Overview of Stakeholder and Shareholder Theories
|✓ Paper Type: Free Assignment||✓ Study Level: University / Undergraduate|
|✓ Wordcount: 1577 words||✓ Published: 12th Nov 2020|
As known corporations have different goals and objectives, many of them are supervised by councils and governments. Many believe it is a moral requirement to make money when possible, by selling products for the highest price (Hiltzik,2018). They are lead to believe that managers mainly care about maximizing the shareholders’ profit (but without committing any crimes or fraud), which is also known as the shareholders’ theory (Smith,2003) – one that has been around for centuries and is used by different corporations all around the world. However, a large number of people believe that it is a moral requirement that corporations should consider and take responsibility for a third party, which is interested or may be affected by the corporations acts or products. This third party consists of groups or organizations, known as stakeholders, and the theory they represent is called the stakeholders’ theory (Smith,2003) Both theories define what the corporation’s objectives should be: a corporation that operates under the shareholders’ theory should take into account every action relating to the shareholders/owners and how it affects them. However, a corporation that operates under the stakeholder theory should take responsibility for all the third parties which are affected by it. Some of the points that will be discussed below are: the importance of selling products for the highest price; the advantages and disadvantages of this approach; different perspectives of shareholders and stakeholders; perspectives that they, in fact, hold in common; and finally what alternative theories or approaches are there.
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In the modern day, in this capitalist economy if you are not able to make money, you will not survive in the market (Hiltzik,2018). Money is a necessity to have a fully functional corporation, capable of developing improving products and services that are unique to the corporation in which it is specialize. In selling them for the highest achievable price, the corporation becomes successful, which will attract customers and investors with new opportunities to develop ground breaking ideas or products and will reassure shareholders that the managers are doing what they were hired to do and that the corporation is in good hands.
On the one hand, the stakeholders’ perspective and theory totally disapproves of this method by assuming that it is unethical to sell products for the highest price, also stating that the managers running the corporation should prioritize all of the stakeholders’ interests by taking responsibility for the environment, customers, communities, governmental concerns and the employees (Jensen,2005). On the other hand, the shareholders’ theory supports the statement that it is a moral requirement to make money when possible (also taking into consideration that corporation do not make money on every product they sell, which is why when companies develop a unique product that is not available elsewhere they tend to sell the product for highest achievable price to make profit). Selling the products or services for the highest price, enables the corporation to develop new products which will make the corporation more desirable and will attract new customers and investors that will be able to recognize the opportunity in the corporation. However, it is a false accusation that managers’ only concern, under the shareholders’ theory, is to maximize the shareholders’ short-term profit. Good managers know that having a purpose, strategy and incentive to make employees work better and harder to achieve the task given to them (Jensen,2005) will maximize the long-term viability and reputation of the company; and thereby its financial worth.
The shareholders’ perspective and the stakeholders’ perspective have a lot in common, both are perspectives of how a corporation should run, have a definition of what the manager’s job is, both perspectives identify that the main aim of the corporation is to make money and in some way both of them can be theories of business ethics, the shareholders’ theory states that managers should use funds to engage activates which are profitable, without breaking the law. The stakeholders’ theory states the managers should take responsibility for the environment, customers and employees, but the main interest of the business is still to make money(smith,2003). However, Managers are expected to act at the best interests of the company to be fair and act in good faith, mirror a good relationship between themselves and the corporation, its employees and the stakeholders (Begbies Traynor, n.d). on the other hand, the shareholder and the stakeholder theories are widely different in what they believe and what the corporation should take into consecration before making a decision, the stakeholders believe that the corporation should consider every action and how could it affect the employees, the environment, the society and then how it would affect the corporation. The stakeholders believe that the managers should do what is in the corporation best interest without committing any crimes or fraud or disobey the law in any way.
Managers are restricted by what they can do as there are laws which ensures operating in fairness and in good faith to protect the shareholders, the stakeholders, the employees and the community.
After years of debate on which perspective should be used and wither it is a moral requirement to make money or not, a new perspective was discovered, that combines both the shareholders’ and the stakeholders’ theories and gives a wide definition on the manager’s duties in the corporation. This theory is called the “Enlightened Shareholder Value” which satisfied both the shareholders and stakeholders and ensured the stakeholders that managers will take them into consideration when making a decision which involves them and the corporation (Begbies Traynor, n.d).The enlightened shareholder value states that before making a decision manager should: consider the long term profit, loss and the consequences on the corporation, how the decision may affect the employees and the work environment, doing what is best for the business despite what the shareholders or stakeholders want, how the manager’s actions could affect the corporation’s good reputation, the company’s actions and how would it effect the environment and the community, being fair to employee’s shareholders and stakeholders and more importantly avoiding conflict of interests. Failing to do the job can have conenoses of which is removal as a manager from office also breach of managers duties can lead to lawsuit by the shareholders and can lead to personal bankruptcy. After removal companies need to get a court issued interim injunction which puts to a halt all actions, sales and transactions for breach of managers duty( Begbies Traynor, n.d).
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To conclude, after all the research made the stakeholders and shareholders theories are different and similar at the same time, both share the main idea of a business which is to make money but the difference between them in what they stand for is greater, there is not a right or wrong theory it is all matter of perspective and what one believes is moral and ethical. some believe it is not a moral requirement to make money but most of the people believe that the primary reason of the business is to invest and make money in the long term. after reviewing the Enlighted Shareholder theory, it appears that this theory might end the conflict of interest that is happening between shareholders and the stakeholders because it Is a combination of both to create a theory both sides are satisfied with, knowing the managers duties and consciences for disobeying them and what power he has in the corporation ensures both sides that the corporation will be taken good care of.
- Los Angeles times Michael Hiltzik (2018) Column: Drug executive: It’s a ‘moral requirement’ to charge patients the highest price. Available at:https://www.latimes.com/business/hiltzik/la-fi-hiltzik-drug-prices-20180911-story.html (accessed at: 07.11.2019)
- Michael C. Jensen (2005) VALUE MAXIMIZATION, STAKEHOLDER THEORY, AND THE CORPORATE OBJECTIVE FUNCTION. Available at https://doi.org/10.1111/j.1745-6622.2001.tb00434.x (accessed at 09.11.2019)
- Smith. H. J. (2003) the shareholders vs the stakeholders debate. available at https://sloanreview.mit.edu/content/uploads/2003/07/b966946aae.pdf. (accessed 10.11.2019).
- Begbies Traynor (n.d) Understanding a company director’s fiduciary duties and consequences of failing these duties. Available at https://www.begbies-traynorgroup.com/articles/director-advice/understanding-a-company-directors-fiduciary-duties-and-consequences-of-failing-these-duties. (accessed:12.11.2019)
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