The ethical responsibility of businesses. We will have a look at three ethical theories of businesses. Let's imagine we have four owners of a restaurant called The Dutch Cow. What should be their ethical approach? Is it their ethical responsibility to offer employees a good salary, to price their products fairly, and to compete honestly? The first theory is the shareholder theory. The exponent of this theory was Milton Friedman, who in 1970 stated that the business of business is business. He argued that companies should solely pursue the interest of shareholders. For him, the ethical responsibility of business is to, "Increase its profits as long as it stays within the rules of the game, therefore, in an open and free competition without deception or fraud." So when looking at our example of The Dutch Cow, the four shareholders own the company. They invest their money to start the company. They are taking all the financial risk and therefore, they should ultimately benefit from the value created. The second theory is the stakeholder theory. This theory was first propagated by Edward Freeman in 1983. He defined stakeholders as anyone who can affect or is affected by the achievement of the organization's objectives. In regards to our example, the stakeholders would be then not only are four owners, but also, for example, the farmers breeding The Dutch cows, suppliers, chefs and waiters, and also the customers. In this theory, it is hence important to realize that not only shareholders have a stake in the company. Stakeholder theory as such, does not say why companies have an ethical responsibility to its stakeholders. It just says that there are stakeholders. Therefore, we should give this theory a moral substance. We call this stakeholder contract theory. This theory is part of the overall social contract theory. But for the sake of simplicity, we will focus on the part of the theory that deals with the stakeholders, in particular. We can conceptualize the relationship between a company and its stakeholders as a hypothetical contract. Stakeholders deliberately give something of value to the company, on the condition that they get something of value back from the company. Employees invest time and effort to get a salary, customers pay money to get a product, and suppliers deliver a product to get money. A contract is only binding when there is a mutual advantage, mutual value creation, and both parties take part deliberately. Therefore, the ethical responsibility of a company is to create sustainable, which is short-term and long-term value for all its stakeholders without enforcing stakeholders to participate in the company. To sum up, we have shareholder theory, and stakeholder theory, with stakeholder contract theory, as a specification of stakeholder theory. Do you share that companies have ethical responsibilities to not only their shareholders, but also their stakeholders? If so, does the concept of a contract work well for you, or do you have a better concept?
