8.In whose interest and whose benefit should a firm be managed? Law doesn't say 2. Economic argument 1. Max interest of stockholders 2. Invisible hand says self-interest will produce greatest good, but moral hazard, externalities, and monopolies exist 3. Externality in spillover costs when letting out pollution 4. Moral hazard when doctors prescribe expensive unnecessary tests and pass along cost to insurance companies 5. Oligopolies like cellular service providers (ATT, Verizon, Sprint) 3. Stakeholder theory of the firm 1. Stakeholder concept 1. Stakeholders are those benefitted or harmed by corporations 2. Narrow definition are those vital to success of the firm 3. Broad definition are anyone who can affect or is affected by the corporation 2. Stakeholders in the modern corporation 1. Corporation is central, outside of that is management, local community, customers, employees, suppliers, and owners 2. Owners have stock and expect returns 3. Employees have their job and their livelihood, expect security, wages, benefits, and meaningful work 4. Suppliers are vital to the success of the firm, requires money for their projects 1. Chrysler close with suppliers, when Chrysler was on brink of disaster, suppliers cut prices 5. Customers want quality goods and services 6. Local communities benefit from tax base and economic/social contributions of the firm, expect them to be good citizens and work with community 3. Role of Management 1. Management plays a special role, duty of safeguarding welfare of the corporation 2. Balancing multiple claims of conflicting stakeholders 3. Stakeholder theory doesn't give claim to one stakeholder group over another 4. Stakeholder theory must redefine the purpose of the firm 1. Stockholder theory says it is maximize welfare of stockholders 2. Stakeholder theory says:
A B B Corporation Ought to Be Governed… Managers Out to Act… Background Disciplines of "Value Creation" are… Doctrine of Fair Contracts In accordance with six principles In interest of stakeholders Business theory, theories that explain stakeholder behavior Feminist Standpoint Theory In accordance with principles of caring/connecting/r elationships To maintain and care for relationships and networks of stakeholders Business theory, feminist theory, social science of understanding networks Ecological principles In accordance with principle of caring for the earth To care for the earth Business theory, ecology, other ● 1. Contractual equality 1. If tables were turned, would each party agree to the other side of the bargain 2. Principle of Exit and Entry- any contract that is the corporation must have a clearly defined starting and endpoint 3. Principle of Governance- procedure for changing rules of the game must be agreed on by unanimous consent 4. Principle of Externalities- if contracts between A and B have a cost on C, then C has a right to enter the contract conversation 5. Principle of Contracting Cost- All parties must share in the cost of contracting 6.
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