Purpose of a Business Entity

Question:

Write a Literature Review on the theories available in relation to Business Organizations.

There has been a long debate in relation to the purpose of a business entity. The prima faice purpose of a business organization has always been towards making profits and ensuring that the investors and other shareholders get adequate returns for the investment made by them in relation to the organization (Smith 2003). However various contemporary studies have depicted that the aim of the modern day business is not merely to make profit, organizations also has a major role to pay in relation to the society as it is also one of the major stakeholders of the organizations (Weinstein 2013). This is because of the growing competition between various organizations goodwill has become point of distinction. The management of stakeholders in relation to the operations of an organization is a critical component. According to Sharplin (2003) any person, organization, group or the society who can be affected by or is likely to presume themselves to be affected by a particular operation is known as a stakeholder. Positive relationships are created through a process of effective stakeholder management. The position can be reached by an appropriate management process with respect to the agreed objectives and expectations of the stakeholders. One of the pillars of proper stakeholder management is the carrying out of operations of a business organization based on the principles of ethics.

Ethical principles have to be incorporated into the functioning of organization to ensure that the organization is able to make profit as well as ensure that the goodwill of the organization among its stakeholders is maintained. However an organization cannot function solely based on ethics as it is the one of the major functions of the organization to make profit and give proper returns to the stakeholders.

The thesis statement of this essay is that the businesses can only function properly if it aims to make profit through the incorporation of ethics in its operations. The paper conducts a literature review on the various theories available in relation to business organizations and provide how the broader view provided by the thesis can benefit the society.  The paper also discusses the approach in light of other theories.

According to Friedman (1970), (2007) “social responsibilities of business in a free-enterprise,” is huge.  He is of a view that the business entities must base their operations under ethical considerations. There are several functions which business entities can serve is relation to the society through basing their operations on the principles of ethics. These functions include providing employment, eliminating discrimination, restricting population and other forms of reforms in relation to the society. However according to the article businessmen have become puppets of intellectual forces which is restricting the fundamentals of free society.

The Role of Stakeholders in Organizations

A corporation is an artificial person and not a real person however this fact is not enough to come to a conclusion that business entities have no responsibility. The doctrine of social responsibility is further used to clarify the statement. The corporations although is an artificial legal person it comprises if natural people who run its operations. A corporate executive is a worker of the business in a private property system free enterprise. Such workers have direct responsibilities in relation to the employer which means the corporation. The responsibility provides that the business has to be conducted by the employees according to the demands of the employer (Sharplin 2003). These desires are primarily with respect to making money while complying with ethical basic provisions incorporated through law and ethical customs. In exceptional cases the employer may have objectives different to what have been stated above. However as provided by Turnbull (1997) corporations are not always incorporated for the purpose of making profit but may also be for a eleemosynary objective. These corporations do not have the objective of making profit but that of rendering specific services effectively. The article states that if the doctrine of social responsibility is to be taken seriously the scope of political mechanisms would cover all human activities (Shah and Bhaskar 2007). According to the article that the only social responsibility of the business organizations is to direct its resources towards making profit as long as it promotes free trade and does not indulge in deception or fraud.

Jenson (2002) provides a relationship between stakeholder management and the theory of values of theory maximization which is known as enlightened value maximization. The concept uses the structure of the stakeholder management theory but also accepts the theory in relation to value maximization in relation to the organization in the long run. The businesses cannot strive if the merely focus on one theory. They need to maintain a balance between making profits and managing the stakeholders at the same time. The article also provides that the theory of balanced scorecard which is a managerial equivalent to the theory of stakeholder management have various flaws if not flawed totally. The scorecard provided to the managers by the theories give no score which means that there is no single measure to evaluate how they had performed. Thus in such a system where there is lack of a proper evaluation method the managers do not get the basis of making evident based and purposeful decisions.  The author argues by considering the positive as well as the normative arguments that the firms who are flowing the traditional stakeholders theories are less likely to succeed in competitive market. To the contrary those firs which adopt a single approach of value creation are likely to flourish in such market. The stakeholders’ theory is only preferred by the managers and executives as it enhances their powers and does not make them accountable.

Ethics in Business Organizations

The idea in relation to a stakeholder is has become one of the most significant additions to the contemporary business ethics (Boatright 2006). The issues faced by all groups of stakeholders have become broadly recognized features with respect to ethical management. According to Beauchamp, Bowie and Arnold (2004) while making a decision the managers must consider the interest of all stakeholders. Commonly the lists of stakeholders include customers, creditors, employees, suppliers, shareholders and the society as a whole. There is not much argument against the concept of stakeholders’ management provided by modern business models. The argument lies in the fact that how to ensure profitability of the business along with the ensuring the interest of other stakeholders. Dobson (1999) provides an argument that stakeholders management acts as a guide for managers rather than a method of corporate governance. The concept provides a useful guidelines to those executives who how all stakeholders can be benefited from shareholders primacy and use it as a reason for not considering other stakeholders. Such executives themselves make a mistake towards determining how the corporation should be managed and governed. There is no reason which suggests that a manager who is acting in the best interest of the shareholders would not be able to provide benefits to the other stakeholders of the business such as the society

Freeman (2007) provides a study in relation to outlining stakeholders’ management which is an emerging view for business organizations. The concept of stakeholders’ management is said to have emerged over the last three decades through scholars belonging to a diverse set of disciplines starting from finance to philosophy. The fundamental principles in relation to the concept provide that the businesses along with its managers must have an aim to create value for employees, customers, suppliers, shareholders and the communities. Carefully attention has to be provided to how to create such values and manage the relationships. However the article contrasts the dominant view which is adopted in the business world which provides for managing the organization to benefit the shareholders and all other benefits and harms are created incidentally. The dominant model of business is resistant to change neither is it consistent with law or fundamental ethical principles as stated by Martin (2010). It has been argued by Hansmann and Kraakman (2000) that the dominant model is a good idea because it provides good consequences for all. The arguments in relation to rights provide that all property rights are provided to the shareholders leaving out the rights of the other stakeholders. Ferrell and Fraedrich (2015) has provides one of the strongest argument in favor of stakeholder management by asking the executives what kind of company they want. Thus businesses must operate in a ethical manner to ensure its proper existence

The Debate on Social Responsibilities of Business

During the past two decades evidence has been provided through empirical studies that corporate social responsibility initiative provides measurable payoffs towards the organization as well as its stakeholders. The organizations have a major role to pay in the society. They have the power to influence the promotion of ethics into the society and seek its overall development. The organizations provide employment to the individual of the society. These individuals work together in the organization towards a common purpose of making profit and other objectives of the organization. How these individual behave in their work place have a significant effect on their behavior outside the workplace. The organizations have significant power to influence the behavior of those who are working for it through the incorporation of ethical principles in its system (Lawrence and Weber 2014). When the organization introduces strict ethical compliance in relation to its workplace the individuals get use to such behavior and thus ethical behavior is reflected outside the organization in the society. For instance the incorporation of principles regarding bullying and discrimination into the workplace polices would also ensure that the individuals would reflect such polices in the society however there may a certain exceptions.

It has been understood for a long period that the motive of a business is only to make profit. Any individual who wants to start a business activity does it solely on the objective of making profit. However when the business grows and evolves into a large organization its objective must become different as provided by the above discussed literatures. According to Carroll and Buchholtz (2014) a business cannot flourish by only acting on the principles of making profit as there is immense competition in the market and a point of distinction which investors and customers seek between the organizations is in relation to their social involvement. The social involvement of the organizations in an ethical manner can do wonders for the society. The organizations have access to large capital which can be used towards the betterment of the society such as increasing measures towards the protection of environment and indulging in community developments activities. For instance an organization which is in indulging in the process of production can incorporate efficient technology to prevent pollution which is a serious concern for the modern day society. This would not only ensure a better environment and trigger sustainability but also enhance the reputational capital of the organization. Through restraining from anti-competitive activities by indulging in ethical dealings the organizations can promote ethical compliance in the society as it would lead to a transparent business structure which is free from corruption. The broader view would only benefit the organization in the long run and along with promoting the development of the society would also ensure that they like up to the expectations of their shareholders through making profit (Martin 2010).

Stakeholder Management and Value Maximization Theories

According to the kantanian theory it is unfair to treat people as means of end and individuals of the society has to be treated as ends themselves. Here the means of end refer to any specific actions for the purpose of achieving a particular goal. The theoretical approach which has been provided by Jenson (2002) in relation to organization proposes that the stakeholder management theory is flawed and a mixture of stakeholder management as well as value creation is needed for proper development is not totally consistent with the Kantnian theory. This is because the theory provides to hold people as the ends themselves whereas the approach provides that people may be used to generate profit for the organization as long as their personal development is also ensured. In the same way the resources of the society can be utilized for the purpose of generating profits for the organization (Bowie 2017).

According to the theory of duty of care a person whose activities can reasonable cause harm to another person has a duty of care towards such person and where the duty is violated it results in compensation. According to the approach provided by Friedman (1970) where the motive of the organizations is to make profit only, the organization cannot make profit without utilizing the resources of the society and as the organization has vast influence on the society its actions can harm the society as whole. The organization therefore owes a duty of care towards the society and if any harm is caused they are responsible to compensate the society for such losses. As per the theory of Boatright (2006) which argues that the organizations must use a more synthesized approach by merging ethical approaches with the profit making approach the duty of care theory would provide to ensure the development of society as a whole as it still involves using the resources of the society.

According to Follesdal (2015) the term justice is used to define the importance of fairness, equality and rights. People would thing that it is unjust when they are not getting proper return on their investments unfairly, having there right of enjoying equality in the society violated and being unfairly treated because of one’s protected traits. In his theory Rawl’s rejects the utilitarian forms of justice and provides that justice is not the same as morality. A new way to have knowledge about the position of justice has been suggested by him.  It has been argued by Rawls that economical and social inequalities are not just unless certain requirements are met. Firstly equal opportunities have to be provided and higher inequalities must advantage those least economical and social resources. Thus the utilitiranism approaches provided by Piacquadio (2017) those economic inequalities can be justified where it maximizes happiness is rejected by the justice theory. Here an argument can be provided by Rawls in against the approach provided by Follesdal (2015) that distributing disposable income in the profit of many would enhance the economy.

Issues in Stakeholder Management

The theories in relation to corporate social responsibility (CSR) provide that the operation of the organization has to be based on two pillars. The organization while having the objective of making profits must also ensure that their actions depict ethical interactions with the surrounding community (Lee 2017). The nature of CSR with respect to an organization also provides the conception in relation to making profit while also having its effects on border question related to the welfare of community. There are four obligations which are imposed on an organization through the concept of corporate social responsibility. Firstly the economic responsibility of earning profits ;Secondly, legal responsibility which is in relation to complying with the legal rules and regulation; thirdly ethical responsibilities which is in relation to doing what is right even when it is not required by law and lastly philanthropic responsibility which means to indulge in the projects of the society even when they are not related to the business activities (Carroll and Buchholtz 2014). The theory is totally consistent with the synthesized approach of ethics and profit argued by this paper and proposed by Boatright (2006). Both the theories provide that ethics and profit making must both be incorporated by the organizations in relation to their operations.

As per the theory of creating shared values Crane et al. (2014) there is mutual dependence among the competitiveness of an organization and the health of communities around it. Capitalism can be redefined and next wave of global growth can be unleashed by capitalizing and reorganizing these connections among economic and societal progress. The theory of CSV, thus is not consistent with the approached provided by Friedman (1970) and Freeman (2007) and is totally consistent with the synthesized approach proposed by this paper. According to Pauli (2010) economy can be enhanced through the process of creating more jobs, reducing the use of energy and alongside benefiting community development know as blue economy. The concept is also to some extent consistent with the proposed argument of the paper in relation ethical observations but not in relation to making profits. The economy model proposed the creation of enhanced values rather than cutting cost in a blind manner (Svensson and Pendleton 2014). This proposal can be interpreted as making profits while addressing the needs of the society. the theory of circular economy which is an alternative to the traditional theory of linear economy which provides the concept of make use and dispose, provides a view that resources are to be kept as long as possible for the purpose of extracting maximum values while they are in use and then recover and reproduce material and products at the end of every service life (Tukker 2015). The view is consistent with the theoretical approach provided by Boatright (2006) in relation to the incorporation of ethics with respect to operations.

Emerging View on Stakeholder Management

Conclusion

“A business is successful to the extent that it provide a product or service that contributes to the happiness in all of its forms”- Mihaly Csikszebtmihalyi. In case the organizations are provided with the motive of making profit only than in the contemporary business world, such organizations would not be able to succeed. This is because there is so much completion and availability of similar technology that the differentiation which the customers seek is with respect to the social indulgence of the organization. In addition an organization would not be able to address the needs of its shareholders and investors if it does not make adequate profits. Thus the synthesized approach is the best possible approach which can be used by the organization towards their operations.

• The organizations must indulge in social projects even when they are not related to the business
• The organizations must ensure ethical and legal compliance within the workplace to ensure that the individuals working for them are influenced by such principles.
• Fair completion and fair trading in the market place has to be used by the organizations in relation to its dealings
• The organizations has to work on the principles of sustainability as it has been provided and proved by various researches that the concept helps in attaining long term goals.

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