Shareholder Theory
STAKEHOLDER vs. SHAREHOLDER
The central objective of the firm and its managers is making optimal tradeoffs and that of value maximization, i.e. maximizing total market value of the firm. There are two theories proposed to achieve the firm’s objective which are the ‘Stakeholder Theory’ and ‘Shareholder Theory’.
“Stakeholder Theory” assumes that values are necessarily and explicitly a part of doing business and the manager needs to take into account the interest of all the stakeholders while taking decisions on the other hand the view that businesses do not have any moral obligations or social responsibilities at all, other than to maximize their own profit is the objective of Shareholder theory.
Shareholder theory has been criticized by many, stating that it’s not the right way towards value maximization as it fails to provide an objective function.
Separation thesis is rejected and argued over the fact that profits are a critical part of business, but concern for profits is the result rather than the driver in the process of value creation. It’s also known that shareholders are a part of shareholders. In shareholder’s view, the managers have more resources and greater deal of challenge, as they offer not only financial rewards, but language and action to show that they value relationship. The theory also says that the process of creating value for shareholders along with stakeholders by not only relying on shareholder but also customers and suppliers. Some examples of successful implications of stakeholder theory are J&J, eBay; Google etc. provide compelling examples of how managers understand the core insights of stakeholder theory and use them to create outstanding business.
Enlightened value maximization theory given by Jenson which was similar to enlightened stakeholder theory which uses the structure of stakeholder theory but accepts maximization of long-run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders.
The central objective of the firm and its managers is making optimal tradeoffs and that of value maximization, i.e. maximizing total market value of the firm. There are two theories proposed to achieve the firm’s objective which are the ‘Stakeholder Theory’ and ‘Shareholder Theory’.
“Stakeholder Theory” assumes that values are necessarily and explicitly a part of doing business and the manager needs to take into account the interest of all the stakeholders while taking decisions on the other hand the view that businesses do not have any moral obligations or social responsibilities at all, other than to maximize their own profit is the objective of Shareholder theory.
Shareholder theory has been criticized by many, stating that it’s not the right way towards value maximization as it fails to provide an objective function.
Separation thesis is rejected and argued over the fact that profits are a critical part of business, but concern for profits is the result rather than the driver in the process of value creation. It’s also known that shareholders are a part of shareholders. In shareholder’s view, the managers have more resources and greater deal of challenge, as they offer not only financial rewards, but language and action to show that they value relationship. The theory also says that the process of creating value for shareholders along with stakeholders by not only relying on shareholder but also customers and suppliers. Some examples of successful implications of stakeholder theory are J&J, eBay; Google etc. provide compelling examples of how managers understand the core insights of stakeholder theory and use them to create outstanding business.
Enlightened value maximization theory given by Jenson which was similar to enlightened stakeholder theory which uses the structure of stakeholder theory but accepts maximization of long-run value of the firm as the criterion for making the requisite tradeoffs among its stakeholders.