A moral obligation is a duty which one owes, and which one ought to perform, but which one is not legally bound to fulfil (Burton’s Legal Thesaurus). The ways in which corporations consider moral obligations and how they enact them vary based on individualized judgements and how they see their moral obligations to various stakeholders.
There are three main theories put forward to articulate what comprises moral obligation in corporations. The first is Friedman’s stockholder theory that “a business’s social responsibility is to make as much money for the stockholders as possible so long as it stays within the rules of the game” (Friedman 1993, p250). The second is Freeman’s multi-fiduciary stakeholder theory that businesses not only have a duty to their stockholders but that they bear a fiduciary relationship to stakeholders as well, with stakeholders being those groups who have a stake in or claim on the firm (Even & Freeman 1993, p255). And lastly, Goodpaster’s theory that stockholders cannot expect of business managers behaviour that would be inconsistent with the reasonable ethical expectations of the community (Goodpaster 1991, p68).
This essay will discuss the advantages and disadvantages of each of the three main theories of moral obligation in corporations and will demonstrate that Goodpaster’s definition provides the most convincing account of the social responsibilities of business.
In order to consider each theory of moral obligations in corporations, the definition of stakeholder and morality must be considered. The way in which a corporation views or defines the term stakeholders influence its decisions regarding moral obligations. This paper will focus on the wider definition of stakeholders: groups or individuals who are affected by or can affect the corporation Even & Freeman 1993, p260). Secondly, to define morality, many philosophers consider the notion of immorality (or that which knowingly causes harm), as the basis for defining morality (or that which does not knowingly cause harm) (Schwartz & Saiia 2012, p12). This means that corporations have a moral obligation to act and speak without knowingly causing harm.
According to Friedman, a corporation’s only moral responsibility is to their stockholders, i.e. their only social responsibility is to use company resources to engage in activities that increase stockholder equity, as long as it conforms to the “rules of the game” (Friedman 1993, p250). These “rules of the game” are the basic rules embodied in law or social ethical customs including deception and fraud.
This theory lends itself to the belief that market and legal forces are adequate to transmute ethical concerns into strategic concerns for management (Friedman 1993, p253). Such that corporations’ categorical concern for stakeholders is, in fact, dishonest and unnecessary. That when a corporation devotes resources to providing benefits to stakeholders such as amenities or donations to charities, they do this not as a social moral responsibility, but as a way of generating goodwill as a byproduct of their expenditures and therefore is in the self-interest of the corporation and their stockholders (Friedman 1993, p253). The greatest advantage of this theory is that corporations will, in their own best interest, be morally responsible and produce more social good.
Although Friedman’s theory also relies on society to establish a framework of law – rules pertaining to issues such as property rights, liability etc., it requires corporations to behave responsibly or morally (Mulligan 1986, p266). In theory, this is satisfactory and in an ideal world, laws would be enacted so that corporations were legally constrained to follow the moral “rules of the game” However, over time, businesses have become involved in setting “the rules of the game”, and therefore have been able to ignore the negative effects of their decisions on powerless stakeholders (Mulligan 1986, p267). Friedman’s theory shows no moral responsibility to stakeholders apart from what is in the best interest of its stockholders. This theory, in essence, makes stakeholders mere means to stockholder’s ends with no moral regard for them (Goodpaster 1991, 61).
The second well recognized theory of corporate social responsibility is that of Freeman, who theorized that businesses not only have a duty to their stockholders as in Friedman’s theory but that they bear a fiduciary relationship to stakeholders as well, with stakeholders being those groups who have a stake in or claim on the firm (Even & Freeman 1993, p255). This theory is along the Kantian lines of moral ethics in that, the corporation serves at the pleasure of its stakeholders and each stakeholder has a right to be treated as an end, and not just a means to a corporate end (Even & Freeman 1993, p255). Because they must agree to be treated as an end, they are able to participate in the decisions making the process of the direction of the corporation in which they have a stake.
The two main principles of this theory are that corporations may not “violate the legitimate rights of others to determine their own future” and that they are “responsible for the effects of their actions on others” (Even & Freeman 1993, p262). The needs of one stakeholder are not considered greater than another meaning the corporation would need to prioritise between stakeholders. To do this, a corporation would focus on the most significant stakeholders who could benefit from the organisation and its offerings.
Freeman’s theory has one primary criticism, that it assumes that various stakeholders’ interests may be balanced or compromised against the others. This is done to deal with the problem of conflicting interests between the different stakeholders (Blattberg 2004, 275). However, by trying to please everyone a corporation may not be meeting its’ fiduciary duties to its’ stockholders.
Moreover, stakeholder theory embraces a view of the corporation prioritising the interests of all stakeholders, which leads to an overall reduction in performance. Therefore, diluting the fiduciary obligation to stockholders (Donaldson & Preston 1995, p70). Because there is no clear boundary for the stakeholder groups to be considered by a company, a company being accountable to everyone may actually be accountable to no one (Goodpaster 1991, p62). Effects of corporations’ decisions on relatively powerless stakeholders may be ignored or discounted even if amoral towards those who do not hold power or influence over the corporation.
The last theory to be discussed in this paper is Goodpaster’s theory, he posits that corporations are agents of their stockholders and therefore owe a fiduciary obligation to them (Goopaster 1991, p67). It also says that as their agent, stockholders cannot expect of corporations as an artificial extension of themselves, behaviour that would be inconsistent with the reasonable ethical expectations that they themselves would be expected to honour in their own right (Goopaster 1991, p68).
Goodpaster’s theory was founded on an attempt to compromise between Freeman’s theory and Friedman’s. He believed that Freeman’s theory surrendered the moral relationship between corporations and stakeholders, therefore, becoming a business without ethics (Goopaster 1991, p61). He believed that Friedman’s theory transformed stakeholder obligations into fiduciary ones, leading to ethics without business (Goopaster 1991, p60).
The advantages of Goodpaster’s theory are based on its assertion that corporations are obligated to act as a moral being in their decision-making. Therefore, the corporation owes fundamental moral obligations to anyone affected by its actions. These obligations are that any human owes to another being to not harm, coerce, nor lie, cheat or steal (Goopaster 1991, p67). These same obligations are cited in legislative and judicial statements, but unlike Friedman’s theory, these obligations would not be contingent on following the “rules of the game’ or subject to the corporation’s goals. Compliance with the “rules of the game” is not what corporation should be aiming towards in being moral and could be unduly limited and likely amoral.
Another benefit of this theory is its understanding of the special fiduciary obligation of providing financial benefits to their stockholders that corporations alone owe. Although corporations owe impartial moral obligations to stakeholders, it does not owe them fiduciary obligations as it does its stockholders (Goopaster 1991, p69). When making decisions the corporation does not have to make sure that its decision is in the best interest of all stakeholders (or even a majority) but in the best interest of its stockholders, both short term and long term as long as it does not erode any of moral obligations it owes to stakeholders as a moral being (Goopaster 1991, p70). This is sounder than Freeman’s multi-fiduciary theory where the corporation must make sure its decision is in the best interest for all involved even at a cost to its owners, as the corporation has only promised a return on business to its stockholders and not to stakeholders. Therefore, the corporation should be maximizing performance for the benefit of the shareholders
The moral obligations that corporations owe to various stakeholders in a firm vary depending on which theory is taken into account. Either they owe moral fiduciary obligations to their stockholders (Friedman), multi-fiduciary moral obligations to all stakeholders (Freeman) or a combination of fiduciary obligations to stockholders while still owing moral obligations to stakeholders (Goodpaster).
Friedman’s theory is not the most convincing account of the social responsibility of corporations as it theorises that corporations will act morally to stakeholders as it is in their best interest in the long-run. In addition, it expects that corporations are being moral by following the “rules of the game”. These actions are not convincing of moral responsibility as corporations are able to affect the setting of the “rules of the game” resulting in a situation akin to business without morals.
Secondly, Freeman’s multi-fiduciary stakeholder theory that corporations owe fiduciary obligations to all stakeholders is problematic. Balancing the management of competing interests of stakeholders, the acceptance of acting amorally to small or insignificant stakeholders and treating all stakeholders identically dilutes the special duty owed to stockholders as principals of the corporation. This is akin to ethics without business and while it may be moral there would be no business and therefore cannot be considered a convincing argument of social responsibility of corporations.
While all theories have their benefits, Goodpaster’s theory is the most defendable argument on the moral obligations of corporations to stakeholders. It takes into consideration what makes the previous theories unobtainable and presents a defendable moral corporation theory. It does not treat all stakeholders as equals and takes only its moral obligations towards them when making decisions, therefore, strengthening the fiduciary stockholder bond that Freeman’s theory misses. It takes responsibility for treating stakeholders as requiring the minimum moral duties owed to another, which Friedman only viewed as a means to an end. And finally, by doing this it is able to make a moral decision towards society while still maintaining it private obligations towards its stockholders.