Profitability or Responsibility
Profitability or Responsibility
purpose of the organization should be. Profitability relates to the shareholder value perspective, while responsibility relates to the stakeholder value perspective. The shareholder value perspective state that the company belongs to the owners and would agree with the statement that firms exists to satisfy the shareholders. Proponents such as Rappaport hold that corporations are instruments whose purpose is to create economic value on behalf of those who invest risk-taking capital in the enterprise. While it might be in the interest of the shareholders to treat stakeholders well, there is no moral obligation to do so.
The stakeholder value perspective claim that all groups hold a stake in the company and are mutually dependent. It is therefore argued that the purpose of the organization is to serve the interest of all parties involved. The proponents of this approach such as Freeman and Reed argue that the stakeholders have the power to seriously affect the continuity of the corporation. Elements of both perspectives are seen below but these are in reality two polar extremes.
Shareholder Value Perspective
Stakeholder Value Perspective
Emphasis on
Profitability over responsibility
Responsibility over profitability
Organization seen as
Instruments
Joint Venture
Organizational purpose
To serve owners
To serve all parties involved
Measures of success
Share price and dividends
Satisfaction among stakeholders
Major difficulty
Getting agent to pursue principals interest
Balancing interests of the various
Stakeholders
Corporations governed through
Independent outside directors with shared
Stakeholder representation
Stakeholder management
Means
Ends and means
Social responsibility
Individual not the organization matters
Both individual and organization
Society best served by
Pursuing self interest (economic efficiency)
Pursuing joint interests (economic symbiosis)
Profitability is vital for survival yet simple profitability is not sufficient, but yet it provides a company with the finances to improve its competitive position and achieve its objectives. Furthermore, people are important and gaining their trust enables productive teamwork and investment in mutual relationships. Firms therefore require a certain level of profitability to be competitive and therefore survive, while a certain level of social responsibility is needed to retain the trust and the support of key stakeholders. Porter and Kramer created the concept of shared value. These authors