The Ethical Obligations of Corporations to Shareholders

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Corporations have an obligation to make money for its shareholders.
Corporations have an obligation to make money for its shareholders. (Image: Jupiterimages/Goodshoot/Getty Images)

Early corporate executives commonly focused on pursuing the highest possible return on investment for shareholders. However, since the 1970s, organizational leaders have turned more and more to corporate social responsibility initiatives, changing the focus from earning money to meeting the needs of stakeholders. While the corporation’s most obvious obligation to shareholders is still to earn money for them, it also has certain ethical obligations to uphold.

Corporate Social Responsibility

Corporate social responsibility is the practice of conducting business in a manner that considers the impact on all stakeholders involved. Often, the practice of ethical corporate social responsibility is in the best interests of the shareholder as well as other stakeholders. For example, when a corporation provides funding for community projects, it creates a positive image for itself in the community, which in turn has a positive impact on the bottom line. Additionally, shareholders often want to believe they are investing in an ethical organization. Thus, the corporation has an ethical obligation to shareholders to uphold a corporate image of which shareholders can be proud.

Shareholder vs. Stakeholder

The terms, “shareholder” and “stakeholder” are easily confused. A shareholder is an owner of the corporation. In most cases, this means the shareholder owns stock in the company. Stakeholders include all those who have a vested interest in the success of the organization. This includes shareholders as well as employees, customers, suppliers and the community. Contemporary managers face the difficult task of balancing the often competing needs of shareholders and stakeholders. While the focus is commonly placed on stakeholder rights, organizational leaders must remember the corporation’s ethical obligations to its shareholders.

Shareholder Value Perspective

The shareholder value perspective places the greatest value on the corporation’s ethical responsibility to earn money for its investors. Additionally, the corporation has an ethical obligation to not only be profitable, but also to be consistently profitable, providing the greatest return on investment to its shareholders as is possible in the long-term, while also acting in an ethical and responsible manner.

Legal Obligation

A corporation has an ethical obligation to meet all legal requirements in regards to its shareholders. The organization has an ethical obligation to ensure the business maintains compliance with all applicable state and federal laws and regulations, including those of OSHA, FMLA, FLSA. In addition to meeting legal obligations, the corporation must refrain from engaging in illegal activities that might harm shareholders or place liability on them.

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