Shareholder Value versus Stakeholders

Shareholder Value Perspective versus the Stakeholder Value Perspective

Over the last 200 years, the influence of business corporations on our society has grown quickly and tremendously. No wonder that the corporate purpose they should serve is discussed by many people with different backgrounds, including:

Theorists in the fields of economics, law, political science and sociology,
Business ethics and philosophic scientists,
Political parties, labor unions, various communities, environmentalists, and
The media and the general public.

In countries with a market economy it is generally agreed that companies should pursue economic profitability. However also not many people would disagree that organizations also have certain social responsibilities. Profitability and responsibility can and should be combined in an ideal world, however it is clear that they are at least partially contradictory.

On one hand, businesses must be profitable to survive and corporations must earn a higher return on the shareholders equity than would be realized if the money were deposited on a no-risk bank account. The profits that are made create trust from investors and are usually reflected in higher stock-prices, which makes it easier to grow the company further towards its goals. The profits are not only a result, but also a source of corporate competitive health and wealth.

On the other hand, companies are networks of parties and people working together towards a shared goal and not merely 'economic machines'. Employees nowadays represent a major part of the value of any company (intellectual capital). In order to motivate people to work hard for the interests of the company, a level of trust must be built with them. Likewise it is important for trust to develop between the organization and its external environment (customers, suppliers, government, and interest groups). Such trust can only grow from the perceived security that the interests of all individuals and stakeholders are taken into account.

Shareholder Value Perspective

The Shareholder Value Perspective emphasizes profitability over responsibility and sees organizations primarily as instruments of its owners. Shareholder Value proponents believe an organizations success can be measured by things as share price, dividends and economic profit, and see stakeholder management rather as a means than as an end in itself. They believe social responsibility is not a matter for organizations and claim society is best served by organizations pursuing self-interest and economic efficiency. The Shareholder Value philosophy is not blind for the demands placed on corporations by other stakeholders than the shareholders. However, recognizing that it is expedient (instrumental) to pay attention to stakeholders does not mean that it is the corporation's purpose to serve them. The purpose of a company is first and foremost to maximize shareholder value, within what is is legally permissible. Advocates of the shareholder value perspective are convinced that society is best served by economic rationale. Responsibility for employment, local communities, the environment, consumer welfare, and social developments are not organizational matters, but are better left to individuals and governments. By pursuing enlightened self-interest and maintaining market-based relationships between the corporation and all stakeholders, pursuing maximal value for the shareholders will result in societal wealth being maximized.

Stakeholder Values Perspective

The Stakeholder Values Perspective emphasizes responsibility over profitability and sees organizations primarily as coalitions to serve all parties involved. Stakeholder Value advocates believe an organizations success should be measured by the satisfaction among all stakeholders and see stakeholder management both as an end and a means. They believe social responsibility is an organizational matter and claim society is best served by pursuing joint-interests and economic symbiosis. A company is not an instrument of shareholders, but a coalition between various resource suppliers, with the intention of increasing their common wealth. Advocates of this perspective refuse to give shareholders a higher moral claim on the organization than providers of other resources. Recognizing the moral claims by stakeholders other than the shareholders introduces other values than financial value in the spectrum of what needs to be pursued by the organization. Stakeholder management is not merely instrumental to create shareholder value, but normative. Due to having strongly motivated employees and nurturing high levels of trust with all parties surrounding the organization, pursuing the joint interests of all stakeholders is not only more just, but will also maximize societal health.

“There is no such thing as absolute value in this world. You can only estimate what a thing is worth to you”.
(Charles Dudley Warner)

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