In this lesson, we will explore stake holder theory in detail, and contrast it to shareholder theory. The idea that shareholders are the primary stakeholders of the corporation for which all managers should act. [MUSIC] So before we analyze the Bayer Crop Science case further, let's step back and look at the stakeholder theory as a theory. Believe it or not this is old of course in 1970 Milton Friedman who is a well known Nobel Prize economist, first argued that the social responsibility of a company is to engage in activities that increase its profits. He does have a proviso to that, that you can engage in whatever you like to increase profits but within the rules of the game. So you have to follow the law, open and free competition without deception or fraud. This is a famous famous quote and so people site Milton Friedman as a reason why companies have no business doing anything but pursuing profits. Now we saw in the Merc case, they ignored this, they decided they weren't just in the business to pursue profits, they were in the business of health, and that became their dominant mission. And so they engaged in various projects, some of which make money and some of which do not. If you hold that managerial model, you also see, are thinking hierarchically that you are shareholders, a board, management and employees very hierarchically looked. And then outside are the community, the customers, the media, the government, activists, all those are affecting the company but by enlarge is the central shareholders and board and management that's controlling this company, and that gives us another way of looking at that. Now, look at this slide for a moment, it's an inward focus, right, the shareholders are in the center. And what happens? Just look this is completely not theoretical, but think about it when you're looking at this slide your eye goes to the middle. And you begin to think the shareholders are the center of the universe, they're the most important stakeholder in this company. And you can't help it because this slide focuses your attention that way. Now, one of the things that comes out of this inward focus, is the question of greed. Of self interest of companies, should companies only pursue their self interests. And so in the next slide, I'm going to give you a URL to return to an old, old movie. Maybe some of you have seen it, called Wall Street in which Michael Douglas is this greedy shareholder who goes in and takes over companies and just decimates them, so that the shareholders make the money. And he has this very famous speech, Greed is Good. And the interesting part, two interesting parts about the speech, one is that obviously the thesis that greed is good. But this speech, came originally from an insider trader named Ivan Boesky, who did so much illegal trading that he was put in jail. But before he went to jail, he went to a shareholder meeting and made this same argument, greed is good. So the producer of this film, Oliver Stone, basically did what we tell you students not to do, he copied that speech and put it in the mouth of Michael Douglas. Now, Ivan Boesky didn't sue him for that because he was in jail, but whether was that ethical? Yeah, well, probably not because he doesn't footnote that, but anyway. So look up that and you'll be able to see the interesting and actually charming, all though scary, greed is good speech. So, that's one model, but there's another model, and that is called stakeholder model. What is the theory of stakeholder theory? That business can be understood as a set of very complex relationships between customers, shareholders, shareholders or stakeholders, suppliers, employers, employers and employees, and the community. So, stakeholder three wants to know how do these all interact to create value? Because without those interactions the stakeholder model argues, you can't create value, you can't create value just to hear about profits because you have to have good employees. You have to have good, think about Merc, you have to have good researchers, you have to have customers who buy things. You don't have customers who forget it, right? Yes you have to have shareholders and owners, yes you have to have managers to manage this, but you also have suppliers and you have to have good suppliers. Because if you don't you get bad supplies and things aren't so good, that's why Bayer Crop Science wants those seeds, that's a great supply for them. So you see, there are all these complications so business can't just be about profit, it has to be about how all these stakeholders work together to create value. And the value has to be for all of them otherwise it won't work. If I treat my employees badly they're going to quit or they're not going to work well they're going to say, you know take all the sick days and you've seen that, you know that. If I don't treat my customers well, they're not going to buy my product, right, they're going to go someplace else. If I don't treat my suppliers well, they're going to go so they don't have to work with me, they go someplace else. And I have to treat my shareholders well or they will of course not help me support my company, so all of these are important. So here is the basic shareholders we always talk about, owners of course, customers, so a small company is just the owner, not the shareholder. Customers or clients, employees, managers, suppliers, and of course the community in which the company operates and those are all important. So business then, we often talk about the natural environment as a shareholder. Now natural environment isn't a person or a group of people or organization, right, but nevertheless business depends on the ecosystem and it affects the ecosystem as you know, it often hurts the ecosystem. Sometimes it's very green and helps the ecosystem, so that's a very important stakeholder, even though it's not a human stakeholder. So perhaps, there's often been this debate between shareholder theory and stakeholder theory, but maybe they all overlap in the end. Maybe it is that in order to make profits I depend on all these other stakeholders. And these other stakeholders, of course, depend on the company making money in order for them to keep doing what they're doing. So there's this sort of complete interaction and interrelationships between all of these components, this message is we can't forget any of them. And in a company you have to run it so all of these matter, because if you don't run it that way, you will suffer. And that's what we'll see later in module four when we look at Volkswagen who forgot about their customers. So this is a very complex stakeholder map, I mean, you don't have to memorize it, but it just shows how companies are so involved with so many people. I mean, it's just astonishing, and so many organizations, I mean it's just difficult business is difficult. And even a little company with one owner, just a small company, think about your little grocer, if you have a grocery near you. Think about all the interactions that owner has to involve to buy the food that the owner sells. Even if I have a little kiosk, where do I get my supply? Very complex, even in little, tiny, tiny organizations, so big organizations, they have work to do, this is complex, but now look again at this slide. The firm is in the middle, and your eyes go to the middle, and that affects your thinking and your decision making. Because we tend to put what's in the middle as primary. And that's all right, but we must be careful that the firm is not the center of the universe, it's just one of thousands of firms. Small firms, medium sized firms, large firms, mom and pop firms, single owner firms. So we have to be very careful about our thinking to remind ourselves that firms are part of many political economic economies. So, this is a standard stakeholder map, and I've put the Bayer in the center here. And you can see that, but what happens if I put the farmers in the middle? Does that affect your thinking? I begin to take a few farmers into account and I don't forget them. They become important and I remember about them because I had forgotten about them. I'm worrying about the Crop Science and the child labor, all that's important but these are also, the Indian Farmers are also key to this case, and we might forget them. Now, in the Bayer Crop Science case, let's look at the stakeholders and do a little stakeholder analysis. Who were the primary stakeholders in this case? Well, I think we know, the Indian farmers, the children, Bayer Crop Science Itself. The shareholders, Bayer as the company and obviously the environment itself is important, although they don't make as much of that in this case as they probably should. But how are each affected? It matters, it matters to those Indian farmers that they have this lease on their Bayer Crop Science because they're very supportive of the farmers. It matters that they have someone to harvest their food, but it matters as those children go to school. And that the rights of the children here, that are really at stake. And of course Bayer is focusing on, they want the best cotton seeds but if they only focus on that, which would be very profitable. That would be a Milton Friedman perspective, then they would forget about the children, and I'm not sure they will always remember they are dealing with Indian farmers, who have rights as well. [MUSIC] So, think about another stakeholder map, what happens if I put a child in the middle? Does that affect your decision making? I think it does, we forget, and then we see this little kid, and that kid's been working in the fields, and suddenly, we've got issues here right? We don't like that, we don't like the idea of five year olds, six year olds, seven year olds working in the field, very uneasy about them. [MUSIC]
