Notes

Management is about people, economic activity takes place in human societies and is based on human work. So it is important to have assumptions about people:

• Homo Oeconomicus, perfectly rational, able to compare alternatives with all information available for free. Individual preferences described by utility functions, maximization of income and no room for reciprocity, trust and other emotions. This view of people is useful for formalizing economic behaviour and building economic models.
• Human Beings, limits on information and cognitive ability (bounded rationality), members of groups, which shape their preferences and behaviour, pursue of well-being, emotions and propensity to cooperative behaviour.

The theory of bounded rationality was introduced by economist Herbert Simon: individuals look for satisfactory solutions to their problems, given constraints on time, available information and resources. Expectations drive initial search but are adjusted according to results until a solution appears acceptable. (People tend to adjust their expectations through the process).

Many organizational activities are carried out in social groups, which are elementary social bodies: usually composed of a small number of members (3-7), spontaneous formation, internal social order, generation of norms, equilibrium between giving and taking, leadership. Each member has expectations of other members and of him/herself.

Organizations have clear goals, formal structures and procedures, information systems, etc.

So, one could think that organizations may come closer than individuals to perfect rationality. However, even group decision-making is often not rational. Sometimes even worse that individuals, example the "Garbage Can Model", where often the solution for the problem is not meritocratic chosen but only on an authority base.

Solutions are proposed for problems that do not exist and choices are made that do not solve the problem.

Cooperation it's useful because it's able to create organizational rents and residual results (dividends for shareholders), but it requires a certain degree of trust among participants. Free ridership is possible when participants can limit their efforts without losing their share of the rent, leading to a destruction of trust, cooperation and rents. Therefore it's auspicial a model where individual contributions are clear, otherwise opportunistic behaviour is possible.

Psychologist Douglas McGregor proposed that trust in groups also depends on hypotheses. These assumptions become self-fulfilling prophecies.

The Shareholder View -- Milton Friedman: Only people have responsibilities. So we must speak of responsibilities of "businessmen", not of firms.

An executive is an employee of the owners (shareholders). His responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible.

If executives pursue social responsibility, they spend the money of company owners for general interest. That is, they impose taxes on the company. Executives who pursue social responsibility are like civil servants. But then they should be chosen through a political process. The doctrine of social responsibility is frequently a cloak for actions that are justified by self-interest. The doctrine of social responsibility undermines the foundations of society, because it strengthens the view that the pursuit of profits is wicked, immoral, and must be controlled by external forces.

The Stakeholder View -- Edward Freeman: According to this theory, business can be understood "as a set of relationships among groups that have a stake in the activities that make up the business". These groups are called stakeholders.

Exist two kind of stakeholders:

• Primary, those who are vital to growth and survival of any business (customers, employees, suppliers, communities, and "financiers").
• Secondary, those who affect primary stakeholders (media, government, competitors, etc.)

Stakeholder theory implies that firms should satisfy all stakeholders, otherwise firms cannot sustain their performance. Unsatisfied primary stakeholders withdraw their contributions, which are essential to a firm's performance. Unsatisfied secondary stakeholders have the means to influence negatively primary stakeholders or make life hard for the firm. Managing for stakeholders means balancing and keeping an alignment among the various stakeholder interests. There are trade-offs but different interests of the various stakeholder groups tend to go together over time. So, managing for stakeholders requires firms to adopt a long-term perspective. Firms should have a purpose, a sense of what they stand for; this includes creating value for at least costumers and employees. This purpose is sometimes stated in "mission statement".