The main purpose of the existence of a firm in the view of traditional and modern firm is different. Therefore, different firms within the same business have different views and approaches to the external parties. In a firms activity there are many participants for the effective delivery of goods and services. These participants called stakeholders. But, this paper deals only with the comparison of traditional and modern views of the role of the firm in relation to its shareholders and society only.
Firstly, the paper presents some points about a firm, its purpose, and followed by the relationship with the shareholders .Thereafter, Firms and stakeholders relationship in the view of the two firms are discussed focusing on societal corporate responsibility. Finally, the paper has a conclusion based on what the main topics are discussed.
What is a firm?
Many scholars define the term firm in different approach. But for the purpose our discussion a firm is considered as a group of individuals, bodies, and agents that they are agreed to work together in order to achieve the interest of the owners or for the common interest of all participants.
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From the above definition it is clear that some firms intended to benefit the owners and others stand for the interest of all participants including the society. And this is the main points considered by the writer to categorize whether a firm has traditional view or not. That means there is a difference in the view of the modern and traditional firm towards its shareholders and society as it is discussed on the subsequent part of the topics.
Purpose of a firm
The primary purpose of the existence of a firm in view of the traditional firm and modern firm is different. According to the traditional view of a firm, the purpose of a firm is to maximize shareholders (owners) wealth through production of goods and services. Here, wealth maximization focuses only on monetary profit for shareholders. They struggle to get profits on every effort. In doing so, violation of norms and ethical thinking may be exercised. But, in today's world, there are many norms, principles, and laws that the firm should abide. This again leads the overall target of a firm to focus on the satisfaction of its shareholders, the community, customers, suppliers, and government called stakeholders. This means, the modern firms' primary aim is not only to maximize shareholders interest but also to open a chance for all stakeholders to benefit from the firms activity. In this view the focus is to efficiently produce goods and service that contribute to the well being of the society. But this does not mean that a firm does not need to make profit, it is obvious that without profit firms could not able to stay in business.
Firms and Shareholders
Shareholders are considered as the owners of the firm because of their contribution of capital to the firm. In doing so, they expect return on their investment. While, overall return comes from proper administration of resources, which is primarily the responsibility of the manager of the firm.
In a traditional firm, Managers are mostly the owners of the firm. Who is the one that makes decision on what to produce, when to produce, how to produce, how much to produce and how much to be the price of the goods and service in the market.
However, in the modern business firms, Managers are agents of the shareholder, who is elected by the shareholders vote in fulfilling the firms' goal. Sometimes, managers may be one of the shareholders. Whatsoever, in both cases the managers makes decisions and is responsible for the smooth run of the firm by making decisions on the activities of the firm.
In relation to the interaction with other stakeholders, the traditional firm view is focused on the profit gain from the business activities, which might be engaged through activities that the society may consider as "out of the norm activity." That is to say, firm's activity may include doing things unethically. Among them, providing poor quality of goods and service and participating on corrupted activities are two of them. Generally, they might engage on harmful activities for other stakeholders (customers, employees, suppliers etc).
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In contrary, in a modern firm wealth maximization is not only for the owner but also for other stakeholders in doing activities ethically and lawfully. They recognize the contribution of each stakeholder and try to handle all of them in a mutually beneficiary approach.
In relation to risk, the traditional firm assumed that the major risk taker in the case of bankruptcy on the firm is the shareholder. That is why; most people were advocate that company's activities should be directed primarily toward protecting shareholders interests.
However, Drucker (2001) argue that, in the modern view of a firm the firm's chief asset is its human capital. As he said, the means of production is knowledge, which is owned by knowledge workers that are parts of the society and is highly portable. Without employees a firm does not exist. Furthermore, in the modern firms view, if the firm fails to continue, all stakeholders are considered to be risk taker. Therefore, if one of the stakeholder's mistreated, firms will lead to failure or to a reduction of target value.
In line with the above idea, Freeman (1984) emphasized that corporate management should look beyond shareholders and proposed a stakeholder perspective in managing the firm.
Firms and Stakeholders
Stakeholder, according to freeman (1984), is the name given to group of people that they contribute to the value creation by the firm. It includes shareholders, employees, suppliers, customers, communities, and lenders. They are the main participants in the transaction of the firms in the way of providing their own goods and services and in receiving goods and service from the firm. As Sivarama (1998) said ,it is assumed that all participants who have transactions with a firm are seen as willing participants in free and competitive markets and are fully compensated at fair market prices for their services/supplies or get fairly valued products/services for the prices they pay.
Shareholders are one of stakeholders. They are assumed as the owners of a firm because of their contribution of capital in establishing a firm. In doing so, they expect financial return from the firms activity.
Employees also considered as one of a stakeholder in the modern view of a firm and they contribute their time, skill, idea, and experience for the achievements of firms' goal. They make different tasks specified on their contractual agreement. In return, they expect periodical payments and other benefits as per the agreed contract, national and international labor laws. Besides, in modern firm, employees have incentives for their outstanding efforts made.
But in the traditional view of firm, employees could not claim on any benefits rather than the salary specified on the contract. In addition, no one could guarantee their employment; it is on the will of the owners or managers.
In relation to the Society, in the current era, Society needs a responsible firm for corporate social activities which we will discuss in more detail in the next section.
Suppliers need to be sure whether the firm could make continuous offer for raw materials needed or not and customers wants timely delivery of products or services maintaining consistent quality at an affordable price.
In general, in contrary to the traditional firms, the modern firms consider all participants as a true legal claimant for their rights. In line with this Buchholz(2008) adds ,A firm must produce efficient product and service that satisfies people need by a well trained employee. In doing so wealth maximization of the participant followed.
Firms and Society
Firms and society are greatly interlinked in many aspects. Firms' corporate social responsiveness is one of the main issues that we should discuss in order to see their relationship on the following sections.
According to Moir (2001) the term Corporate Social Responsibility (CSR) refers to
the continuing commitment by a business to behave ethically and contribute to economic development while improving the quality of life of the work force and their families as well as the local community and all other members of the public at large.
In addition, Carroll and Buchholtz (2003) defined CSR as the economic, legal, ethical, and discretionary expectations of the society from a firm at a given point in time. That means, CSR urges firms to not only maximizing profits but also to lay more importance on improving the economic and social standards of the community in their countries of operation.
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Traditional firms think that, investing on CSR activities is like a donation to the society and it is a wasteful activity to the firm. Because of this, their activities are planned in the vision of to benefit only the firm, most of the time at the expense of the society. They may pollute their environment by releasing their industry wastage to the atmosphere and lands. Which adversely affect the well being of the society, ecosystems etc. They do not want to pay additional money for the conversion of their wastage to the legal stanadard.Generally; they consider only the return of the monetary value that comes out from their pocket. However, in today's world, there are law, ethical standards, and international norms that firms should considered when doing their activity and in fact these revealed that CSR activities have the following advantages.
Firstly, doing CSR activities helps companies to get a competitive advantage by creating smooth relationship with local communities and public organizations. In support of this idea Kanter (1999) asserts, CSR activities help firms to improve firms' reputation and customer loyalty which results new markets creation. In addition, he argues that CSR makes to boost employee morale.
Furthermore, CSR encourages transparency and trust worthiness in the firm, which again leads to creation of high level of customer satisfaction and loyalty.CSR focused business would promote the public interest by encouraging growth and development, and voluntarily eliminating activities that may harm the society.
Followed , CSR activities contributes positively to market value suggesting that managers can obtain competitive advantages and this helps firms in financial saving and higher attraction to investors.
In general, the overall objective of the modern view of firm, as Berle and Means's (1932) model of CSR advises is to seek the maximum profits while obeying a moral of the society.
Currently, CSR is becoming one of the activities of the firm in line with their primary goal. Some firm recognizes the benefits of CSR; others do CSR because of the presence of law, regulations, and norms. Still other does CSR following their competitors' action and so on. But, this section discusses the possible drives of why CSR has been implementing by the modern firms.
First, CSR activities help to minimize the pollution effects of firm's factory wastage. In a few decades ago, i.e. where most of the firm's views are traditional, companies does not care about the environment and society. They could pollute their environment through the wastage and emissions from it. There were no obligatory laws and principles that act on behalf of the society.
Second, in today's world, societies are not willing to accept decision made by the firm especially when its impact affects the society negatively. And most companies are responding positively to the society requirement by treating their decision in such a manner that it does not primarily affect the society. Most decision is becoming considered its responsiveness to the society. But still some firms exist that they do not discharge their responsibility.
Third, Societies are becoming aware that there is a limitation of resources. In addition they developed knowledge toward the effects of industrial wastage to the ecosystem. Therefore, they are in need of searching the best method to elongate the natural life span of resources through efficient utilization.
Forth, socially responsible firm are becoming the most respected and profitable one in today's competitive market environments. Therefore, CSR is becoming the parts of the firms' activity leaving thoughts of CSR as the deliberate inclusion of public interest in to the firm's activity.
Fifth, the emergence of different rules and regulations in the world forced firms to act in accordance with the criteria set up the regulatory body. Furthermore, some of the national and international markets obliged to have certification for being compliant to the international standard. To mention, ISO 1400 certification (Environmental Management System, EMS) is one of the international standards set by International Standard Organization (ISO) to measure the firms' responsiveness to the environment. It is very important for the current firms because it is a third party witness for the conformance of the firm to their environmentally friendly products and service. Moreover, EMS Certification has been a prerequisite for Export strategy.
Generally, today's firm, be it large to small, is expected to make CSR contribution to the society.
CSR activities and approaches
As we have discussed above, the traditional firms does not want to engage on CSR activities. They want to be favored on the expense of society's needs, by creating polluted environmental, and by denying other stakeholders interest.
But, the modern firms consider the well being of the society and recognize the long run environmental effects of each activity. Consequently, these firms have been different approaches to address CSR. Some of the approaches are described below.
The first approach is to help the community through participating on the education system through establishing education and training Centre. This helps communities' children as well as adults to develop new skills and knowledge that is helpful for them.
Second, Firms may engage on awareness creation activities to take care of the society from different harmful activities, like providing awareness creation training on HIV/AIDS and in general on health care activity.
Third, the firms may support local community in relation of development and investment projects. Like supporting self-help group to create a micro business and this opens further employment opportunity to the society.
Fourth, firms may participate on support of environmental activities, like plantation of tress, sewerage management etc.
Last but not the least, some firms provide sponsoring different activities in giving monetary donation to the society and to local organization for different CSR activities. Like sponsoring different recreational sport games, supporting R&D activities etc.
In general, socially responsible firm participates on so many CSR initiatives.
The overall discussion of the paper was to compare the traditional and modern view of a firm in relation to shareholders and society. Interaction between firms, shareholders, and society are discussed both in the view of traditional and modern approach.
The modern views of a firm focus on the valuable assets of a firm, i.e. it focuses on welfare of stakeholders. While the traditional firm focuses to benefit the owners only.
Additionally, we have seen CSR activities benefit not only the society but also the firm.
Based on the discussion, the writer of this paper stands on the favor of the win-win approach of the modern view of a firm as they are stands not only for the firms but also for the betterment of employees, customers and community as a whole.