A Stakeholder Apologetic for Management

Abstract

Whom does management serve? No question is more central to business ethics than this. The classical theory of the firm assumes that management acts to maximize shareholder wealth, rather than its own, resulting in objective function which does not differ based on whether the firm is widely or closely held (Henderson and Quandi, 1971, 52-101; Samuelson, 1948, 21, 57-89; Fama, 1972, 299-301). Cyert and March (1963, 5) wrote, Assuming that the firm is operating within a perfectly competitive market, the generally received theory asserts that the objective of the firm is to maximize net revenue in the face of given prices and a technologically determined production function. Jensen and Meckling (1976, 306-7) called the classical theory of the firm an empty And Eisenhardt (1989, 57-8) noted that economists are accustomed to treating the organization as a box within the theory of the firm. But the widely-held firm is hardly a black box. And assuming that management strives to optimize interests other than its own appears heroic, to say the least. Further assuming management singles out anonymous and impotent shareholders for its benevolence is incredible. In Tiie Wealth of Nations, first published in 1776, Adam Smith noted the separation of ownership from control and the lack of congruence of managerial and stockholder interests which exist in stock companies. He concluded, Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such companies (1937, p. 700). Because of this, Smith believed, use of the corporate form of organization was only reasonable in certain isolated circumstances (1937, 715). In 1932 and periodically thereafter Berle and Means expressed concern about the apparent problem and found that ownership continued to grow more diffused and separate from control (Berle and Means, 1968). Chandler described the corporate