Social Responsibility Perspectives: The Shareholder and Stakeholder Approach

It was Milton Friedman, the famous nobel prize
winning economist, who once said there is one and only one social responsibility of
business—to use its resources and engage in activities designed to increase its profits
so long as it stays within the rules of the game. Friedman's comments characterize one of two
perspectives related to business social responsibility. On one hand we know that the primary objective
of a business is the attainment of profits. But does that mean that profits are the only
factor that business managers should consider when making decisions? Before we go into greater detail on the different
perspectives related to social responsibility, lets define the term. Social responsibility can be defined as a
businesses obligation to make decisions that ultimately benefit society. The issue that I'm sure you're beginning to
realize, is how does a business engage in actions that benefit everyone? This is a very difficult task, however business
managers must be able to balance these competing interests. But lets get back to Friedman and the shareholder
model. Friedman felt that business social responsibility
was pure and unadulterated socialism, and even compared businesses that engage in social
responsibility efforts to government institutions. So why is Friedman so adamantly opposed to
social responsibility? Well there are in fact a few different reasons. First lets take a look at how most large businesses
are structured. For liability and financing purposes, many
large businesses are structured as C-Corporations. Now the only thing you need to know about
C-Corporations to understand Friedman's argument is their composition. The key parties of C-Corporations include
shareholders, the board of directors, and corporate officers. The shareholders are those individuals who
invest their money in the company in exchange for a percentage of ownership and typically
voting rights. This makes shareholders the actual owners
of the company. Since shareholders doesn't necessarily have
the time or expertise to make company decisions they elect the board of directors, who appoint
corporate officers to manage the day-to-day operations. And since shareholders, who again are the
owners, can't make the decisions it's the responsibility of the corporate officers to
make decisions that are in the best interests of the shareholders. And what is more important to shareholders
than profit? So it is the responsibility of a corporate
executive to make as much money as possible, while of course operating within the rules
of the game, which refers to established laws. Now engaging in what is termed social responsibility
is in direct conflict with the shareholder model because it diverts resources and energies
away from profit maximizing behaviors. Take for instance giving to a charitable organization. Friedman isn't arguing against donating to
your local church, but he is arguing that a business is not the appropriate vehicle
to do it. For one, finding a cause that all of its shareholders
agree with would be nothing short of a miracle. And secondly, by spending energies and resources
on social responsibility the business is giving up those alternatives that it may have otherwise
engaged in. Those alternatives may produce more of a benefit
for the business. Instead Friedman believed that businesses
should pursue profit maximization, essentially making as much money for shareholders as possible,
and with that extra cash shareholders could donate to whatever organization they wish. Friedman's views of course represent just
one of the two perspectives related to social responsibility. The second perspective is known as the stakeholder
model, and maintains that businesses have a responsibility to not only seek profits,
but to also satisfy the interests of multiple stakeholders. These stakeholders represent individuals or
groups that have an interest in the actions and behavior of the business. The idea behind the stakeholder model, is
that business managers need to maintain a positive relationship with society and their
environment if they are to operate effectively. Failure to do so can harm a businesses reputation
and ultimately affect their ability to operate. Now since all stakeholders do not have the
same influence on an organization, we commonly separate them into two categories: primary
stakeholders and secondary stakeholders. Primary stakeholders represent those individuals
or groups who have a greater influence on the organization. They include a business's customers, employees,
investors, suppliers, government agencies, and the local community. These groups are of utmost importance because
the business relies on them for long-term survival. Think about the impact on a business if its
customers stopped buying products, or investors withdrew their investment. Under the stakeholder model, business managers
top priority should be satisfying the various interests of these groups. Although secondary stakeholders are not as
critical as primary stakeholders, they still can influence public perception of the business. Common secondary stakeholders include special
interest groups and the media. These groups don't conduct business regularly
with the organization, but what they communicate or choose to communicate can have an impact
on public perception. Just look at the efforts that oil and gas
company British Petroleum has gone to in order to repair its battered image in the wake of
the Deepwater Horizon oil spill. Although the criticism was certainly warranted,
special interest groups and media played a significant role in transmitting information
related to BP's decisions that led to the explosion and subsequent oil spill. Now that we've outlined both the Shareholder
and Stakeholder Models, and as we finish up this video, I want to leave you with a parting
question. Should business managers subscribe to the
shareholder model or stakeholder model ? Perhaps a better question is If you were the business
manager making the decisions, which model would you follow? If profitability is a businesses objective
than is it wrong to make decisions with that objective in mind? Although you could certainly make the case
that cutting costs to boost profits in the short-term didn't benefit BP in the long run. So maybe acting socially responsible is less
about being socially responsible and more about being profitable. It could be that being socially responsible
is in fact good for business, and not pure and unadulterated socialism as Milton Friedman
suggests. Even if business managers only consider the
interests of stakeholders for the incentive of profits, doesn't everyone win? Let us know what you think in the comment
section below. And while your leaving that comment, go ahead
and click the like button, assuming of course that you enjoyed this video. And remember to subscribe to Alanis Business
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32 thoughts on “Social Responsibility Perspectives: The Shareholder and Stakeholder Approach

  • Yes! I believe "If managers only consider the interest of stakeholders for the benefit of profits" that alone will create a win-win solution. The other needs of Stakeholders should be met by other means & with the assistance of government.

  • Funny thing that one of the main, under-represented groups of Stakeholders are the employees. Not addressing employee concerns leads to high turnover which is far more costly than taking care of your employees. See the absurdity? Social responsibility in the form of donating to charity or re-investing in your business's community are at best tertiary to that issue but no one talks about it directly.

    In terms of shareholder value vs. stakeholder value model being better, stakeholder value. Shareholder value approach is unsustainable. In the extreme in a Capitalist society like the United States when the majority of workers are marginalized because they aren't consider share holders what ultimately happens is political and social upheaval. We are starting to see cracks in the system right now in the United States. Extreme political protest groups on the left and right like Antifa and the White Nationalists are starting to grow in numbers and protesting with violence that has not been seen in decades. The end game for that is not in anyone's best interest. Everyone LOSES.

    The good news is baby boomers are the ones that evangelize this particular rhetoric of Friedman. Very few young people (<= 40 years of age) agree with his views on this and that is a good thing.

  • Very helpful. My lecturer at the university showed this video to us. Like the way you speak. Thank you.

  • What is so misunderstood about Friedman's doctrine is that it is not mutually exclusive; it is indeed possible to serve the primary interests of the shareholders while still generating positive externalities on all other stakeholders. The stakeholder model assumes that whenever profits are maximized only negative externalities are generated. This is emphatically not the case. One of the essential principles of capitalism is that when an individual pursues his or her own self-interests, he or she benefits society. Milton is in no way advocating for businesses to never give charity or do good for society, rather, he is invoking that it is their will to do so. Most businesses are started not because the founder wanted to help society but because he was pursuing his own self-interests. Once that business grows large enough, the owner may find that the swift and savvy methods he is employing to generate profits are no longer optimal. The business owner may then figure out that by contributing to society, directly through his business, he can, in fact, increase his profits in the long-run. This additional gain to society wasn't a result of the business owner utilizing the stakeholder model, but rather, a product of the business owner, again, pursuing his own separate interests. Milton had a phrase for corporations who were witty enough to figure out that by cultivating a persona of social responsibility, they'd increase profits–"window dressing." Milton expressed his own concerns of corporations attempting to reinvent themselves as "socially responsible" in the press, as he believed it would do more harm for business than good (I don't have time to address this now, but my prior points still stand). Nevertheless, the thesis of the shareholder model is that "when individuals pursue their own interests, society benefits," while the stakeholder model is based around a completely flipped notion of "when individuals pursue society's interests, they benefit themselves." The latter of which is essentially the equivalence of socialism. Lastly, in case I forgot to address it, I am aware that negative externalities can be generated by businesses. This is true. However, that doesn't mean we should go about completely reinventing capitalism when the answer(s) has always been there. Milton explicitly says that businesses should be able to do as they will, so long as they stay within the rules of the game. It is not the job of CEO's to make laws that regulate all business activity, but rather the government's job. Corporations can either fix the externalities themselves or wait until the heavy fist of government comes down from above them and completely ruins their state of efficiency.

    I believe people have profoundly misinterpreted what Milton Friedman had in mind when he was writing his original piece and have created models in opposition to these flawed visualizations that are abominations to free enterprise systems. Please excuse any grammar/spelling errors and feel free to respond. Thanks.

  • I definitely to choice the stakeholder approach for long term and shareholder one for short term.
    The primary and utmost important of a business is making profits as a prerequisite for survival!
    Without profits there were no resources, no resources means no any impact could be!

  • If Shareholders may not have the education, background or expertise to know what's best for the company can you tell me some issues that could occur when they elect the Board of Directors with their own agendas or motives taken into consideration? What if they haven't taken the time to do their due diligence about the company, their background, sales strategies, etc?

  • I love this. Very simple and easy to follow. The Stakeholder Approach is the best. A win-win for all

  • Very Informative we're watching this in my online Behavioral Management class. At the end of the video I actually understood what you were talking about so it was very helpful with the topic we're on.

  • It is very important for the business to optimize their profit for its shareholders. However, when the business focuses on only profit, they might lose big one in the long-run. By contributing a manageable amount of its profit to the society, they can build a good reputation, earn a favor from the stakeholders, and eventually they would increase more profit. I don't think that a business is only a money maker. Business and society are interdependent. When society survives, so does business.

  • I agree with Friedman's position – "The business of business is business". Investors, when they are looking to buy shares, want to get the most profitable ones. It should not be CEO's responsibility to spend investors' potential profit. Shareholders should decide themselves what to do with it.

  • I think it is totally related to the objectives of the business and the nature of the business as well as the size of the organisation. CSR is an expensive commitment for an organisation where a small company that is not achieving profit, CSR might not be an ideal commitment for them and only obey to the basic rules of ethics. While a MNE or big companies that are able to maximise their profit in a long run, CSR will add more value to their business and increase their reputation in the marketplace and society. To sum up, companies could move from a shareholder model to the stakeholder model in a long run to to be able to compete in the competitive marketplace.

  • it is very wonderful and accurate in empirically.  this beautifully explains its practical aspects. Please request to do more explain about strategy, resource based and shared value perspectives of CSR.

    Saminda Kodithuwakku(MBA).

  • 3 minutes ago  ·  Shared publicly 


    Please contact me through my e-mail. I really liked your video. Was very helpful. I'm gonna write my exam on introduction management soon. Your resources is really helpful. 

    Adwoa Kwartemaa5 minutes ago  ·  Shared publicly 


    Hi there,
    I'm a student enrolled in health care administration at Athbasca university. My question is do you teach other health care administration courses? If so can you turtor me. Here is my email: [email protected]

  • Have a test tomorrow, wish I have had seen this before… loved it, good speech pace and well described. Thanks


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