We put ‘shareholders vs stakeholders’ as ‘owners vs any parties interested in the company’. Note that shareholder is a subset of stakeholders. A shareholder is someone who owns a financial share (equity stock) in the company and thus has an ownership share in the company. A stakeholder is someone who has an interest in the company’s performance for reasons other than just capital appreciation due to an increase in the stock price.
Stakeholder’s welfare is a superior corporate goal over shareholder’s wealth maximization. Stakeholder’s welfare looks after all the factors responsible for its success whereas the wealth maximization as an objective overemphasizes the importance of money provider i.e. shareholders.
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There has been a lot of debate on the shareholders vs stakeholders and on who of the two set of people be given more importance. Let us first have a look at the major differentiating factors between shareholders and stakeholders.
Shareholders are common people who become part owners of the company by buying equity stock either from the company i.e. through initial public offering or from the secondary market. The shareholders make profits in terms of dividend and capital appreciation if the companies make profits and the price of its share of the index increases. On the other hand, if companies make a loss the same gets affected negatively by the share price and the returns that shareholders get are also affected.
Stakeholders are people who have an interest in the company either directly or indirectly. Employees, customers, creditors, suppliers etc. who may be affected by what happens in the company are all stakeholders of the company. The general public is also considered as stakeholders under CSR governance. One can say that all shareholders are stakeholders but not all stakeholders may be the shareholders of the company.
Shareholders are affected directly by the monetary performance of the company like profits or losses as it quickly reflects the price of the stock.
Stakeholders may be directly or indirectly affected by what happens in the company. The stakeholders have an impact/influence on what is going to happen to the performance of the company while shareholders are only affected by the outcome.
The shareholders want the company to undertake activities that ensure having a positive effect on the stock price or increase dividend or actions that improve the financial condition of the company in the immediate future.
Stakeholders, on the other hand, focus on the long-term longevity of the organization, apart from the financial performance of the company. The stakeholders (employees and staff) may seek the better quality of services from the company rather than the higher profitability. In other words, shareholders focus on quantity and stakeholders focus on quality.
Conflict of Interest
The company is always under dilemma as to whom to give higher priority viz. shareholder’s wealth maximization vs stakeholder welfare as a corporate objective. The shareholders being the key controllers may want the company to focus on improving the financial performance. On the other hand, stakeholders want to incur expenditure that increases their value but does not necessarily add to profitability especially in the short term. With changing economic dynamics companies have now started treating increasing stakeholder value as a part of corporate social responsibilities (CSR).
However, given the number of frauds that corporations have seen under the disguise of stakeholder value creation, clouds of doubts are created on which aspect to be given higher priority. Many companies now try to balance the two by giving focus to increase the shareholder value without compromising or violating any stakeholder rights and doing business activities in a legally correct manner. The objective is to maximize profit along with keeping long-term stability and sustenance of the firm intact.
Shareholder’s wealth maximization is a well-accepted corporate objective in almost whole the world barring a few exceptions. Indisputably, it is a superior and healthier goal compared to profit maximization which was lacking a long-term perspective. Apart from shareholders, there are various parties which are affected by a business conducted by an organization viz. employees, customers, suppliers, communities etc. Wealth maximization as a corporate goal does not mention concerns of any of these parties except shareholders. Hence, a stakeholder’s welfare is evolving as a further improved and wider corporate objective.
Should a manager take the decision only for shareholders and neglect the interest of all the other stakeholders? Let us think the other way round. How is a manager able to maximize wealth and welfare of shareholders? It is only with the support of all the other stakeholders. If the supplier does not supply good raw material, can managers produce good quality products? If the employee does not work efficiently, can the managers alone do everything? If the customers are provided with low-quality goods, will they continue buying them? The answer to all these questions is a clear “No”.
If we see, there is a simple math. The management is able to serve the shareholder’s objective with the help of other stakeholders of the business and stakeholders are also not doing it for charity. Naturally, they would also look for their well-being. If their objective is not fulfilled, sooner or later their interest in working with the organization will be lost and they may mend their way. Without welfare of the stakeholders, shareholder’s wealth creation is not possible.
In different countries, the different culture is adopted. In the US, UK etc, wealth maximization of shareholders is the main corporate objective
In different countries, the different culture is adopted. In the US, UK etc, wealth maximization of shareholders is the main corporate objective whereas, in countries like Germany, the interest of the workers is given first priority. In Japanese companies, employees and customers are kept at par with shareholders.
Have we seen a tree where only one branch is grown and the rest remain as it is? When a tree grows, all its branches grow. Wealth maximization as a sole objective resembles the first situation which is not practical and possible whereas the stakeholder’s including shareholders welfare resembles the second situation which is natural and healthier.
Growth and development of a business have a number of requirements and not only the money. Shareholders only provide money and rest is provided by the other stakeholders of the business. When the input required for growth is shared by all the stakeholders, the outcome in the form of wealth and welfare should also be shared among all the stakeholders.
References:August 23rd, 2018