MANAGERIAL PRACTICE

Managerial Practice

Managerial Practice

Introduction

The most fundamental distinction among models of corporate governance is the one made between the shareholder and the stakeholder models. But in these times of globalization, the powerful growth of institutional investors has an increasing impact on how corporations function. One important question that arises is whether one particular national corporate governance system is better than another, and whether national governance systems will converge. If convergence does occur, does that mean that systemic differences will disappear, leaving only one model, or are we witnessing a dual convergence leading to a hybrid model, specific to each system according to the dependency path? (Hofstede 2003:50)

Stakeholders

In today's business environment, firms are facing mounting pressures from different stakeholder groups to adopt socially responsible practices (McWilliams & Siegel, 2001, p. 117). This issue has aroused fierce debate to whether these practices have an adverse impact on the firm's ability to meet its obligations towards its shareholders (i.e. to maximize profits). Firms reacted in various ways adopting one of two opposing theories to conduct their business through; the shareholder theory and the stakeholder theory (Whitehouse, 2006, p. 284). The shareholder theory argues that the ultimate aim of the business is profit maximization and that a business should adopt only those practices that contribute to this goal (Friedman, 1970). Conversely, the stakeholder theory takes a more ethically appealing stance holding that the responsibility of the firm goes beyond maximizing profits reaching discretionary responsibilities of serving the interests of the whole community (Aragndona, 1998, p. 1093).

Corporate social responsibility and the stakeholder theory are considered hot topics in strategic management and the context of ethics today (Marens & Wicks, 1999, p. 273). Even though the definition of CSR remains under academic debate, several firms have come to establish some consensus definition upon which they have based detailed CSR actions and practices as part of their code of conduct (Whitehouse, 2006, p. 279). Such adoption and implementation of the concept has become necessary due to pressures from stakeholder groups and as a result it has become integral to determine the extent of management's involvement in CSR (McWilliams and Siegel, 2001, p. 117). Debates regarding the integration of ethics and adoption of CSR in business practices have triggered interest in researching these concepts and similarly have intrigued the interest to write this paper.

Thus purpose of the paper is to conduct a comparison between the shareholder and stakeholder theories and demonstrating the various views that refute and support each, in an attempt to answer the question of whether corporate social responsibility and business ethics have a positive impact on profitability or financial performance. It is hypothesized that corporate social responsibility has a positive impact on profit maximization if strategically planned.

The paper is organized as follows; the literature review comprises three main sections discussing business ethics and social responsibility, profit maximization and finally the effect of business ethics and CSR on profit maximization. The first section puts forward basic definitions in business ethics and presents the concept of CSR ...