they choose to neglect this issue, they can simply lose the trust of their clients.
In this regard, one can mention the notorious case of Ford Pinto. The management of Ford Corporation chose not to recall the car that had a poorly designed gas tank (Danley 2005, p. 234).
When this information was revealed, the reputation of Ford Corporation suffered a severe blow. More importantly, their revenues began to decline. This case illustrates that ethics has to be an inherent part of businesses activities, because without them, no form of cooperation will be possible.
The thing is that business activities are premised on long-term cooperation and the formation or partnerships or alliances (Solomon 1999, p. 18). They can hardly exist provided that partners think only about their self-interests. Apart from that, this example shows that companies are dependent on many stakeholders, for instance, customers.
Although, they do not own stocks of a company, they can strongly influence this organization. In this context, the term stakeholder can be defined as every person or organization that can affect a company is affected by it (Fassin 2012, p. 85). This is another reason why profit maximization cannot the sole objective of managers.
On the whole, managers should not assume that ethical decisions always run against the self-interest of a company or individual. This is the assumption that only harms many businesses.
Profitability and responsibility toward various stakeholders are quite consistent with one another. This is the main issue that business administrators should consider. Such scholars as Bryan Husted and Jose Salazar (2006) argue that modern firms should not be forced to behave in a socially responsible way (p. 75).
Under such circumstances, they will act as “coerced egoists” (Husted & Salazar 2006, p. 76). Most likely, the managers of these organizations will only speak about social responsibility without actually practicing it.
The main argument of these authors is that the ethical principles should be imbedded into the strategies of an organization.
In their belief, the goals of stakeholders and stockholders do not oppose one another. In fact, one should draw a line between them.
Managers should remember that it is possible to increase the wealth of stockholders without compromising ethical and legal norms. The following two sections will discuss various rationales for behaving in a socially responsible way.
Creation of benefits for stakeholders
At this point, it is necessary to demonstrate why managers should pay attention to the needs of various stakeholders. First, even if a person assumes that the task of a business is the maximization of profits, there is still no clear-cut strategy for attaining this goal (Shaw 2009, p. 573).
The need to increase revenues does not actually show the path that managers should take. Thus, one still has to evaluate alternative strategies that are available to the company. Some of them can correspond to the standards of corporate social responsibility while other cannot.
In his article, David Ahlstrom (2012) points out that the most successful companies have some features in common; in particular, they are willing to create innovative goods or services that benefit customers and society (p. 12). These organizations create employment opportunities in the community and make the lives of people more comfortable.
In other words, these companies strive to create value for various stakeholders. They have some of the following characteristics: 1) the empowerment of employees; 2) customer orientation; 3) the adoption of eco-friendly technologies; 4) accountability of corporate executives (Bejou 2011, p. 3).
These are the most distinctive traits of these organizations. Among them one can distinguishing such corporations as Apple Inc, Google, AT&T and many others.
They occupy leading position in their markers. These examples are important because they show that a responsible behavior of a company does not necessarily harm its financial performance.
Furthermore, one should take into account that people’s attitude toward businesses have evolved within the last fifty years. According to David Ahlstrom (2012), contemporary societies expect companies to bring benefits to the community (p. 22).
These organizations should be accountable to both governmental organizations and community in general (Smith 2003, p. 63). Thus, a company that is driven only by self-interest will find it difficult to achieve success. The idea that revenues are the only goal of a business, could be acceptable thirty or forty years ago.
However, it cannot be easily tolerated by people who live at the beginning of the twenty-first century. In the modern world, corporate social responsibility is a norm that an organization should adhere to.
This is one of the issues that corporate executives should not overlook if they want to be successful in the workplace. It is hardly permissible to assume that advanced societies will tolerate pure pursuit of profits at the expense of the entire community.
Furthermore, it is necessary to point out that for-profit organizations influence and can be influenced by a variety of people or organizations. Among them, one can single out stockholders, customers, governmental organizations, employees, trade unions, environmental organizations and so forth.
Admittedly, stockholders occupy the most important place, because they invest capital in a company. Any company will simply go bankrupt provided that their needs are not fully met. Their prosperity should be the main priority for management.
However, one should not disregard other stakeholders, such as customers or workers. They can affect the public image of an organization, its revenues, and internal performance. Without their commitment the very sustainability of a company can be jeopardized.
Those business administrators, who focus only on the wealth of stockholders, can forget that their companies depend on other people, for instance, customers whose attitudes can profoundly impact the sales rates every company. Such corporate executives can actually lead the companies to stagnation.
Therefore, managers should determine the way in which certain stakeholders can affect a company. In this way, they can better develop long-term strategies of this business. The main point is that businesses and stakeholders are interdependent entities and they have to find solutions that benefit each side.
Additionally, one should note the majority of successful companies are those ones which were able to win the trust of loyalty of the employees who are very influential stakeholders.
If these people feel that they are valued by the organization, they will be more likely to be committed to the goals that the management sets (Bejou 2011, p. 4). They will be willing to defend the reputation of a business.
More importantly, these people can hardly accept an idea that they are treated only as means for increasing the wealth of shareholders. If they realize that the management does not attach much importance to their needs, they will fewer incentives to work harder.
The management will be able to motivate them only with the help of financial rewards or punishments. Moreover, one can even expect them to violate the rules that the management sets. Employees can also be considered as stakeholders and they can shape financial and organizational performance of every company.
For instance, they can affect the company’s relations with its clients. Therefore, a good manager will try to find a compromise between the needs of these people and the interests of stockholders.
This is one of the main tasks that corporate executives should try to cope with when they will develop long-term strategies of companies.
When discussing the need for corporate social responsibility, one should not focus only on ethical considerations. It is also possible to mention economic rationale for adopting this strategy.
The study carried out by Pieter van Beurden and Tobias Gössling (2009) shows that companies, which adhere to the principles of CSR, usually yield better results (p. 409).
These authors identify various forms of corporate social responsibility, namely, philanthropy, accountability to the public, environment protection, and promotion of diversity in the workplace (Beurden & Gössling 2009, p. 409).
These scholars found a positive relationship between the ethical behavior of an organization and its financial performance.
Socially responsible business activities can positively affect market return, share price appreciation, and stock performance (Beurden & Gössling 2009, p. 411). Surely, in each case, the degree of positive influence varies, but there is a marked correlation between business ethics and improved performance.
Moreover, the researchers single out other benefits of corporate social responsibility (CSR).
For instance, Jacqueline Cramer and Fred Bergmans (2003) identify the following advantages that CSR can bring: 1) a good reputation that is earned through ethical business practices; 2) improved energy efficiency that can be achieved through the use of alternative energy technologies; 3) greater commitment of workers; and 4) the trust of customers (p. 50).
Some of these benefits can be measured quantitatively, in particular, economic efficiency, in turn, some of the advantages are intangible. Yet, in each case, CSR can give a company competitive advantage over its rivals.
Yet, this goal can be attained only if managers strive to reconcile the needs of different stakeholders who do not necessarily have to be owners or shareholders. A good company should be able to identify the ways in which it can influence others; they also have to think about the possible impacts of stakeholders on their performance.
This knowledge will help this organization acquire and retain leading positions in the market. The following section will focus on the risks that managers take when they focus only profitability.
The drawbacks of disregarding corporate social responsibility
Some corporate executives may be reluctant to follow the principles of CSR because possible advantages do not always yield numerical measurement. This is why one should mention that increased emphasis on the revenues can actually harm a company in the long-term.
The thing is that such an organization can become unwilling to adopt new business models or technologies. In many cases, corporate executives pay attention only to the short-term profitability of their businesses and overlook the needs and values of other stakeholders.
Secondly, they can overlook the risks that are associated with the pursuit of profits. Such corporate leaders can overlook the dangers to which their companies can be exposed to (Christopoulos, Mylonakis, & Diktapanidis 2011, p. 11).
They often forget that in most cases such a strategy only harms a business. For example, one can mention such a company as Lehman Brothers. This management of this corporation was primarily concerned with the increase of short-term profitability (Christopoulos, Mylonakis, & Diktapanidis 2011, p. 11).
Very little attention was paid to the obligations that Lehman had toward investors and their interests. Yet, they did not to assess the threats to which they were exposed. As a result of this policy, many employees and investors lost their money.
One can even argue that the recent financial crisis can largely be explained by unscrupulous policies of many businesses and unwillingness to think about long-term growth of businesses.
Thus, managers should remember about the dangers of looking only at financial performance, and disregarding the social performance of a company. As it has been said before, profitability of a company and ethical behavior are usually inseparable from one another.
It should be noted that the majority of modern companies are not monopolies. Only such organizations can dictate their terms to the customers and sometimes even to the entire community. Nevertheless, the number of such monopolies was reduced to a minimum.
As a rule, contemporary businesses have to face severe competition. They have to differentiate themselves among others only by creating a distinct value for the customers. Provided that this goal is not achieved, a company will become stagnant or simply lose its positions in the market.
Those companies that are driven by the pursuit of profits often fail to identify the needs and values of customers. Therefore, it will be difficult for this organization to differentiate its products from those ones manufactured by its competitors. In the future, the revenues of this company may decline.
Thus, mere pursuit of revenues can actually be self-defeating because it does not allow a company to create innovative products. Thus, managers should take this possibility into account and minimize such risks.
Furthermore, one should not forget that businesses can be affected by governmental organizations. For instance, there are environmental agencies, departments of labor, internal revenue services, trade commissions, and so forth.
They are able to impose fines on the company or develop regulations that can restrict the activities of many businesses. These institutions have the capacity to coerce every company.
Besides, those businesses that disregard the rules of ethics often have to face many lawsuits. Sometimes, the costs of these lawsuits can be devastating for an organization.
Thus, there is a distinct and economic need to think about the needs of the community, customers, or employees. Loss aversion may not be the most ethical reason for behaving in a socially responsible way, but even in this way one can see that an unethical business is more likely to fail.
Managers, who are concerned only with revenues, run the risks of violating the law and losing money. So, one can argue that there are legal reasons for thinking about corporate social responsibility.
Conclusion
This discussion indicates that profitability of an organization should not be separated from ethical considerations because without them businesses will not be able to achieve sustainable growth.
Secondly, even if managers assume that their task is to increase the revenues of owners or stockholders, they should not forget that this goal can be achieved only if they meet the needs of various stakeholders, namely employees, customers, governmental organizations, and the community in general.
They are capable of boosting the financial performance of a company, but they also can ruin it. The most rational strategy for a business is to accept the idea that self-interest should be restricted by ethical constraints, especially the necessity to promote the wellbeing of a community.
Overall, special attention should be paid to customers, workers, and governmental organizations since they are the most influential stakeholders. The managers have to find a way in which the financial goals of a business can be made consistent with the principles of corporate social responsibility.
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