We begin this course by looking at the questions of why do firms exist and what the purpose of business is in society.

To do this, we look at 4 main views of the firm.

Topic 1 focuses on the shareholder approach and the stakeholder approach, and Topic 2 on the triple bottom line view and the corporate social responsibility view.

In short:

The shareholder approach, sees the firm as existing principally, or even exclusively, for the benefit of its shareholders and the role of the Board and managers is to deliver, or some would say maximise, shareholder value.

In contrast, the stakeholder approach sees the firm as a social entity whose existence requires the inputs of a broader range of parties than merely that of shareholders, plus the firm impacts on, and is impacted on by, many parties. In this sense, managers have a role to deliver or, again some would say, maximise, value to all of the firm’s stakeholders, not just shareholders.

The triple-bottom-line view that sees a firm as having economic, social, and environmental responsibilities and proposes that these all need to be given consideration in Board and management decision making.

Finally, the corporate social responsibility view, which is similar in many ways to the triple bottom line view, sees a firm as having a number of social and environmental responsibilities and proposes that pursuit of profits is conditional on these responsibilities also being met.

Much of this debate on different ways the firm is viewed and, flowing from that, the responsibilities of Boards and managers in how they go about their decision making and activities, is based on our view of the world and how business fits in.

In particular, property rights is a strong theme in the shareholder view, where one argument supporting this view is that shareholders are the owners of the business and as such, managers have first and foremost a responsibility to meet the interests of shareholders – the owners.

Critics of this view might say that this shareholder focus tends to separate business out of the social context and instead business should be seen as having a purpose to benefit society.

If in doing so, a business can make money for shareholders then all well and good, but growing shareholder value is dependent on social (and in the sustainable business context, ecological) wellbeing criteria first being met.

Another point made by critics of the shareholder view is that shareholders are not the only parties that are responsible for a firm coming into existence and staying viable.

Firms need a legislative framework to operate in, infrastructure (transport, utilities etc), use of natural resources (land, air, water etc), employees, banking and finance…. so the list goes on.

So why, if all of these things are needed to see a firm exist and function, do we separate out shareholders as being the ones that the Board and managers give first priority to? Why aren’t all of the other stakeholders given similar importance in having their interests met?

It’s here that we see the difference in the shareholder approach verses the other 3 approaches we cover coming into the open. The stakeholder, TBL and CSR approaches all take this broader view of business – as it being something embedded in society – and all parties who are impacted on by a business have a valid stake in the firm whether a shareholder or not.

Why does all of this matter?

Well, as we work through the rest of the course hopefully this will become clearer but at the core is the question of what the role of the Board and management should be – what purpose should these key parties in an organisation pursue?

In addition, it impacts on what might be seen as right or wrong in business decision making.

For example, those holding a strong shareholder view could – and do – argue that charitable giving by a firm is unethical unless there is a clear payback to the firm…..the reason is that managers are claimed to be spending shareholder money on things that do not add to shareholder value.

Under this view, any charitable actions that have no payback to the firm should be left to shareholders to do privately out of their distributed profits.

Whether this view is a fair one or not is something we will consider during the course but hopefully it illustrates the point of why the questions covered in these first two topics are important to work through early in the course.