Sign Up Now
Get instant access to over 1 million+ study documents
OR
Already registered? click here to login
By creating your account, you agree to our terms of service, privacy policy and student honor code.
Stakeholder Theory
In business, there is a conflict of ideas between the competing ideas of shareholder theory and stakeholder theory. This paper will outline what each of these theories is, and underscore some of the issues in this debate.
Shareholder Theory
Shareholder theory is the idea that businesses work for the shareholders. The idea was perhaps most famously elaborated by Milton Friedman in 1970. Friedman, arguing at a time when the idea of corporate social responsibility was just becoming popular, made a case that the social responsibility of business is to increase its profits. He offered the constraint that it should do so within the legal and moral context of the land, but the crux of the argument is that businesses do not have other responsibilities beyond the profit motive. At the heart of this theory is the idea that businesses are nothing more than a vessel by which investors earn a return on their capital. As such, managers are the agents of these investors, and the concern of managers should be to increase the wealth of the investors.
Underlying this is the idea that if businesses pursue other objectives, that represents an opportunity cost for profits, and one that was not authorized by the shareholders, who are assumed to behave in a...
This is the shareholder theory, that businesses should only be concerned with the needs of shareholders because business only exists as vehicle by which capital can be expanded.
Stakeholder Theory
Stakeholder theory rejects many of the underlying assumptions of shareholder theory. First, stakeholder theory challenges the assumption that business only exists as a vehicle for investment. Business exists, it is argued, as a means of producing the goods and services that society desires. We have businesses to provide incomes for business owners, but to provide goods and services for society, and income for business employees. The latter is what separates a modern business from a business founded on slavery. Being that many people rely on business for many things, there are therefore many different stakeholders in any given business. Investors/shareholders are definitely one of those stakeholders, but they are not the only one. Managers therefore need to make decisions based on balancing the needs of the different stakeholders, rather than focusing on the needs of only one stakeholder (Donaldson & Preston, 1985).
The other assumption that stakeholder theory rejects is that investors are purely rational. That is an idea created…
References
Donaldson, T. & Preston, L. (1985). The stakeholder theory of the corporation: Concepts, evidence and implications. The Academy of Management Review. Vol. 20 (1) 65-91.
Friedman, M. (1970) The social responsibility of business is to increase its profits. New York Times Magazine. Retrieved November 10, 2014 from http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html
Poteshman, A. & Serbin, V. (2001). Clearly irrational financial market behavior: Evidence from the early exercise of exchange traded stock options. OFOR Paper 01-02. Retrieved November 10, 2014 from https://www.ideals.illinois.edu/bitstream/handle/2142/3794/ofor01-02.pdf?sequence=2
Stakeholder management is a concept applied to many types of organizations, where strategic decision-making takes into account the interests of multiple different stakeholders (Thompson, 2016). Advocates of the stakeholder perspective have argued that the stakeholder approach is a better way to evaluate a business' success, as opposed to strictly considering financial results (Perrini & Tencati, 2006). The concept of the balanced scorecard hypothesizes that businesses that look after the interests
If the enhanced stakeholder perspective is truly the best for corporate social responsibility, this has significant implications not only for management but also for corporate governance. While Nohria (no date) argues that corporate governance is a hygiene factor in that its absence is a problem for companies but its presence did not correlate with improved performance, this is only for basic levels of governance. For a board to truly adopt
Introduction Milton Friedman’s quote gets to the heart of the conflict between shareholder theory vs. stakeholder theory. Shareholder theory posits that a corporation’s sole responsibility is to maximize the return on investment (ROI) for shareholders. Stakeholder theory posits, on the other hand, that a company owes a duty to all stakeholders (not just shareholders)—members of the community, workers, consumers; in short, anyone who is part of or who is impacted in
Appropriate Objectives: Managers in Accounting and Finance According to the classical theory of the ethical responsibilities of a firm, the sole obligation of the firm is to shareholders and the need to make a profit to sustain them economically. However, this classical theory has since been challenged by arguments that sustainability, obligations to employees and the community, and professional and social ethics must also influence firm decision-making. Particularly in the wake
Intellectual PropertyA for-profit corporation has to protect its intellectual property (IP) needs if it wants to stay competitive. At the same time, it should understand the needs of its customers, who are more likely to be interested in the product itself rather than in who controls the IP. Thus, corporations have a question to ask: how should they guide themselves? Should they use a shareholder theory approach or a stakeholder
Stakeholder Approach to Corporate Responsibility This essay examines the question of whether adopting a stakeholder approach is a sufficient means of assuring that corporations meet their moral responsibilities due society. The essay includes a survey of the literature on the subject. Any discussion of the effectiveness of stakeholder theory must address who and what are considered stakeholders. R. Edward Freeman (1984) defines stakeholders as "any group or individual who can affect or