Business Ethics and Risk Management

Table of Contents

2.Introduction

3.Friedman Theory

4.Stakeholder Theory

5.Conclusion

6.References

2.Introduction to Ethical Theory and Business

The CEO of music streaming company Spotify was criticized for his statement on musician which stated that if musicians want to make more money then they have to make more music. This approach was criticized because of Spotify underpaying musicians and their greedy approach. Through this essay, it needs to be clarified whether the statement made by the CEO of Spotify is ethical and whether Spotify's approach of paying less to the artist is valid. To decide this issue we will look into the idea propounded by renowned economist Milton Friedman and compare it with the approach taken by stakeholder theory.

3.Friedman Theory

In a very popular article titled "The Social responsibility of a business is to increase its profit" world-renowned economist criticized the people in the business community who believed that the aim of running a business is in achieving a beneficial social objective. This essay was also known as “Friedman Theory” This essay states that the primary target of a company is to maximize the return for shareholders. This essay has led to a debate whether the purpose of a company should focus on the benefit of shareholders or it should focus on the welfare of employees and for the benefits of its customer. “The plea for maximization of shareholder returns that constituted a departure from the prevailing wisdom and put that prevailing wisdom under immediate threat” (Cheffins,2020). When the essay was written it was accepted that profit generation was the main purpose of a company. Milton Friedman's approach would have been straightforward in this case as he has clearly stated that the primary target of a company is to maximize the return for shareholders. In this case, even though the criticism against the CEO Daniel Ek is for underpaying musicians but Ek's statement was about musician expecting more pay for less work they are doing. According to him if they give more work then they can earn more money. Because making huge money by making one song in two or three years would seem wrong to Milton Friedman as it would be against the interest of the shareholders of the company. Because according to Milton Friedman primary target of the company is profit generation for their shareholders. As Daniel Ek, the CEO of Spotify is the employee of the people who own the company. They have certain objective in their mind. The objective would be to make profit. Thus Daniel Ek needs to work to achieve those objectives. “In some cases, his employers may have a different objective. A group of persons might establish a corporation for an eleemosynary purpose--for example, a hospital or a school. The manager of such a corporation will not have money profit as his objectives but the rendering of certain services” (Friedman,1970).

Another important thing that Milton Friedman answered is regarding social responsibility. If the Company's executive has social responsibility then he would not be able to act in the best interest of the company. He can't increase the price of the product because it would lead to inflation which would be against his social responsibility. Friedman stated that the executive is spending someone else's money in fulfilling his social responsibility. The stockholder, employees and customer can separately spend their money on fulfilling their social responsibility if they need to do so. According to Milton Friedman the interest of the company's shareholders is above the employees. In this case, the musicians can be considered as the employee even though they are not directly employed by the company for the sake of understanding the theory propounded by Milton Friedman. In this case, Milton Friedman would look into the interest of the company over that of the employees. But the employee’s interest will not be completely neglected by Milton Friedman because there are chances that they might stop their association with Spotify. In this case, the interest of musicians might not be considered as important because Milton Friedman might find the demand for asking for more money for one song in a period of two to three years as unreasonable. 

4.Stakeholder Theory

According to stakeholder theory, it has been held that the company's stakeholders involve anyone who is impacted by the company. This view is contradictory to the views expressed by Milton Friedman according to whom the in-company only the interest of shareholders need to be considered. Thus stakeholder theory includes customers, employees, competitors, community, etc. "The basic idea is that businesses, and the executives who manage them, actually do and should create value for customers, suppliers, employees, communities, and financiers (or shareholders)"(Freeman,2009). According to Freeman the objective of the company is to create value as long as the profit is made without any deception and fraud. Thus based on Freeman's approach, the question that arises is whether underpaying a contractor would be considered as deception or fraud. The underpaying or contractor can't be considered as deception or fraud. Freeman has used the term value instead of profit.

Freeman mentions a long list of people for whom value is to be created. This would also include the musicians that Spotify is associated with. The important question that needs to be asked is whether underpaying the musician associated with Spotify would be against stakeholder theory. This would be against the stakeholder's theory to underpay a contractor or an employee for the work that they have put in. But in this case, the important thing to be considered is whether Spotify is underpaying their employees. To decide this question we can look into different things like how are the competitors paying the musicians who are uploading songs on their portal.

The other important thing that needs to be considered is whether Spotify is treating music as a product in place of an art form. The answer to this question is yes. The important question is whether a value is being created by encouraging art. Yes, value is created if we encourage art in any form. But in this case, value is not created as the company is forcing musicians to create more music in less time which would compromise with the quality of the music. If the quality of music is compromised then the value will not be created for customers too. It is also important to create value for shareholders according to Freeman’s theory. Thus is there a conflict between the interest of shareholders and the interest of musician and customer in this case. There is a conflict of interest between the interest of shareholders and that of musician and customer. In this case how to decide whose interest needs to be considered. In this case, the interest of musicians and customer needs to be considered based on stakeholder theory. If a value is not created for the customer then it might affect the company's profitability because of the chances of the customer moving to competitor companies. Similarly, if the value is not created for the musicians there is a chance that the musician might cut their ties with Spotify. In both, these cases company will be at loss, and thus in the interest of shareholders, musicians, and customers, the musicians mustn't be underpaid.

The stakeholder theory has many definitions that are not in favor of stakeholder theory. Even though the Freemans definition is most popular there are many different approaches. Thus creating a problem for the readers. 

Conclusion on Ethical Theory and Business

In this case, the stakeholder approach is found to be more convincing compared to the approach taken by Milton Friedman. The approach taken by Milton Friedman is outdated as it was given in the year 1970 and no changes have been made to it. Based on Milton Friedman's approach the focus is only on profit-making by the firm. It is only considered with the aspect of shareholder’s profit. According to it, the executives are appointed to work for the benefit of the shareholders of the company. But these days it is important to ensure that value is provided to all the stakeholders associated with a company. In the present case if the value is not provided to other stakeholders such as musicians or customers then in the end it will affect the profits of the company. Thus affecting the shareholders. Milton Friedman's approach is also faulty because it states that companies are not responsible in any way for the welfare of society. If any charitable work is to be performed it will be performed by the shareholder of the company in their capacity. But in recent times the companies are required by law to have corporate social responsibility. 

6.References for Ethical Theory and Business

Cheffins,R.B. (2020) Stop Blaming Milton Friedman, University of Cambridge. available at https://poseidon01.ssrn.com/delivery.php?ID=490074106114121088123087011020091104041021014087045043087031003025124101014085003075048120001122008096009117110066089015023081008007035089016084085065083065014031120024034042093092017066097065125126029097119117114116074099065025101111123087127082115007&EXT=pdf>

Freeman,E.R. (2009)"Managing for Stakeholders." In Ethical Theory and Business (8th edn.). New Jersey: Pearson.

Friedman, M. September 13, 1970, The Social Responsibility of Business is to Increase its Profits, The New York Times Magazine available at http://umich.edu/~thecore/doc/Friedman.pdf

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