Alternate Views on the Purpose of Business A Resource for Business Ethics Instruction.doc

10th global conference on business & economicsisbn : 978-0-9830452-1-2alternate views on the purpose of business: a resource for business ethics instructiongary l. karnsprofessor of marketingschool of business & economicsseattle pacific university3307 third ave. w. ste. 201seattle, wa 98119tel: 001.206.282.2948e-mail: alternate views on the purpose of business: a resource for business ethics instructionabstractthis paper provides an instructional resource for business educators to help frame a student discussion of the purpose of business which will contribute to the development of their business philosophy and their perspectives on business ethics. it is offered as a response to the numerous calls for a reformed vision of the purpose of business in the wake of many ethics scandals associated with practices fostered by the shareholder wealth maximization paradigm. the paper gives a concise overview of the tenets and critiques of the shareholder, stakeholder, and stewardship paradigms; compares their underlying worldviews and perspectives on business ethics so students can enter the discussion with a fuller understanding of the approaches; and, provides discussion questions for student reflection on the purpose of business and their preferences for the different paradigms. the paper explicates the recently articulated stewardship paradigm which proposes that the purpose of business is contribute to human flourishing by serving customers with products and services, employees with creative and meaningful work and the community; that management practice should follow a positive ethic, a duty to do as much good as possible; and that business should relate to government and other social institutions as a partner rather than as an adversary.introductiondissatisfaction with the behavior of business has intensified in recent years due to the many ethical lapses that have occurred. the groundswell of dissatisfaction has included concerns about the shareholder wealth maximization (swm) paradigm. it has been asserted that swm is morally deficient (donaldson & preston, 1995; freeman, parmar & wicks, 2004). martin (2010) calls the premise that shareholders and society benefits from maximizing shareholder wealth flawed and argues for reinventing the purpose of business. john mackey (2009) of whole foods, inc. has said: “what we need is a transformation we need a deeper, fundamental reform in the essence of business” navarro (2008) echoed this sentiment, calling on business schools to re-think their teaching about the purpose of business. this paper responds to this need by providing business students a resource for exploring the purpose of business as construed by the two main paradigms for business, swm and stakeholder theory, and a new stewardship view offered by daniels et al (2007).foremost among alternative approaches to understanding business is the stakeholder (skh) approach (donaldson & preston, 1995; freeman, 1984) which has broad exposure in contemporary business education. conscious capitalism, a recent movement within skh, sees business as having a purpose deeper than profit maximization. bill gates (2009), co-founder of microsoft, advocates “creative capitalism” as a potent vehicle for addressing social needs in partnership with governments and charitable organizations. creative capitalism leans on the business argument that the poor can express sufficient demand to support an appropriately designed business model and that mainstream buyers value the social-benefits created by socially responsible firms. yet another re-visioning called “consumer capitalism” suggests that putting customer satisfaction as the first order of business will pay off for shareholders over the long run (martin, 2010). this paper discusses the worldviews of the swm, skh and daniels et als (2007) recently articulated stewardship or “another way of doing business” (stw/awdb) paradigm in which the purpose of business is to serve customers, employees, and the community with profit playing an instrumental role. it is intended to serve as a resource for business educators to help frame an interaction with students on the purpose of business, to contribute to the development of their philosophy of business, and to help them clarify their perspectives on ethical choices in business. it is hoped that in reading and discussing these ideas students will formulate a more noble vision of business. the paper provides an overview of the tenets of the paradigms, a synopsis of the criticisms that have been voiced about them (usually from advocates of another paradigm), and finally contrasts the paradigms in terms of their underlying worldviews.the paradigmsthe shareholder wealth maximization (swm) and the stakeholder (skh) paradigms should be quite familiar to readers. there are extensive literature streams regarding both approaches, including comparisons of the two (halal, 2000; jones & wicks, 1999; kaler, 2003; shankman, 1999). this papers comparison of the new stw/awdb paradigm brings additional perspectives to understanding the purpose of business.shareholder wealth maximization paradigmswm is the dominant paradigm for understanding the role of business and the practices of management. its most notable proponent has been milton friedman. its roots are in the industrial age and adam smith (halal, 2000; key, 1999). as illustrated in figure 1, swm places business solidly within the economic sphere of life, which is only slightly inter-penetrated by the social sphere. the purpose of business as an institution is to maximize shareholder wealth, to create capital though making profit (friedman, 1970). the owners of a business, motivated by self-interest, are seen as having property rights on that profit and all other parties involved in the business enterprise (i.e., customers, employees, value-chain partners, etc.) are in contractual relationships with it. managers, as agents of the owners, have the fiduciary duty to manage the firm as a nexus of these contracts to create profit for the owners, subject to the contractual, legal and moral boundaries within which society allows business to operate. profit is the desired end and all other parties, relationships, and resources are seen as instrumental means to that end (donaldson & preston, 1995; halal, 2000). financial results serve as the primary indicators of a firms performance. control of participants occurs via contract under the auspices of the owners, or their elected representatives, as delegated to management. the control system between owners and managers is explained by agency theory. under agency theory, managers tendencies toward opportunistic self-interest are held in check by aligning their economic interests with those of the owners. systemic control of firms as entities occurs via the countervailing self-interest that exists across the multitude of firms and involved parties and via government that imposes social/political will on firms through laws and regulations. government is seen as the other major institution in society. it should be noted that swm does not deny the importance of social good, rather it ascribes the achievement of social good, beyond providing products and jobs, to government and the social sphere. firms may engage in corporate social responsibility only to the degree necessary to keep the rules of the game set by government and public opinion from being too intrusive, or in so far as it is otherwise instrumental for generating return for shareholders, even if that return is across the longer-run. figure 1 herethe underlying values and worldview presumptions of the swm paradigm center on self-interest, economic rationality, and property rights (donaldson & preston, 1995). egoistic hedonism is the applicable moral framework (jones & wicks, 1999). swm asserts that entrepreneurial risk-taking is incentivized by the prospect of economic gain for example. people and the natural environment are seen instrumentally, not for their intrinsic value. swm implicitly acknowledges the importance of truth-telling, honoring contracts, avoiding harm to others, and respecting freedom of choice as the necessary bases for a functioning economy and system of contracts (shankman, 1999). critiques of swmswm has been criticized for exacerbating the moral failures evident in a number of corporate scandals. exploitation of any opportunity for advantage and avoidance of the recognition of externalities and long-run consequences are encouraged under swm (freeman, parmar & wicks, 2004). martin (2010) also argues that swm has fostered short-run thinking among ceos and has not actually produced superior results for shareholders.swm has also been criticized for having a narrow perspective on the nature of humankind. the notion of economically rational persons is too simplistic (jones & wicks 1999). moreover, swm compartmentalizes the economic, social and moral aspects of persons and institutions. the saying, “its not personal, its just business” is an example of this compartmentalization and of the instrumental view of persons. critics argue that agency does not adequately portray the nature of the role and behavior of managers (shankman, 1999). management often acts more independently of distant owners and on its own behalf. making management into owners through stock incentives has not overcome this concern. stakeholder paradigmfreemans 1984 book, strategic management: a stakeholder approach gave formal articulation to the skh paradigm which was advocated by proponents of corporate social responsibility and business ethics and gained momentum in the 1990s (jones & wicks, 1999; kaler, 2003; key, 1999). in the skh paradigm (illustrated in figure 2) firms exist to achieve the range of economic and social interests of their stakeholders (donaldson &preston, 1995; freeman, parmar & wicks, 2004) who live within inter-penetrating economic and social spheres. profits per se do not drive a business from the outset; rather they result from the creation of value. in essence, skh says firms do well by doing good as part of the overall value they create (jones & wicks 1999). doing good, under skh, entails more than merely providing products and jobs.figure 2 hereskh is primarily focused on the practice management. under skh, firms are a nexus of relationships, not contracts, (bryde, mason & kirkbride, 2007) among mutually interested parties with legitimate, substantive interests in a businesss processes or outcomes. these stakeholders have intrinsic value and should not be seen as merely instrumentally useful in pursuit of profit for shareholders (halal, 2000; jones & wicks, 1999). satisfying the interests of stakeholders as measured by a “triple” or “quadruple” bottom-line indicates successful performance for a firm (donaldson & preston, 1995). bell, meng & neville (2005) have suggested that a firms reputation is a useful overall measure of stakeholder satisfaction. the duties of management in skh include: structuring the relationships a firm has with, and among, its stakeholders; marshalling resources and activities to produce the benefits desired by the stakeholders; and, assuring the sustainability of a firm (halal, 2000; shankman, 1999). skh expands managements agency responsibilities to all of its stakeholders (donaldson & preston, 1995). moreover, management is expected to be a sensitive, moral agent, not merely a loyal one, seeking a just, fair balancing of the multiple interests that may be in conflict with each other (halal, 2000). governance within skh involves participation of the stakeholders as a community (halal, 2000) in a multiparty bargaining process. this necessitates judgments by management on whether a partys interest merits having its “voice” heard (charron, 2007; donaldson & preston, 1995; jones & wicks, 1999). effective governance relies on the alignment of values and interests among the stakeholders (bryde, mason & kirkbride, 2007). at its core, skh emphasizes business ethics and social responsibility. it pursues economic and social justice, the creation of value, and the “common good.” it is built on ethical idealism, a deontological moral framework based on the idea that persons have inherent dignity and are not to be treated instrumentally (charron, 2007; donaldson & preston, 1995; gibson, 2000; jones & wicks, 1999). skh takes a complex view of persons whose motivations include a mix of economic and social mindedness, altruism and self-interest. skh sees property rights as embedded within human rights and as subject to the injunction to do no harm. shareholders property rights do not give them the ultimate decision-making authority (freeman, parmar & wicks, 2004). critiquesskh is criticized for being a set of prescriptive, over-reactive “oughts” focused on the role of management and on its ethical and social responsibilities rather than being a theory of the firm since it does not explain the behavior of firms in a dynamic, competitive market economy. it is viewed as being overly optimistic about human nature, failing to recognize the tendency toward opportunistic exploitation and as placing too much emphasis on the social sphere and not enough on value creation (charron, 2007; key 1999; shankman, 1999). critics offer as evidence that firms adopting skh under-perform financially (charron, 2007). a related criticism is that skh diminishes the incentive for entrepreneurial risk-taking (dufresne & wong, 1996). skh is seen as improperly diminishing the importance of legal contracts and, especially, the private property rights of ownership. the importance of shareholders is not sufficiently recognized or is mischaracterized as a mere investment relationship (charron, 2007; bryde, mason & kirkbride, 2007). there are questions about whether stakeholders “rights” are on par with the property rights of shareholders (kaler, 2003) and whether they diffuse responsibility away from management (bryde, mason & kirkbride, 2007).skh is seen as being unclear about how management should balance or prioritize the multiple, conflicting interests, leaving management to favor itself and those of the primary stakeholders that it chooses to preference. one aspect of this difficulty is that what one stakeholder deems ethical, another may deem unethical. management cannot anticipate the outcomes of its decisions and its ability as an arbiter of moral truth is dubious (charron, 2007; bryde, mason & kirkbride, 2007). stewardship paradigma stewardship theory of management has emerged as a clarification of skh (caldwell & karri, 2005; davis, donaldson &, schoorman, 1997; mccuddy & pirie, 2007). it explicitly integrates religious spirituality and moral conscience as the source of values which include being more “other-centered” and building trust among the parties through a covenantal approach to relationships. it asserts that stewards identify more closely than agents do with their organizations. stewards values include mutual accountability; care for people, planet and economic sustainability; and, empowerment of the parties. stewards are also seen as being motivated by higher-order, intrinsic needs (preston, 1998). this closer alignment of values and motivations better aligns steward and stakeholder interests and reduces the need for the control and incentive structures. daniels et al (2007) have separately proposed the stewardship/“another way of doing business” (stw/awdb) paradigm. this view emerges from their understanding of the creation, fall, redemption, and consummation meta-narrative elements in the judeo-christian worldview. stw/awdb shares some commonalities with skh and conscious capitalism, but it does depart from some fundamental skh tenets. the stw/awdb paradigm (figure 3) proposes that the purpose of business is to contribute to the flourishing of humankind and the natural environment by providing: the goods and services that enable people as consumers to flourish; opportunities for meaningful and creative work that enable people as employees to flourish; and, support for the community-at-large and other institutions in society. while the economic and social spheres are seen as inter-penetrating and business contributes to achieving social outcomes, under stw/awdb business should not encroach upon the roles of other institutions (i.e., government, family, church, etc.). rather, it should be a cooperating partner. in a marked point of departure, generating profit is not a fundamental purpose of business, rather profit is a resource and capital providers are co-steward partners. figure 3 herea second key departure from skh is that management is cast in the role of leading a firm forward in pursuit of its purpose and doing so by acting as responsible, ethical stewards rather than as balancing the interests of stakeholders. over and above doing no harm to consumers, employees, community, and the planet, stw/awdb proposes that management has an affirmative duty to do as much good as possible, and to grow a firms ability to fulfill its purpose. the motivation for entrepreneurial risk-taking and innovation proceeds from a deep desire to make life better. the relationships of a firm and its management with its role partners are covenantal in nature (i.e., commitment to constructive relationships, even when not reciprocated). stw/awdb does incorporate the need for behavioral incentives and controls based on its presumptions that while humankind is fundamentally good, it is also “broken” and can be quite exploitive. stw/awdb proposes that firms adopting this approach are likely to engender trust, organizational commitment, brand preference, etc. which will in turn produce favorable financial results.