Ethics Theory and Business Practice
Student Resources
The Responsibilities of Business Executives
Chapter Summary
Chapter 10 addresses a question that is central to business ethics: what are the ethical responsibilities of corporate executives. Two contrasting responses to this question are discussed. First, the approach of shareholder theory is explored, which proposes that executives are primarily responsible to their shareholders. Next, a contrasting perspective, normative stakeholder theory, is outlined, which proposes that executives have broader ethical responsibilities. Some compelling rationales in favour of each of these perspectives are explored. Two other perspectives, which sometimes lead to confusion about executive responsibilities, are also outlined and their relationship to shareholder theory and normative stakeholder theory are considered.
Self-test Questions
The Primacy of Shareholders
1. Explain what a shareholder is, listing some different types of shareholder.
2. What, according to shareholder theory, is the prime responsibility of a business executive?
Some Supporting Rationales for Shareholder Theory
3. What, according to Milton Friedman, is the difference between acting as an agent and acting as a principal?
4. What does Friedman propose business executives should do when they act in their role as the agent of shareholders?
5. Why does Friedman think that corporate social responsibility is a ‘fundamentally subversive doctrine’, which interferes with people’s right to exchange property as they choose?
6. Why, according to Friedman, is a business executive who devotes company resources to social and environmental causes guilty of usurping the role of government?
7. Describe some ways in which rights figure prominently in Friedman’s arguments.
Normative Stakeholder Theory
8. Who, according to normative stakeholder theory, do business executives have responsibilities to?
9. How does normative stakeholder theory differ from instrumental stakeholder theory?
10. Describe a situation in which the conclusions of enlightened shareholder theory would differ from those of normative stakeholder theory.
11. When might it be in the long-term interests of shareholders for business executives to ignore their responsibilities to a particular group of affected stakeholders?
Some Supporting Rationales for Normative Stakeholder Theory
12. Give an example of an investment that each of the following might make in a company: a shareholder; an employee; a customer; a supplier.
13. Explain how shareholder theory entails treating all other stakeholders purely as a means to the end of generating shareholder wealth.
14. What might a business executive do to avoid treating stakeholders purely as a means to an end?
15. List some ways in which businesses depend for their success on resources and services provided by society.
16. List some ways in which the normative stakeholder theory rationales described in the book differ from those offered in support of shareholder theory.
Web Links
and
The Adam Smith Institute and the Cato Institute are economic-libertarian institutions in the UK and the USA respectively, which are dedicated to promoting the principles of free economic markets. Although not explicitly associated with shareholder theory, both institutions support the economic approach advocated by Milton Friedman and, like Friedman, they are generally opposed to intervention in business activity on social or environmental grounds.
and
The Work Foundation and the New Economics Foundation are, respectively, UK- and USA-based institutions dedicated to exploring ways in which work and business activity in general can be more effectively linked to social purposes. The perspectives they offer are therefore closely aligned to that of normative stakeholder theory.