Stakeholder theory

 

This article focuses on two, competing theories related to the responsibilities of managers. The first, which is generally favored by economists and reflected in American corporate law, commits managers solely to the maximization of profits for the benefit of the firm’s owner/shareholders. Shareholders are the “residual” owners of the firm’s assets. Maximizing their returns should provide the most efficient outcome for the firm and society.¹² Other constituencies of the firm, including employees, suppliers, and customers, can protect themselves through contracts or, when necessary, through protective legislation. The managers’ duty, generally speaking, is to protect and enhance the shareholders’ financial interests. As the last takers in the case of liquidation, shareholders only profit if every other interest in the firm has been satisfied.

The other model, which finds less support in law and practice in the United States, requires managers to consider the interests of all “stakeholders” in the firm. Under this theory, business decisions must account for the interests of employees, customers, and even the community in which the firm is located. This model, which is reflected in modern “constituency” statutes, treats the firm as a social creation that must operate for the benefit of society.¹³ The benefits of legally sanctioned business organizations—limited liability and perpetual existence—come at some cost. The price of these benefits is a responsibility to the public that goes beyond simply maximizing the wealth of investors.