Corporate governance relies on how capable management and the board are in coordinating the interests of constituents who comprise of employees, shareholders and the community (Freeman, 1984; Adams and Ferreira, 2007, pp.220). In recent years, the issue of shareholder primacy has brought about a debate on whether company management should focus on shareholder wealth maximization or should also encompass other constituents. Managers should aim at fulfilling their obligations to an constituents and as such should not leave their personal values at home.
Kluckhohn (1951, pp.389) defines values as desirable concepts that guide individuals in the selection of actions, evaluation of people, events and in justifying their actions. They affect how people perceive and interpret their environment (Gandal et al., 2005, pp.1230), their identity, choices and behaviour (Verplanken & Holland, 2002, pp.439). According to Litch (2004), it is possible to combine shareholder focused corporate governance with conservation values. Personal and organization values differ and impact differently on the organization but both are important (Lee, 2008, pp.52). Values in the business setting help individuals to make ethical decisions, increase self awareness, prioritize on tasks and develop leadership credibility (Verplanken & Holland, 2002, pp.441).
Values influence individual choices but at times, choices made influence one’s values (Kluckhohn, 1951, pp.392). Change in personal values is a slow and gradual process that usually starts with behaviour change. The tendency to take for granted choices which we repeatedly make over time often results in a drift in values. It is quite easy to even though initially they were incongruent with our values, resulting to drifting of values (Lee, 2008, pp.55). For managers, it is important that they uphold their personal values as they will help them make ethical decisions on their duty in the company.
The principle of shareholder wealth maximization holds that corporations conduct business for the sole purpose of making maximum profits for shareholders (Smith, 2003, pp.87). The manager is an agent of the shareholder whose purpose is to ensure that this goal is achieved. Most managers work towards this end in a discrete manner without interference from the constituents. The manager is mandated to attain the goal of wealth maximization by any means deemed appropriate. This shows that businesses are usually created to increase wealth of shareholders but not to redistribute it (Smith, 2003, pp.87). Personal values play a significant role in helping the manager make appropriate choices that do not harm other constituents (Lee, 2008, pp.53).
The aspect of Corporate Social Responsibility (CSR) is often used by businesspeople to create good relations between the company and part of its constituents namely the community. Implementing the concept of social responsibility ensures that important ethical values run in organizations (Gandal et al., 2005, pp.1235). It is often argued that managers should let CSR play the role of value so that they focus on making maximum profits for the business (Gautam & Singh, 2010, pp.44). In this sense, managers should leave their personal values at home. This argument is quite flawed as managers are often the ones responsible for overseeing CSR activities and personal values may be of help in making good decisions. Also, the other constituent; the employee should be considered before the manager decides to do away with personal values as the manager is also responsible for the welfare of this constituency.
A corporation is an artificial person with artificial responsibilities. In a free enterprise system of private property, corporate executives are employees of business owners. The executive’s responsibility is to the employer. This means the executive will have to do business in accordance to his employers’ desires. This may make it difficult to apply personal value as the job description may not give room to this factor. Dahlsrud (2008) states that as an artificial person the company also has personal values which are commonly referred to as Corporate Social Responsibility. Being different persons, it is argued that the manager should only play his sole role which is to ensure wealth maximization for the shareholder. This argument lacks merit as the company as an artificial person lack in ability to perform many human function one of which is decision making. As such the manager and the company though perform different functions and the roles of one cannot be placed on the other (Fougere & Solitander, 2009, pp35).
Personal values can also impact on the behaviour of the manager beyond the scope of his employment. The manager as a person may have other duties that he performs willingly to his conscience, his family, his church, his feelings of charity, his city, his clubs, his country. This concept of responsibility may impel him to devote a part of his income to a cause he sees as worthy (Baron, 2007 pp. 696). This is an individual social responsibility that would not be beneficial to the society as a result of business.
Many managers believe that the concept of CSR helps to give a competitive advantage to firm’s hence greater market share (Husted & Salazar, 2006, pp.80). It also differentiates a company from its competitors by engendering employee and consumer goodwill. Corporate social responsibility may be used to prevent competitors from being at an advantage (Husted & Salazar, 2006, pp.80). If one firm implements’ the policies for corporate social responsibility successfully, rivals firms are likely to do the same. If the competitors do not implement policies, they may lose customer loyalty. Some firms simply get involved in corporate social responsibility because they know it is the right thing to do (Gautam & Singh, 2010, pp.46). This shows how managers are expected to uphold values in their work place to maintain trust of their customers.
There are several theories under corporate governance. The common ones include stakeholder theory and the legitimacy theory. The stakeholder theory maintains that corporations should think about the effects of their actions on their customers, general public, suppliers and employees or those who have an interest or stake in the corporation (Smith, 2003, pp.86). Proponents of this theory reason through the provision of stakeholders’ needs, corporations ensure continued success in their businesses (Jensen, 2002, pp.239). The theory maintains that increasing shareholder wealth is a myopic view. According to this theory, increased corporate social responsibility make attractive to consumers. Managers should therefore stick to their values so that they can be attractive to their customers (Hemingway & Maclagan, 2004, pp.37).
The legitimacy theory is an extreme version of the stakeholder theory. This theory argues that corporations have implicit contracts for providing shareholders’ long-term wants and needs. If stakeholders are given what they desire, this legitimizes the corporations’ existence (Husted & Salazar, 2006, pp.77). The society gives important benefits to the corporation hence the corporation is obliged to promote the interests of the society in return. This theory claims that corporations should engage in social ventures because they have resources. In addition, this theory maintains that the larger the firm, the greater the responsibility they have (Husted & Salazar, 2006, pp.77).
The argument voiced for the stakeholder theory is that the society should allow business to solve societal problems because other institutions have failed to do so. For a business to retain social authority, it must meet the society’s needs (Husted & Salazar, 2006, pp.77). Those in support of this argument also referred to it as the Iron Law of responsibility. The law claim that in the end society acts to reduce power for those who do not use it responsibly. On the other hand, the shareholder theory proposes that corporations should legally maximize the shareholder wealth on a long-term basis. If products are sold at a good price, the business is beneficial to the society. The shareholder theory advocates that firms should maximize on the value of cash flow presently (Smith, 2003, pp.86).
Managers are hired to make money for shareholders and not to be like charity or act like the government. When shareholders needs are served, business generates wealth, which benefits the society. If corporate social responsibility initiatives can increase the bottom line, the theory recommends implementing such initiatives. Nobel prize-winning economist Friedman was a modern proponent of the theory of shareholder. He outlined the concept of wealth maximization for shareholders and concludes that it is improper to focus on social investments (Husted & Salazar, 2006, pp.89).
The main goal for corporations should be providing returns to shareholders. If a corporation focuses on external social responsibilities, it gets distracted from its main purpose. He says that corporations do not know how to properly invest in social things hence this should be in the hands of individual and not corporations. Firms could hire executives with expertise in social; responsibility. Shareholder wealth maximization is imperative in any corporation. However, managers should not neglect their personal values in the process of carrying out their mandate (Hemingway & Maclagan, 2004, pp.41). Managers should make sure that they uphold their values while at the same time ensure that they maximize shareholders’ wealth.
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