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Whats the Purpose of

the Firm?
Is it Merely
Generating Profits or
Managing
Stakeholders?

Introduction
Stockholders/Shareholders versus Stakeholders
Debate: Do Corporations have any responsibility
towards society?
Stockholders Approach Summed up by Danie De Vito
in Other Peoples Money(
https://www.youtube.com/watch?v=kqeCOv90TUo)
Shareholders Approach Summed up by Gregory Peck
in Other Peoples Money (
https://www.youtube.com/watch?v=xJRhrow3Jws)
Are they dichotomous or the debate generates false
dichotomy?

Stockholders Approach versus


Shareholder Approach: The Case of CIPLA
Do Pharma Companies have any Special responsibility
towards society?
Examine from the point of view of Shareholders versus
Stakeholders (debate) the question of corporate
imperatives and societal demands that CEO Hamied of
CIPLA is confronted with
Is CEO Hamied a humanitarian or a pirate?
CIPLAs Business Model: Is ot based on Stakeholders
approach?
Examine Big Pharmas Responsibility towards Society
Is there any multi-lateral solution where all firms can
make money and still save lives of the poor AIDS
victims

Stockholders/Shareholders
Approach
Based on Adam Smiths philosophy as enunciated in The Wealth
of Nations which can be summed up in the following 3 premises
Importance of free markets
Invisible hand of self-regulation
Importance of enlightened self-interest
A Brief Timeline
Earliest proponents in 20th century: Austrian School of Economics
(Frederich Von Hayek, Joseph Schumpeter) advocated laissez
faire
Chicago School: Overriding purpose of Firm is maximise
shareholder wealth
TCE and Agency Theory: Form foundations of currently existing
CG practices Focus on a) Monitor manger behaviour and b)
Provide incentives to managers to align interests with those of
stockholders

Milton Friedmans Thesis


on Shareholders
Approach
The Central Premise: Social Responsibility of Business is to
increase profits
The Rationale
Corporate executive is merely an agent of the principal
Not in sync with Friedmans division of labour in society
comprising of political mechanisms and market mechanisms
Executive should not step beyond his mandate of making
profits and go beyond his managerial jurisdiction
Executive should not assume the role of Taxman on the bases
of principles and consequences
Involves acceptance of the socialist view
Can lead to disastrous consequences ,for, it would lead to
interference from government/bureaucracy
Firedmans Important works( Capitalism and Freedom; Free
to Choose)

Stakeholders Approach
Who are stakeholders?: Groups/individuals who are affected by or
can affect the achievement of organizations objectives
Impetus: Build a framework thats responsive to managerial
concerns of being buffeted by unprecedented levels of
environmental turbulence and change
Timeline
Heart of the Stakeholders Approach: clinical studies of
management practitioners carried on over years in the University
of Pennsylvania through the Busch Centre, Wharton Applied
Research Centre and the Managerial and Behavioural
Research Centre
SRI: Pioneering work in 1960s Main contention being managers
needed to understand stakeholders concerns and develop
objectives that the latter would support-Led to emergence of four
distinct research streams during 1960s-80s,namely, a) Corporate
Planning b) Systems Theory c) Organizational Theory and d) CSR
These four went on to constitute the building blocks of the
Stakeholders Approach

Stakeholders Approach.. cont


Archie Carroll and Edward Freeman
Archie Carroll: Firm has 4 major responsiblities,namely, a) Economic, b)
Legal, c) Ethical and d) Discretionary
If firm creates values for stakeholders it creates value for shareholders
Freemans works prompted to raise the following queries
Who counts and under what circumstances
Hierarchy of salience can change depending on relative power of
stakeholders
Trade-offs become important
Stewardship Theory (Lex Donaldosn and Jim Davis): Human
beings may put others interests above
Social Capital Theory (Sumantra Ghoshal)
Organizational actors have proclivity for goodness and self enlightened
behaviour
Co-operation between employees and shareholders
Trust, goodwill, psychic benefits equally relevant
University of Michigans Ross B school runs Centre for Positive
Organizational Scholarship conducts research on factors like
compassion, positive identity, positive leadership and social capital

Building Blocks of
Stakeholders Approach
Corporate Planning
Environmental scanning to
facilitate prediction and
adaptation
Ansoffs Corporate
Strategy stressed
importance of identifying
critical stakeholders
Stakeholders as constraining
factors in realization of firm's
goals
Management should
understand limits set by
stakeholders and maximise
shareholders stock value

Systems and
Organization Theory
Stresses external links
Identifying stakeholders and
detect linkages b/w them is
critical for firms success
Development of collective
strategies that optimize
network is crucial
Thompson (Clientele)
developed the concept to take
into account groups outside the
traditional boundary of the firm
Limitations
Firms autonomy?
No obvious starting or ending
point

Building Blocks of Stakeholders Approach


CSR Approach
Broaden scope of stakeholder analyses
Imperative for management to build relationships
with previously estranged groups
Considers stakeholders as constraints like the
Corporate Planning school
Considers CSR as add on luxury than a core
input to corporate strategy

Salient Features of the Stakeholders Approach


1. Single strategic framework ,flexible enough to deal with
environmental shifts without requiring managers to regularly adopt
new strategic paradigms
2. A Strategic Management Process ( plots a new direction for firm and
considers how firm can affect the environment and vice-versa) and
not a Strategic Planning Process ( predicting future environment
and independently developing plans to exploit its position)
3. Central Concern: Direct a course for firm and no singular reliance
on one over-riding objective(maximise shareholders wealth) by
optimizing output-About balancing multiple relationships and
objectives
4. Encourages management to develop strategies by looking out from
firm and identifying and investing in relationships to ensure long
term success-Diverse stakeholders co-operate in long run if they
share core values Values are vital-Scholars add how morality and
ethics play a critical role
5. Prescriptive and descriptive-Crucial to develop concrete
stakeholders specific to firm
6. Integrated approach

Stakeholders Research in 4 Sub-fields

Normative theories of Business


Managing diverse stakeholders necessitates sharing core set of values
Enterprise Strategy (Schandel and Hofer): What do we stand for?
Donaldson and Preston : a)Normative(why should firms give consideration
to stakeholders) b) Instrumental and c) Descriptive
Corporate Governance and Organizational Theory
Williamson (Asset specificity and relevance of shareholders)
Freeman and Evan(Many stakeholders have firm specific stakes)
Jones (Central Paradigm combining TCE, Agency and Contract
Theories)
CSR and CSP
Mitchell, Agle and Wood ( Using criteria of power, legitimacy, and
urgency, developed principle of who and what really counts)
Waddock and Graves ( High level of CSP leads to increase in institutional
investing in stocks)
Strategic Management
Distinction b/w stakeholders analysis and management
Ethics is of critical concern
Environment a) Operating and b) Broader view
2 Basic Postures: Buffering and Bridging

Concluding Thoughts
Stakeholders vs Shareholders Debate is divided to
false dichotomy
Collins and Porras (Built to Last): Strong set
of core values important for long term financial
success of the firm( respect and opportunity in
HP, PPP in 3M, Bring Happiness to Millions in
Disney)
Challenges for Stakeholders
The Separation Thesis
Pragmatist perspective Management

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