Edward Freeman formulated the stakeholder theory, to bring about a change in how corporations ran their management in the 21st century (Freeman 24). Since the industrial revolution, theories of management employed scientific management to manage big business entities. Milton Friedman was a philosopher who helped to formulate the scientific management of businesses. Friedman’s core argument was that companies or corporations’ main reason for existence is to maximize profits. Friedman’s theory did not consider the concept of societies marginal cost; the sacrifices that the society makes.
Edward Freeman contradicted Friedman’s idea by showing that stakeholders are not the only beneficiaries from the corporations (Freeman 32). Other players that help corporations make profits include suppliers, creditors, managers, customers and members of the society where the corporations operate, are also a stakeholder, and their welfare must be considered. For example, the strategy of management used by Merck is not ethical in the modern world. George Merck used to manufacture a drug called lvermectin for animals to curb river blindness caused by worms in the river, and the disease attacked both animals and humans. In obtaining more profits from the lvermectin drug, the management decided to test it on humans, but the result was increased human suffering. The essence of harming humans for the sake of making more profits is not morally acceptable in the modern society.
Moreover, Freeman elucidates that the conceptual sanity of Friedman’s theory is compromised and the equity of shareholders is not placed at the most suitable level. For instance, Freeman argues that welfare of the least well-off stakeholder should constitute the main goal of the organization (Freeman 65). Least well off stakeholder is the community, who should not be used as a means to an end. Freeman came up with distinct ground rules that corporations have to follow to eliminate unethical tendencies from the management. Managing a corporation calls for the stakeholders to appoint agents to run the corporation on their behalf. For agents to be morally upright, Freeman suggested the use of normative ethics, which entails the appliance of cognitive values such as virtue, utility, and deontology. Normative ethics instills the ability to make correct judgments in profit-making decisions.
Additionally, every agency relationship is faced with the agency problem, whereby the agents have a conflict of interests, which harms the least well-off shareholders. Ground rules that Freedman used as theoretical devices to propose the adoption of the stakeholder theory were best on having morals above profit generation. Freemans’ ground rules include good governance, of individuals chosen by the majority. The choice by the majority ensures transparency to the stakeholders. A consideration of business externalities is also an important rule which prevents some shareholders incurring inhumane costs in the name of profit maximization. Edward Freeman also stressed that agents should work to the best interest of the stakeholders, and also shares the costs of production among all stakeholders. Freemans’ theory conforms to John Rawls concepts of fairness, autonomy and fairness. Apparently, Freeman stipulated that profits should be pursued to a point where the reputation of stakeholders has to be preserved, by balancing the pains and gains of productions.in a situation where pains exceed gains, the pursuit of profits should thus cease (Freeman 82). Freeman’s theory is bold enough to change the way corporations operate, by providing a morally and ethically upright approach.
Work Cited
Freeman, R E. Strategic Management: A Stakeholder Approach. Boston: Pitman, 1984. Print.
