The shareholder and stakeholder theory management essay

There is nevertheless a turning acknowledgment of an drawn-out duty outside of these duties, with duties towards the society in which the concern operates.

The shareholder and stakeholder theory management essay

Economics In this report, purposes of corporations are investigated under two different approaches on corporate value maximization: Shareholder Approach and Stakeholder Approach. So, firstly both approaches are defined briefly.

The contemporary perception of shareholder theory: a discouse on the Essay

Secondly, compare and contrast of shareholder and stakeholder approaches is made. Shareholder Approach on Value Maximization. They believe solving social problems is the responsibility of the state. Friedman believed, in short, that the business of business is business. When firms become involved in social or public policy issues, wealth is diverted to issues outside the core expertise of their managers.

This inefficient use of wealth will affect society in the long run. Friedman never argued that firms can act unethically, immorally, or illegally. TCE focuses on the importance of corporate hierarchies and monitoring employee behavior to minimize self-interested behavior.

TCE focuses primarily on the principal vs. Manager relationship in publicly traded firms, and how to best align the competing interests of two parties to maximize firm value. Stakeholder Approach on Value Maximization: The idea that a company should have an expanded role and responsibilities to other stakeholders besides its owners is much newer than shareholders theory.

Both shareholder and stakeholder approaches are concerned with the purpose of the firm and strategies to improve its competitive position.

The shareholder and stakeholder theory management essay

Stakeholder approach does not view maximization of shareholder wealth as the most efficient way to generate competitive advantage for the firm. Approach holds that firms can best generate competitive advantage and wealth by taking more than just shareholders into account.

In the late s and early s, researchers with backgrounds in philosophy, psychology, sociology, and management began putting foth a new theory of the firm that challenged some of the basic assumptions of classic economics and shareholder approach.

Carroll noted that corporations have four major responsibilities: Both Carroll and Freeman believe that if a firm creates value for its stake holders, it will create value for its shareholders, as well. Thus, unlike the assumptions of classical economics and shareholder theory that a firm can only maximize value on one dimensionstakeholder theorists believe that taking all constituent groups into account is the better way to maximize oveerall firm performance.

The stakeholder theorists smell blood. Scandals at Enron, Global Crossing, ImClone, Tyco International and WorldCom, concerns about the independence of accountants who are charged with auditing financial statements, and questions about the incentive schema and investor recommendations at Credit Suisse First Boston and Merrill Lynch have all provided rich fodder for those who question the premise of shareholder supremacy.

Who are Stakeholders?

Before attempting to declare a victor, however, it is helpful to consider what the two theories actually say and what they do not say.

According to the stakeholder theory, managers are agents of all stakeholders and have two responsibilities: The objective is to balance profit maximization with the long-term ability of the corporation to remain a going concern.

The fundamental distinction is that the stakeholder theory demands that interests of all stakeholders be considered even if it reduces company profitability. Second, some criticize the shareholder theory as geared toward short-term profit maximization at the expense of the long run.

Third, it is sometimes claimed that the shareholder theory prohibits giving corporate funds to things such as charitable projects or investing in improved employee morale. In fact, however, the shareholder theory supports those efforts — insofar as those initiatives are, in the end, the best investments of capital that are available.

Similarly, the stakeholder theory is sometimes misunderstood.THEORY THE THE STAKEHOLDER OF CONCEPTS, EVIDENCE, CORPORATION: AND IMPLICATIONS THOMAS DONALDSON Georgetown University LEE E.

PRESTON University of Maryland The stakeholder theory has been advanced and justified in the management literature on the basis of its descriptive accuracy, instrumental power, . THEORY THE THE STAKEHOLDER OF CONCEPTS, EVIDENCE, CORPORATION: AND IMPLICATIONS THOMAS DONALDSON Georgetown University LEE E.

PRESTON University of Maryland The stakeholder theory has been advanced and justified in the management literature on the basis of its descriptive accuracy, instrumental power, and normative validity.

So, firstly both approaches are defined briefly. Secondly, compare and contrast of shareholder and stakeholder approaches is made.

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Keywords: Purpose, Corporation, Value Maximization, Shareholder Approach, Stakeholder Approach. Shareholder Approach on Value Maximization: Shareholder approach on value maximization focuses the corporation’s purpose on maximizing the wealth of owners by .

Spence () writes that the Stakeholder Theory has emerged as an alternative for the Shareholder Theory of the firm. According to Freeman (), the term stakeholder can be traced back to management literature of when the term was defined as "those groups without whose support the organisation would cease to exist".

This essay has been submitted by a law student. This is not an example of the work written by our professional essay writers. Evaluation of . The issue whether managers should apply shareholder theory or stakeholder theory is opens for debate.

Some theorists believe that maximize shareholder profit is the highest objective of firm. However, there are many articles and academic journals assert that stakeholder theory is the modern management methods.

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