Introduction
From the historical point of view of innovative strategies, there is an understanding of how thoughts related to economy, politics, society, and culture stayed throughout the history of business organization development (Latapí Agudelo et al., 2019). The road of purpose that corporate goal represented – from Adam Smith’s monumental work to the present day with stakeholder capitalism or ESG integration – is a wonderful tale of transitioning goals and viewpoints within the business world (Bruner, 2021; Smith, 2010). The paper will focus on the historical economic perspective of SHWM and modernity and ESG requirements as a strong factor for companies’ decision-making.
Historical Perspective
Through his revolutionary book (1776), Adam Smith was celebrated for creating classical economics, which paved the way for new economic thinking. Smith conceived profit maximization as the main vehicle for humanity, which fundamentally depended on the idea that the formation of an individual’s fulfilled aspirations can make the whole society happy (Smith, 1776). In contemporary neoliberal days, when the main truth of doing business is corporate greed, which is predetermined only by profit maximization, there was an all-out engrossment.
The Industrial Revolution in the 19th drastically changed businesses as companies such as Standard Oil, Carnegie Steel, and Ford Motor Company became symbols of industrial capitalism while prioritizing profit maximization overtook the corporate objective (Mokyr, 2011). After the onset of the 20th century, the era of managerial capitalism was about to cement in the business world; where Standing at the end of the 20th century signified a fully free-market economy, which turned out as completely free from government interference, as it was described by Milton Friedman (Friedman, 1970). This is a manifestation of the corporate America mindset, predictable in the instances of such takeovers as leveraged buyouts, concentrating on the benefits of the shareholders.
On the other hand, the critiques emerged in the late 20th century and beyond, causing a new understanding of the key issues of social injustice, environmental degradation, and irresponsible corporate behavior (Arnold & Lewis, 2019). The concepts of stakeholder theory and CSR were devised later on. The business used the social responsibility aspects of the stakeholder theory as a founding principle to the idea that the company’s responsibility should not be limited to the stockholders and the society alone (Freeman, 1984). As done by businesses like Patagonia, Unilever, and Interface, shifts toward a wider perspective are slowly taking place. For these enterprises, the demand that they should only be accountable to the stakeholders, the society, and the environment issues rather than only profitability performance is a new reality.
Shareholder Wealth Maximization
The classical economic approach, which saw the increasing dominance of SHWM in the latter half of the 20th century, emerged based on the idea of shareholder value maximization being a single-dimensional circuit through which society benefitted. According to this approach, when managers have the same interests as shareholders, the best outcome is expected, whereby efficiency and the best performance are realized (Friedman, 1970). Friedman’s chief idea is that companies serve only the shareholders, so shareholders’ empowerment will automatically spur economic efficiency and general public welfare (Kaplan, 2020).
However, there is a balance that it must strike, as the scale of the whole environmental impact, along with the effects on the community and society, needs to be considered. The critics claim that social inequalities and discrimination occur when corporate social responsibility is seen as insignificant, leading to unethical behavior and, thus, to environmental environmental pollution. In addition, the major reasons set by economists for this choice of maximizing shareholder wealth are being critically and heavily scrutinized. There are now stains of doubt about its values and merits (Jensen, 2001).
In this respect, the opinion makers among the high officials (C-level executives), for instance, CEOs, CFOs, and board members, make the strategic planning of a company and the management style based on SHWM. Shareholder value growth generation at the first management level is seen as a duty subscribing to the owners of the shares. Without robust financial performance, stock prices will grow to the minimum (Arnold & Lewis, 2019). The ex-CEO of General Electric, Jack Welch, is famous for his tough position regarding shareholder value.
ESG (environmental, social and corporate governance)
ESG integration is an ethical change with environmental sustainability, investment in social acceptance, strong governance practices, and eventually, financial success reaching the peak. ESG standards have become a major item to be considered in recent years because, just like the other financial aspects of an organization’s stability and resilience, they have to be on par (Clark, 2000). Simply put, incorporating ESG means businesses must think well beyond profit maximization and about their positive and negative impact on all the stakeholders. By integrating ESG, Environmental, Social, and Governance in a business decision-making system, companies can enhance security measures, improve their reputation, and become more sustainable (Clark, 2000).
Socially Responsible investing alters firm objectives by changing the standpoint of strategic priorities, business resources capitalization, and companies’ performance measurements. While organizations are searching for a competitive edge by tapping emerging opportunities, the growing trend is ESG being integrated into their business processes for strategic planning, product development, and supply management. They look for risk-control mechanisms, e.g., investing in projects concerned with renewable energy to reduce the firms’ carbon footprints and using internal diversity and inclusion programs. (Grove & Clouse, 2018).
In the future, ESG integration will completely reform corporate targets and company strategies. Addressing issues such as accounting and dialoguing with stakeholders, consumers, and regulators, as well as preparing for more and more transparency and accountability, will clear the path to play a key role for ESG (Grove & Clouse, 2018). Integrating the ESG aspects into its practices and mentioning the company’s conscious attitude towards sustainability and social responsibility will promote overall competitiveness; the investor influx will follow, and stakeholders’ long-term commitment and loyalty will lead to trust and mutual interest.
Current Arguments Concerning Corporate Goals
At the core of the current debate are two opposite answers to the question of how much corporate leaders should focus on shareholder wealth maximization (SWHM) (Sheehy, 2005) versus a broader understanding of environmental, social, and governance (ESG) aspects incorporated into decision-making processes (Fleck & Schjerning Povlsen, 2023).
Supporters of SHWM insist on an emphasis on the relentless battle for maximizing shareholder value, which serves as one of the main tools of the economic efficiency and wealth generation process. This position is about maximizing the profit of the enterprise by making the corporate objectives connected to the accumulation of the shareholder fund and rewarding managers for delivering good financial results (Friedman, 1970). The supporters believe that if economies exhibit horizontality and uniformity, myopic behaviors can proliferate, leading to the abandonment of the interests of society, which creates welfare in the long run. Meanwhile, ESG considers the business responsibilities not only to shareholders but to par with superior mechanisms, such as the whole world and other people or groups whose interests must be considered above all that.
Emerging Frameworks: Increasing integration of SHWM and ESG concepts is also seen to be mobilizing and engaging communities beyond the usual, as well as the emerging viewpoints on firm functions such as stakeholder capitalism. The term stakeholder capitalism is equivalent to the business idea that companies should best the interests of all the stakeholders, including employees, customers, suppliers, and the community nowadays. It cannot be simply an interest of shareholders (Freeman, 1984). By extension, this philosophy embeds the business’s different operations that closely interrelate society and the environment. Instead of being payback-oriented, it promotes an integrated way of creating value (Porter & Kramer, 2006). The converse view is the shareholder supremacy theory, which maintains that a business should operate exclusively to benefit shareholders. However, according to stakeholder capitalism, businesses operate not only in the interests of shareholders but also in the social-economic contexts of society. This means they are, by default, responsible for how their actions affect all stakeholders (Smith, 2011).
Recommendation
All-types corporations, both small and big, should embrace corporate responsibility dialogue and start to deliberately find ways to stay in balance between SHWM and shareholder capitalism. This means a change in the orientations of corporations from immediate profit and increases in shareholder value ratio towards sustainable growth and environmental activism (Freeman & Dmytriyev, 2017; Freeman & Velamuri, 2023). Small and Medium-sized enterprises (SMEs) can emphasize the local involvement of the residents and adopt sustainable practices, which will mobilize the residents to take action on green initiatives, startups, and the tech sector, which can be built on the idea of sustainability in their core values and culture. Nowadays, it is hard to imagine, but global MNCs can take advantage of their chain of distribution, international reach, and supply to combat contemporary social and environmental problems. On the contrary, social enterprises and non-government organizations can become the real torchbearers of the community by setting the example of transparency and fairness and implementing projects focusing on local communities. To sum up, stakeholders’ interests should be prominent, and any business could be considered responsible global citizens and benefit other people or communities (Dmytriyev,2021).
Conclusion
In conclusion, shifting the company’s goals from profit maximization to maintaining shareholder wealth and integrating ESG indicates the deep transformation of society’s values, economic principles, and business practices. We all know that a heated discussion of the objectives of big business is quite topical nowadays. Besides, social and ecological responsibility is recognized on an increasing scale. This can be accomplished through the use of a holistic approach that encompasses both the financial performance and the green (environmental), community (social), and governance (good governance) indicators. Through this move, transnational corporations will pursue sustainable development, enhancing the business’s growth and the surrounding environment.
Reference
Arnold G., and Lewis D., 2019. Corporate Financial Management. 6th ed. Harlow: Pearson
Bruner, C. 2021. Corporate Governance Reform and the Sustainability Imperative. Stembler Family Distinguished Professor in Business Law, University of Georgia School of Law. Retrieved from University of Georgia School of Law Research Paper Series. (Paper No. 2021-22).
Clark, G.L., 2000. Pension fund capitalism. Oxford University Press.
Fleck, R.S. and Schjerning Povlsen, C., 2023. Exploring the decision-making process for environmental, social, and governance (ESG) procurement investments within organizations: Interviewing sustainability managers.
Freeman, R. E., 1984. Strategic management: A stakeholder approach. Boston: Pitman.
Friedman, M., 1970. The social responsibility of business is to increase its profits. The New York Times Magazine, 13(1970), 32–33. https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-business-is-to.html
Freeman, R. E., & Dmytriyev, S., 2017. Corporate social responsibility and stakeholder theory: Learning from each other. Symphonya. Emerging Issues in Management, (1), pp. 7–15.
Dmytriyev, S. D., Freeman, R. E., & Hörisch, J., 2021. The relationship between stakeholder theory and corporate social responsibility: Differences, similarities, and implications for social issues in management. Journal of Management Studies, 58(6), 1441-1470.
Freeman, R. E., & Velamuri, S. R., 2023. A new approach to CSR: Company stakeholder responsibility. In R. Edward Freeman’s Selected Works on Stakeholder Theory and Business Ethics (pp. 251–264). Cham: Springer International Publishing.
Grove, H. and Clouse, M., 2018. Focusing on sustainability to strengthen corporate governance. Corporate Governance and Sustainability Review, 2(2), pp.38–47.
Jensen, M. C. 2001. Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8–21.
Kaplan, 2020. Financial Management – ACCA Exam Kit. Berkshire: Kaplan Publishing.
Latapí Agudelo, M. A., Jóhannsdóttir, L., & Davídsdóttir, B. (2019). A literature review of the history and evolution of corporate social responsibility. International journal of corporate social responsibility, 4(1), 1-23.
Mokyr, J., 2011. The European Enlightenment, the Industrial Revolution, and modern economic growth. In Law, economics and evolutionary theory. Edward Elgar Publishing.
Porter, M. E., & Kramer, M. R., 2006. The link between competitive advantage and corporate social responsibility. Harvard Business Review, 84(12), 78-92.
Rivera, L., Ortiz, N., Moreno, G. and Páez-Gabriunas, I., 2023. The Effect of Company Ownership on the Environmental Practices in the Supply Chain: An Empirical Approach. Sustainability, 15(16), p.12450.
Sheehy, B., 2005. Scrooge-the reluctant stakeholder: theoretical problems in the shareholder-stakeholder debate. U. Miami Bus. L. Rev., 14, p.193.
Smith, A., 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan and T. Cadell.
Smith, A., 2010. The Wealth of Nations: An inquiry into the nature and causes of the Wealth of Nations. Harriman House Limited.
Smith, R.E., 2011. Defining corporate social responsibility: A systems approach for socially responsible capitalism. University of Pennsylvania, Philadelphia, Pennsylvania.
Watson D. and Head T., 2019. Corporate Finance, Principles and Practice. 8th ed. Harlow: Pearson
write