QUESTION : Shareholders’ interest and stakeholders’ interest are always being a matter of discussion in business houses. In your opinion, how do shareholder’s value theory and stakeholder theory of the firm differ?
Answer:
The discourse surrounding the interests of shareholders versus those of stakeholders represents a significant aspect of corporate governance and business ethics. The two prevailing theories that encapsulate this discussion are Shareholder Value Theory and Stakeholder Theory. Below are the distinctions between them:
Shareholder Value Theory
Focus: This theory, championed by Milton Friedman, posits that the foremost objective of a corporation is to maximize the wealth of its shareholders.
Assumption: It is based on the premise that shareholders are the proprietors of the company, and it is the duty of managers to make decisions that enhance their financial returns.
Priority: The primary goals include profit maximization, appreciation of stock prices, and the distribution of dividends.
Criticism: Detractors contend that an exclusive emphasis on shareholder value may result in unethical practices, a focus on short-term gains, and a disregard for social responsibilities.
Stakeholder Theory
Focus: This theory, articulated by Edward Freeman, advocates that a corporation should take into account the interests of all its stakeholders, rather than solely those of its shareholders.
Stakeholders: This group encompasses employees, customers, suppliers, communities, governmental entities, and even the environment.
Priority: The emphasis is on sustainable and ethical business practices that address the needs of all stakeholders.
Advantage: It promotes long-term business viability, corporate social responsibility (CSR), and ethical governance.
Criticism: Some critics argue that this approach may dilute accountability and complicate the decision-making process.
Key Differences at a Glance
| Aspect | Shareholder Theory | Stakeholder Theory |
|---|---|---|
| Primary Focus | Maximizing shareholder wealth | Balancing interests of all stakeholders |
| Decision Criteria | Profit and stock price | Ethical, social, and financial factors |
| Key Proponent | Milton Friedman | Edward Freeman |
| Time Horizon | Short-term profits | Long-term sustainability |
| Criticism | Can ignore ethics and social responsibility | Can lead to decision-making complexities |
The Shareholder Value Theory focuses primarily on financial returns, whereas the Stakeholder Theory advocates for a more comprehensive and sustainable approach to business. Contemporary enterprises frequently incorporate elements from both theories, striving to achieve profitability while maintaining social responsibility.
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