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Philosophical dispute
This week the important lesson to draw from the rocketing financial scandals and stock market crash in the US and further afield is that at the heart of every serious economic crisis of capitalism there are a number of major philosophical disputes and contestations. In this instance our discussions have so far underscored the fact that much of the blame for the present crisis can be located in questionable business ethics. There is little doubt that unethical business behaviour has precipitated the collapse of two of the largest firms of all time, Enron and WorldCom. Since then, a philosophical debate has resurfaced in the USA about the nature and meaning of business ethics.
Business ethics
In the wake of business scandals in the 1970s and 1980s, business ethics became a major focus of public attention. This led to immediate action, as is customary in the US. Business ethics was soon introduced as a subject into universities and taught in all business schools. Frequently it was made a compulsory requirement for students. The practice also developed for major corporations to recruit in-house ethics officers and publish ethical guidelines for their employees. The question that arises therefore, is why with this strong professional and academic focus on business ethics, should a major crisis develop around unethical practices in some of the largest and most renowned corporations in the USA?
Two explanations are usually offered for this outcome. One is that ethics initiatives taken in US corporations rarely tackle what are termed as 'root causes' of unethical behaviour. By root causes are meant the systemic issues of incentives, deterrents, and controls within corporations. The other response is that there is an on-going fundamental contest between two schools of thought about the nature and operations of the capitalist firm. The dominant school is held responsible for the current mess, because its views prevail in the classroom and form the consensus today.
Stakeholder view
The two schools of thought are labelled as 'the stakeholder' and 'the shareholder' theories of the capitalist firm. The former school is the dominant one and represents consensus among academics, teachers, and practitioners in the USA. In a nutshell, the stakeholder view of the firm is that the 'managers' of a firm (its executive officers) are obligated to serve the interests not only of the owners of the firm (shareholders), but all those who have a 'stake' in it. Those who have a stake in it are all those who can affect or are affected by the firm. According to this theory, there are five major categories of stakeholders.
First, there is the category of 'shareholders,' that is, those who own the stock or equity of the firm. The firm legally belongs to this group. Second, there are the 'employees' of the firm, who depend on it for their livelihoods and contribute to the production and therefore earnings of the firm. Third, there is the category of 'suppliers,' that is, all those who provide through sale, inputs into the firm's production process. These inputs include raw materials, capital equipment, infrastructure, utilities and other services to the firms. Their activities clearly affect or are affected by the firm. Fourth, there are the 'customers' of the firm, that is, all those who while deriving satisfaction from their purchases, in doing so provide income to the firm through sales. Fifth, there is the wider 'community' in which the firm operates.
The stakeholder theory recognises multiple interests and expects there to be conflict in reconciling these interests from time to time. In their view it is the task of the managers/executive officers to strike the 'right balance' among these five competing interests. It is from this obligation to find the 'right balance' that their primary ethical responsibilities flow.
Shareholder view
The shareholder theory of the firm is distinctly different. Here managers/executive officers are seen as confined exclusively to serving the interest of the firm's owners, the shareholders. Their social responsibility, as Professor Marcoux puts it, is limited to "making good on contracts, obeying the law, and adhering to ordinary moral expectations." Obligations to the other four stakeholders are unnecessary, unwarranted, and unjustified restraints on shareholders' interests. Supporters of the shareholder theory further argue that the law does reflect (and indeed can only properly reflect) the shareholder view of the firm.
From these perspectives we can see how the different philosophical treatment of business ethics poses problems. From the standpoint of the shareholder view, the only worthwhile goal of the firm is to increase its profits. Ethical responsibilities should only flow from this and existing laws define the moral requirements of this position. The stakeholder view however, tries to compromise between the sole pursuit of profit and minimising the ethical dilemmas that capitalism generates. The difficulty that arises, however, is how to make the law in practice reflect this objective. It is believed by some that this cannot be done legally. And, to the extent that it cannot be done legally, the shareholder theorists argue that by asking managers/executive officers to serve many masters at the same time, the situation effectively frees them from all masters! In being answerable to all, they become truly answerable to none. In this circumstance it is almost impossible to contain the gross managerial excesses we have witnessed in Enron and WorldCom, and other corporations.
In Guyana and the Caribbean, the stakeholder view of the firm also holds sway. If the shareholder theory has any merit to it, the future looks grim indeed.