Shareholder vs. Stakeholder Theory: A Corporate Governance Debate - Essay Sample

Introduction

Undeniably, it is often perceived that shareholders are the most important stakeholders of every organization. However, this notion contrast with the business Roundtable Declaration and other stakeholders' theories that dictates how a corporation should be run. Shareholders theory is centered on profit maximization and argues that shareholders are the only objective of the organization (Corporate Governance, 2019). On the other hand, stakeholders approach implies the satisfaction of all stakeholders, including customers employees, suppliers, communities and shareholders. In practice, the shareholders perspective has dominated most corporations. However, corporate scandals, including financial crisis, has raised significant doubts about the effectiveness of the approach leading to loss of trust. Therefore, the paper aims to critically analyze the Business roundtable declaration on changing the purpose of the organization and explore the importance of different stakeholders to an organization. In orders to achieve this objective, will compare stakeholder and shareholder approaches of corporate management.

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Overview of the Business Roundtable Declaration

To create familiarity, Business Roundtable is a non-profit group located in Washington, D.C. The group comprise about 200 chief executive officers (CEOs) from large corporation in the United States. Notably, the group organizes periodic meetings to discuss general business policies that advocates multiple public policies for the general interest of organizations. Despite not being a globally recognized body, statements and declarations from this group often attracts global attention and debate including the Business Roundtable declaration, "Statement of the Purpose of a Corporation" which majorly focus on changing the purpose of the organization (Business Roundtable 2019). The declaration reflects moving from the idea that maximization of shareholders value is the primary purpose of organization. Notably, the statement should come as no surprise since it has been on the headlines that young US consumers have opted to conduct businesses with businesses that embrace social responsibility (CSR) that reflects their values (Friedman, 1970).

Shareholder Theory

The theory is based on the primary idea that corporations exist primarily for-profit maximization leading to increased shareholders wealth by making such arguments that shareholders are the owners of the company and the directors' act on their behalf. Consequently, according to this approach, the directors have a fiduciary duty to act in the best interest of the owners of the organization. Thus, they should not serve their own interest. Moreover, managers are bound to a legal framework created by the society or the states to ensure that issues get solved (Charles, 2019). However, the shareholders should not be disadvantaged. The approach stipulates that, the only effective way of increasing the value of a firm is to serve the interest of shareholders and that serving the interest of many stakeholders would create many unsolved conflicts leading to making wrong decisions by a manager and thus decreasing the value of the firm and the interested groups. The theory also stipulates that, shareholders bear the risk of capital investment and hence deserve immediate attention and that some shareholders only have short term interest and only demand profits at any cost.

Stakeholder Theory and Business Roundtable Declaration

The stakeholder theory concurs with the Business Roundtable Declaration, on the approach of corporate governance. The statements notes that, American need an economy that serves everyone and not just a few individuals. Therefore, a successful corporation needs to create value for all stakeholders in the organization. Managers are charged with the responsibility of determining the interest of all stakeholders. Due to the shortcomings of shareholders theory, including financial fraud and managers serving their interest, there is a need for contemporary corporate governance. Stakeholders approaches stipulate that taking the interest of everybody in the organization makes firms perform better rather than focusing on a single stakeholder; this sentiment implies that, if an organization create value to all stakeholders, shareholder's value will also be maximized in the long run.

Stakeholders approach concurs with the declaration perception, and many contemporary employers have started changing their scope of corporate governance by investing in employees and communities since it is the only way of long-term survival of firm and it for these modernized principles that reflects the business community's unwavering commitment to redefining organization purpose (Business Roundtable 2019). Many organizations give customers priority, followed by employees and then shareholders. Customers are undisputedly the main asset of every organization and satisfying their need means that the needs of the employees and shareholders will also be achieved. For instance, if an organization fails to manufacture products according to the taste and preference of the customers, the organization will experience minimum profits. Thus, the goal of profit maximization will not be feasible. Similarly, highly qualified and motivated employees should be regarded as a significant resource as they give an organization a competitive advantage and thus increased performance leading to revenue generation.

Conclusion, Recommendation and Thoughts

Ideally, the business should change the scope of their management and focus on creating long term value to all stakeholders. Therefore, the organization should adopt the stakeholder's approach of management, which is aligned to the Business Roundtable Declaration. Moreover, the competitive advantage of firms is an important issue on the strategic management of an organization, and some researchers have linked stakeholder's management to long-term competitive advantage. Besides, Porters five competitive forces stipulate that organizations need to evaluate their bargaining power by influencing such stakeholders like suppliers, buyers, competitors and potential investors. Therefore, the corporate business community should redefine all aspects of corporate governance to serve all stakeholders.

References

Business Roundtable 2019. Business Roundtable redefines the purpose of a corporation to promote 'An economy that serves all Americans (August 19) https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans.

Charles. R Taylor (01 Nov 2019) https://www.tandfonline.com/doi/full/10.1080/02650487.2019.1677047

Corporate Governance, (Aug 19, 2019) https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans

Friedman, M., 1970. The social responsibility of business is to increase its profits. The New York Times Magazine (September 13). https://web.archive.org/web/20060207060807/https://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html. Accessed August 27, 2019