Corporations have potential for creation as well as destruction. A corporation can generate wealth and employment, develop life-saving medicines or distribute affordable food. On the other hand, it can exploit lax child labor laws in developing countries, pollute the environment or leave thousands out of work to maximize revenue. Theories of corporate governance seek to determine the duties of the corporation, balancing the interests of the shareholders and the stockholders.
A shareholder or stockholder is anyone who owns shares of a given corporation or mutual fund. Stockholders can be individuals or institutions, with the only requirement being ownership of at least one share. Collectively, the shareholders provide a significant portion of the capital of the organization.
Anyone who is affected by the operations of the organization can be defined as a stakeholder. Customers, employees, providers, creditors, debtors and the overall community can be seen as stakeholders. Shareholders are stakeholders too, and a distinction must be made between nonshareowning and shareowning stakeholders.
Duty to Shareholders
Directors of a corporation are charged with taking care of other people's money, usually thought to belong to the shareholders. In modern business practice, maximizing shareholder wealth/value is the ultimate business objective. Directors who take unprofitable but socially responsible actions can be accused of doing charity with other people's money. On the other hand, a company focused on increasing short-term value with no regards of the social cost runs the risk of alienating stakeholders and decreasing long-term viability.
Duty to Stakeholders
Ethical treatment of stakeholders is in no way incompatible with maximization of shareholder profits. Badly managed corporations can easily harm both their shareholders and other stakeholders at large, particularly in countries and periods where social activism, political lobbying or media campaigns have the power to promote or disgrace large corporations. Conversely, investments in stakeholder management can lead to increased customer and employee loyalty and an improved reputation.