Throughout our exploration of professional responsibility, we have stressed the core idea of fiduciary duty and how executives advance the interests of shareholders by making the firm more valuable. But this is not the entire story. Executives must also manage the firm within the norms and laws of the society where it operates. As we learned, this means that the actions of the firm must be defendable. In this lesson, we will further develop our understanding of defendability.
specifically with respect to laws. To do so, we need to introduce and apply a very important concept from the realm of political theory, the concept of the individual right. Now most of us know something about rights because we live in societies where, as individuals, we do have rights that are clearly defined and rigorously enforced. For example, in the United States, we have the right to a public trial by a jury of our peers. This means that if we are charged with a crime, The state will have to spend the time and the effort to find, select, and compensate 12 fellow citizens who sit through a public trial, weigh the evidence, and deliver a verdict, which is then enforced by the state.
It is critically important to see that even though the right to a jury trial belongs to the individual, it is the responsibility of the state to enforce that right. In fact, only the state can enforce the right. The individual cannot. If you think about other rights, you will see they all work this way. Unless the state enforces the right, the individual does not have it.
The right becomes mere rhetoric. As this example suggests, enforcing an individual right costs money. So the state must use its resources, usually collected through taxes, to do so.
In sum, rights are not held by individuals alone. Instead, they imply a form of community membership. An individual has a right when he or she is a member of a community that responsibly enforces that right.
A U.S. citizen can inspect a trial by jury because that right is enforced by the U.S. government. How does the concept of individual rights help us define the broader duties of executives as they manage the firm on behalf of shareholders? It is the executive's duty to ensure that while advancing the interests of shareholders, the firm does not infringe upon the enforced rights of its stakeholders. And what are stakeholders? Simply all those individuals or entities who are affected by the firm's actions, who are in material relationships with the firm, and who therefore have a stake in how the firm behaves.
Stakeholders come in different types and include debt holders, who lend the firm funds expecting repayment with interest, Customers who purchase the firm's output. Employees who work for the firm by selling their labor. Communities where the firm locates plants, offices, and outlets. Suppliers who sell their own products as inputs to the firm.
Within a political community such as the USA, all of these stakeholders have rights which are enforced by U.S. law. For example, The right of debt holders against default are enforced by federal bankruptcy laws and a dedicated branch of federal bankruptcy courts. The rights of customers to safe, truthfully labeled food and drug products are enforced by the Food and Drug Administration, the FDA. The rights of employees to minimum wage, 40-hour work weeks, and time and a half for overtime are enforced by the Federal Labor Standards Act.
The rights of all workers to a safe work environment are enforced by the Occupational Health and Safety Administration, OSHA. The rights of people living in communities to clean air and drinking water, safe from industrial pollution, are enforced by the Environmental Protection Agency, the EPA. In a global economy, suppliers are almost always offshore, so they are in different jurisdictions with different enforceable rights.
These enforced rights constrain the actions that executives might take to advance the interests of shareholders. And these constraints almost always increase the short-term, and often the long-term, cost structure of the business. It takes money to pay overtime, install safety equipment, and build pollution control systems.
The funds required for these actions reduce the bottom line and make the firm less profitable, especially in the short term. Still, because these rights are by the rule of law and the power of the state. The firm must respect these rights if it seeks to operate in a way which is legally defendable.
So we have now arrived at a fuller description of the executive's professional responsibility. Their job is one of constrained optimization, to advance the interests of shareholders while respecting the enforced rights of stakeholders. In this way, the executive seeks and develops market inefficiencies that are legally defendable.