Shareholders and Stakeholders Theory

Shareholders theory and stakeholders theory are the two normative theories of business ethics and corporate social responsibility. Both of them are theories about how corporate leaders deal in their business environment by each of their different perspectives, one is emphasizing to put priority on shareholders’ interests, the other is emphasizing to put priority on larger business stakeholders’ interests. These different perspectives drive how executives and managers make business decisions.

Shareholders theory is introduced by Milton Friedman. In 1970, Friedman wrote in NY Times that “there is one and only one social responsibility of business: to use its resources to engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.” The idea of the shareholder theory is that managers primarily have a duty to maximize shareholders’ interests in the way that is still permitted by law or social values.

Stakeholder theory is introduced by Edward Freeman in 1988. Stakeholders is a group that is broader than shareholders. They are individuals or groups that provide critical support to business firm, such as shareholders, employees, suppliers, customers, local community, environment, even the world community. Therefore, they get benefits and risks regarding their involvement with the company. According to stakeholder theory, business leaders’ duty is to balance the shareholders’ interests with other stakeholders’ interests. In other word, stakeholder theory demands that interests of all stakeholders should be considered. It also shows the importance of social contracts, not just a business contracts.

There is debate between both theories supporters. With “maximizing shareholders’ interests” jargon, shareholder theory is frequently misunderstood as it allows executives and managers to do anything that can make profit. It should be remembered that shareholder theory obligates managers to increase profits only through legal, nondeceptive means. Therefore, this theory puts laws and ethics as control mechanism how company conducts business.

On the other hand, the stakeholder theory is also criticized by its opponents. They claims that the stakeholder theory does not put focus on profitability. Even though the ultimate objective of stakeholder theory is the concern’s continued existence, it must be achieved by balancing the interests of all stakeholders, including the shareholders, whose interests are in profits.

Both theories can be applied in daily business activities. Executives and managers should be clear about the choice of theory applied in internal and external corporate communications. If employees are confused about the corporation’s objectives, they will likely make inconsistent decisions which, at the end, will backfire to company itself. The clear choice will provide same ground to decide in daily business.

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