Shareholder and Stakeholder Approaches
Abstract
In this report, purposes of corporations are investigated under two different approaches on corporate value maximization: Shareholder Approach and Stakeholder Approach. So, firstly both approaches are defined briefly. Secondly, compare and contrast of shareholder and stakeholder approaches is made.
Keywords: Purpose, Corporation, Value Maximization, Shareholder Approach, Stakeholder Approach.
Shareholder Approach on Value Maximization:
Shareholder approach on value maximization focuses the corporation’s purpose on maximizing the wealth of owners by maximizing the profit while minimizing the importance of the other roles of corporation in the society. The origins of the ideas shaping shareholder theory are more than 200 years old, with roots in Adam Smith’s (1776) The Wealth of Nations. Smith’s three ideas are followed by modern supporters of shareholder approach,
1. The importance of ‘free’ markets;
2. The ‘invisible hand of self-regulation’ and
3. The importance of ‘enlightened self-interest’
Shareholder approach supporters defend the idea that excessive oversight and regulation of industry is unnecessary. Members of the ‘Austrian School’ of economics were early supporters of the shareholder approach. They advocated the idea of ‘leave alone’ capitalism, which focuses on the importance of self-regulation among firms, with limited government intervention.
Shareholder theory in its current form is linked most directly to the ‘Chicago School’ of economics, most notably to Milton Friedman and his colleagues, who have argued for nearly four decades that the overriding purpose of the firm is to maximize shareholder wealth. They believe solving social problems is the responsibility of the state. Friedman believed, in short, that the business of business is business. When firms become involved in social or public policy issues, wealth is diverted to issues outside the core expertise of their managers. This
In this report, purposes of corporations are investigated under two different approaches on corporate value maximization: Shareholder Approach and Stakeholder Approach. So, firstly both approaches are defined briefly. Secondly, compare and contrast of shareholder and stakeholder approaches is made.
Keywords: Purpose, Corporation, Value Maximization, Shareholder Approach, Stakeholder Approach.
Shareholder Approach on Value Maximization:
Shareholder approach on value maximization focuses the corporation’s purpose on maximizing the wealth of owners by maximizing the profit while minimizing the importance of the other roles of corporation in the society. The origins of the ideas shaping shareholder theory are more than 200 years old, with roots in Adam Smith’s (1776) The Wealth of Nations. Smith’s three ideas are followed by modern supporters of shareholder approach,
1. The importance of ‘free’ markets;
2. The ‘invisible hand of self-regulation’ and
3. The importance of ‘enlightened self-interest’
Shareholder approach supporters defend the idea that excessive oversight and regulation of industry is unnecessary. Members of the ‘Austrian School’ of economics were early supporters of the shareholder approach. They advocated the idea of ‘leave alone’ capitalism, which focuses on the importance of self-regulation among firms, with limited government intervention.
Shareholder theory in its current form is linked most directly to the ‘Chicago School’ of economics, most notably to Milton Friedman and his colleagues, who have argued for nearly four decades that the overriding purpose of the firm is to maximize shareholder wealth. They believe solving social problems is the responsibility of the state. Friedman believed, in short, that the business of business is business. When firms become involved in social or public policy issues, wealth is diverted to issues outside the core expertise of their managers. This
References: 1. MITSloan Management Review - The Shareholders vs. Stakeholders Debate http://sloanreview.mit.edu/article/the-shareholders-vs-stakeholders-debate/ 2. Michael D. Pfarrer. ‘What is the Purpose of the Firm?: Shareholder and Stakeholder Theories’, Good Business: exercising effective and ethical leadership, 2010, p.86- 92 3. Latha Chari and R. P. Mohanty, Understanding value Creation - The Shareholder Value Perspective