shareholder value or ethics?


Via Organizations and Markets, the Chronicle has an article about the business of business education. Should business professors teach their students (particularly MBAs) to pay attention to ethical and moral issues, instead of just focusing on shareholder value maximization? Many business profs contend that ethics is not their domain of study. Leave that to the philosophers. Others, however, argue that by only teaching MBA students how to make a profit, business schools fail to establish a professional ethic.

Lynn A. Stout, a professor of law at the University of California at Los Angeles and an expert on corporate governance, also is using behavior to challenge the shareholder-primacy approach emphasized at business schools. She argues that businesses lose public trust and damage employee morale when they base decisions solely on how they will affect shareholders’ profits. Companies are more likely to succeed, she argues, if they follow a “team production” approach in which the interests of shareholders are balanced with those of other parties, including employees and customers. “The tough part is getting business-school professors to focus on it,” she says. “We’re asking them to move on from a simple ‘earth is flat’ theory of the corporation that’s so easy to describe and apply. There’s more to the corporation than the simple problem of getting the directors to do what the shareholders want them to do.”

[Herbert] Gintis and [Rakesh] Khurana argue that business students should have the same sense of social responsibility that members of other professions have. “If you’re a doctor, you don’t decide how to treat a patient based on how much money you’re going to make off the case,” says Mr. Gintis…

It seems strange to me that this debate is framed simply as shareholder value vs. other stakeholder concerns. Clearly, the two are connected in many ways. Corporate image has a large impact on investor confidence, as shown by a number of recent studies. If corporations want to keep their stock prices high, net of other financial factors, they should try to do things that do not violate the public’s trust. So, there is a shareholder value reason for being a good corporate citizen and being ethical (Richard Posner mentions this in the article). The second point is that Enron and other recent cases of corporate fraud would have been prevented had the executives actually followed the shareholder primacy rule. The problem with Enron wasn’t just that Fastow and Skilling lacked an ethical grounding. They didn’t care about their shareholders. They were only concerned with lining their own pockets.

Written by brayden king

June 23, 2006 at 4:49 pm

Posted in brayden, ethics

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