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Shareholder Theory

By | April 2008
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Shareholder Theory

According to the previously mentioned Stakeholder Theory, the very purpose of the firm is to serve and coordinate the interests of its various stakeholders. These stakeholders can include employees, suppliers, customers and the communities in which the firm operates. It is the moral obligation of the firm's managers to maintain a balance among these interests when directing the activities of the firm. Shareholder Theory, on the other hand, focuses strictly on those who have a monetary share of the company. According to this view, a firm’s only purpose is to serve the needs and interests of the company’s owners. In many industries there are companies that seem to follow a stakeholder theory framework while guiding the majority of interests towards the shareholders and ultimately enforcing a shareholder theory framework. An analysis of shareholder theory applied to the management styles found in major league baseball has revealed such a conflict of interest. According to shareholder theorists such as the Nobel winning economist Milton Friedman, managers should only focus on serving the interests of the firm's shareholders. In an article he published in the New York Times, The Social Responsibility of Business is to Increase its Profits, he states, “Responsibility is to conduct the business in accordance with their [shareholder’s] desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.” (Friedman, 1970) Freidman goes on to discuss the social obligations of the firm as confined to making good on contracts, obeying the law, and adhering to ordinary moral expectations. He assumes that if society has outlined most ethical and moral standards with corporate law, then the company’s obligations to non-shareholders will be fulfilled with lawful business practices. Again, this view poses the usual question when...

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