Shareholder theory versus stakeholder theory in business

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 perfectly pure rational manner. 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.

Conclusion

Stakeholder theory is far more logical than shareholder theory. The underlying assumptions of shareholder theory are weak and unproven, to the point where it seems stakeholder theorists backfilled them in supported of their a priori conclusions. Businesses have always had a multitude of interests and while investors are one of them -- a very important interest group at that -- they are by no means the only interest group. Indeed, the corporation exists and succeeds because of the different groups interests' being intertwined, something that shareholder theory rejects in its quest to rule out business pursuit of anything but profit.