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Home / news / Shareholders vs. Stakeholders: Who should businesses be accountable to?

Shareholders vs. Stakeholders: Who should businesses be accountable to?

Should companies only strive to maximise shareholder value or try to serve the interests of all stakeholders?

There are two conflicting theories attempting to answer this fundamental question: the shareholder theory, on the one hand, and the stakeholder theory, on the other.

According to the former, businesses should only be oriented towards maximizing their profits and shareholder returns. According to the latter, companies are accountable to all their stakeholders (such as employees, customers, suppliers and local communities), and not just their shareholders, even if considering stakeholders’ interests means reduced profits.

A crucial difference between the two competing theories is that for the shareholder theory, stakeholders and their interests are seen as a means to the end of a company’s profitability, whereas for the stakeholder theory, stakeholders’ interests should be regarded as an end in themselves  Tweet This!.

It has also been argued that companies’ managers are, inescapably, driven to embrace the shareholder theory, as they face dismissal, if they do not maximize a company’s profitability. But, at the same time, it has been shown – for example, by a study by Julian Franks and Colin Mayer – that neither legal, nor market forces or mechanisms impose the shareholder theory on senior executives.

What should executives and boards of directors do?  

As we seem to be entering a post-shareholder value era, with the stakeholder theory becoming more popular in recent years, company executives and board members:

  • Could shift from speaking about “maximizing shareholder value” to talking about “maximizing our company’s value” or “maximizing our company’s contribution to our economic system”.
  • Should feel free to openly change their attitudes, not least as regards expressing their belief in the stakeholder theory.
  • Should communicate their company’s objectives clearly – regardless of which of the two theories they embrace –, in order for midlevel managers not to be confused.

 

References:

This article was compiled using a publication by MIT Sloan Management Review. For the sake of readability, we did not use brackets or ellipses but made sure that the extra or missing words did not change the publication’s meaning. If you would like to quote these written sources from the original please revert to the link below:

http://sloanreview.mit.edu/article/the-shareholders-vs-stakeholders-debate/