Stockholder Theory Vs. Stakeholder Theory

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There is a longstanding debate among business analysts as to the business and social responsibilities of corporations. While some believe businesses should focus their efforts on the corporation’s profits, others believe that corporations have an ethical responsibility to the environment in which it operates. Stockholder theory and stakeholder theory map out these two paths, allowing each business to decide which ethical path it will choose to take.

Both stockholder and stakeholder theories are normative theories of corporate social responsibility that outline the ethical responsibilities of a corporation. Although each theory has its roots in business ethics, the foundation of the two theories differs greatly.

Understanding Stockholder Theory

Stockholder theory, also known as shareholder theory, says that a corporation’s managers have a duty to maximize shareholder returns. According to the theory, which was first introduced by Milton Friedman in the 1960s, a corporation is primarily responsible to its stockholders due to the cyclical nature of business hierarchy. Shareholders approve the salary of a corporation’s business managers, who, in turn, are in charge of the corporation’s spending, which should also be in line with the wishes of the shareholders.

Understanding Stakeholder Theory

Alternatively, stakeholder theory says that business managers have an ethical duty to both the corporation’s stockholders, as well as those individuals or groups that contribute to the company’s profits and activities and those who could benefit from or be harmed by the company. A corporation’s stakeholders typically include stockholders, employees, customers, suppliers and the local community in which it operates. According to this theory, a company must consider the interests of all stakeholders when making business decisions.

Common Misconceptions of Both Theories

Stockholder theory is often misunderstood to mean that business managers must do anything necessary to maximize a business’s profits. While maximizing profits is at the root of the theory, managers are encouraged to increase profits legally and through nondeceptive practices. Additionally, many understand the stockholder theory to prohibit charitable giving altogether. While social responsibilities are structured as stakeholder initiatives, proponents of stockholder theory will say that charitable projects are supported within the theory, as long as these projects either benefit the corporation’s bottom line or are the best capital investment available at the time.

Misconceptions also surround the stakeholder theory. Some believe that profit must be completely disregarded when adhering to this theory. In reality, profit is a piece of the larger ethical puzzle that should be considered when determining what impact the company has on the stakeholders in question.