Shareholder vs. Stakeholder Theory
Shareholder Theory
Stakeholder Theory
Developed by
Prof. Milton Friedman
Prof. Edward Freeman
Definition
A Shareholder is a person who owns share(s) in a company and therefore gets part of the company’s profit and has right to vote on how the company is controlled
Stakeholders of an organization are any group or individual who can affect or is affected by the achievement of the organization’s obejctives
Key Idea
The only responsibility of managers of a corporation is to maximize profits - and therefore increase shareholder wealth
The key idea of stakeholder theory is that the firm should create value not only for the shareholders, but for all stakeholder, including employees, creditors, NGOs, and also shareholders
Introduction
Question: Should companies focus on profit maximization or do they also have moral obligations and social responsibilities? Two theories have opposing answers:
Shareholder theory
Stakeholder theory
“The social responsibility of business is to increase its profits“ - Prof. Milton Friedman
Shareholder theory is based on assumption of neoclassical economics
Principle of free market
Existence of market prices
Economic efficiency
Profit maximization
Firms contribute most to society when they maximize their own profit while adhering to all applicable laws and regulations
Spending money on social causes is seen as misappropriation of financial means
According to shareholder theory, alleviating social misery is the task of governments
It received both praise and criticism:
The Economist in 2016 named it “biggest idea in business“ as shareholder value rules the business world
Controversial social and moral principles and it focuses solely on profitmaking
“The task of executives is to create as much value as possible for stakeholders without resorting to tradeoffs. Great companies endure because they manage to get stakeholder interests aligned in the same direction“ - Prof. Edward Freeman
Executives should maximize value for stakeholders (including shareholders) while minimizing trade-offs between stakeholder interests
Managers should consider sustainability activites beyond legal requirements if they matter to stakeholders
Stakeholders can be both:
Internal: employees, managers, shareholders
External: suppliers, NGOs, Governments
Stakeholders act according to their own perspectives, and their action can affect the firm in terms of profit and reputation
Compromise View
No theory is right or wrong
Shareholders and stakeholder theory can be balanced, if time is taken into account
Short-term perspective:
Focusing on shareholder value bad strategy
It can end up destroying value for both shareholders and stakeholders
Long-term perspective:
Focusing on good stakeholder management good strategy to achieve long-term shareholder value
In long-term, stakeholder value often coincides with shareholder value
If trade-offs between stakeholders’ interests are required, managers should maximize long-term shareholder value
Last changed4 months ago
