Stockholder vs. Stakeholder

Topics: Utilitarianism, Fiduciary, Stakeholder theory Pages: 6 (2260 words) Published: November 7, 2013

1 Introduction
Decisions in companies are often made by the management and influence not only the profit of a company, but also they influence the employees, many people outside of the company such as the supplier as well as the environment in the surrounding area of a company. Against this background, the question how a manager should act with regards to the owner of a company and the employees of a company is quite important. A possible answer to this question can be discussed in the stockholder vs. stakeholder debate. Although there are reasonable arguments for both – the stockholder and the stakeholder theory - I will use this paper to show that the stakeholder approach is superior and should be used for business in companies. To reach my conclusion, I structured the paper in the following way: The second Chapter should explain the basic idea and the basic concept of the stockholder and the stakeholder theory. Based on this explanation the following third chapter will discuss arguments in favor of the Stockholder Theory. In the second section of the third chapter I try to invalidate these arguments and I will present arguments supporting the Stakeholder Theory. The final chapter four contains the conclusion of my paper. 2 Explanation of the Basic Concepts

2.1 Stockholder Theory
The stockholder theory, which is also known as “Friedman Doctrine” and is a model most often associated with the Noble Prize winning economic theorist Milton Friedman, defines a manager as an agent for the stockholders (Bowie and Werhane, 2005, p 21). A “stockholder” is a person, who has a monetary investment in a business or company. Many business schools follow the orthodox view that according to the stockholder theory, the unique purpose of the manager is to increase the profits of the company. Consequently, a manager should try to maximize the wealth of the shareholders. Milton Friedman summarizes the theory by saying that “there is one and only one social responsibility of business - to use its resources and 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.” (Beauchamp et al, 2008, p. 55) Theodore Levitt, a former editor of the Harvard Business Review, Robert Nozick, an American political philosopher as well as Albert Carr are supporter of the orthodox view of the Stockholder approach Albert Carr was persuaded that ``business has its own morality`` (Bowie and Werhane, 2005, p. 22) and that you can compare the behavior of a businessman with a poker player. Other important supporters of the stockholder theory are in most cases supporter of the utilitarian view like Jeremy Bentham (Sandel, Michael J., 2009, p. 34). 2.2 Stakeholder Theory

The stakeholder theory, which is most closely associated with R. Edward Freeman, is a business theory which states that management has a fiduciary relationship to all its stakeholders. According to Freeman, the term “stakeholder” can be used in a narrow and a wider scope. The narrow definition includes persons who are vital and necessary for the benefit and the survival of a firm like stockholders, managers, suppliers, customers and employees. The wider scope defines a stakeholder as any group, which is affected by the actions of the firm such as families of employees (Bowie and Werhane, 2005, p. 26). The biggest challenge of the Stakeholder approach is to balance the competing claims by creating as much value as possible without tradeoffs between the different groups of stakeholders. Therefore, Freeman is persuaded that every stakeholder would unanimously agree to six basic principles, no matter which stakeholder they would be: (Bowie and Werhane, 2005, p. 27) 1. The Principle of Entry and Exit: A Corporation has to define clear rules how you can enter and exit and how you can renegotiate conditions to know when a contract is valid and exists. 2. The...
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