Businesses Have Stakeholders, Not Just Stockholders
By Felicia Bailey, Class of '19 | January 18, 2018
For many years, the agency theory dominated the field of organizational management. The agency theory claims that the managers of a corporation must act exclusively in the interests of its stockholders; they are agents of the owners. In 1983, Edward Freeman introduced the stakeholder theory, a competing theory of management’s role in the corporation. The stakeholder theory claims that instead of acting exclusively in the stockholders’ interests, management’s job is to balance and adjudicate between the different stakeholders in the corporation. The stakeholders can include employees, customers, suppliers, and the local community in addition to the stockholders. The following is an argument for stakeholder theory.
Stockholder theory claims that if stockholders own shares in a firm, they should have certain rights and privileges (Freeman 263). While this is a fair point, stockholder theory neglects what is owed to the rest of the stakeholders. “Stakeholders are those who have a stake or claim on the firm,” including not only stockholders, but suppliers, customers, employees, and the local community as well (Freeman 263-264). Firms can be socially responsible by taking into account all of the stakeholders. Contrary to many arguments, considering all of the stakeholders of a firm does not inhibit a firm’s ability to pursue profits, but instead the opinions and needs of all the stakeholders may actually support the firm in increasing long-term profitability. Businesses should embrace stakeholder theory because it will assist in the firm's ability to be socially responsible and enjoy long-term profitability as opposed to short-term stock gains that stockholder theorists are fixated on.
Each stakeholder has the right to not be treated as a means to an end, and instead should partake in determining the future direction of the firm in which they have a stake (Freeman 264). Firms owe different stakeholders different assurances. Employees, for example, have their jobs at stake and in return for their loyalty and work they should receive a fair wage, have their needs filled, and not be taken advantage of (Ciulla 198). Customers, who exchange resources such as money for products provided by a firm, should receive the full benefits of that product and should not be harmed by false information (Freeman 266-267).
Along with being socially responsible, firms also need to establish long-term profitability to achieve stability and be able to reinvest profits in order to grow. However, profitability should not be the only goal of a firm. Proponents of stockholder theory may argue using the “polestar” argument, which claims if firms act to maximize profits as their sole purpose, the result will be best for everyone (Stone 256). This argument may sound reasonable in theory, but in actuality, social responsibility towards all stakeholders does not result from a solitary goal of maximizing profits.
An article in The New Yorker explains how stockholder theory, or focusing solely on maximizing profits, can hurt employees. The article explains how hedge-fund investors often push companies to reduce costs by laying off employees and discouraging high wages or wage increases for employees. The article summarizes, “When companies prize investors above all, they’ll do anything to increase their stock price, and that’s not good for workers.” Stockholder theory leads to a fixation on short-term stock gains, which is inherently unstable and is not good for the overall health of the firm or its stakeholders.
A focus on profits may not lead to social responsibility from a firm, but a focus on social responsibility towards all stakeholders can lead to greater long-term profitability. When firms are socially responsible in terms of the way they treat their employees, it often motivates employees to work harder, which results in greater efficiency within the firms operations. Firms can also improve profitability by considering the wants and needs of customers. Customers respond to respectful treatment by being a loyal customer, continuing to purchase products or services from the firm, and encouraging others to do the same. Loyal customers lead to not only short-term profits but also stable long-term profitability.
Management’s primary role should be to look after the overall health of the corporation by balancing the multiple claims of conflicting stakeholders. A firm's overall health relies on not harming those who have a stake in the firm as well as having long-term profitability. Firms operating in accordance with stakeholder theory will act in socially responsible ways, which will lead to stable long-term profitability.
- Ciulla, Joanne B., et al. “Exploitation of Need.” Honest Work: a Business Ethic Reader, Third ed., Oxford University Press, 2014. pp. 198-200.
- Freeman, Edward R. Ethical Theory and Business. 1994, pp. 66-74. Rpt. in Honest Work: a Business Ethics Reader. By Ciulla, Joanne B., et al. Third ed. New York: Oxford University Press, 2014. pp. 263-269. Print.
- Stone, Christopher D. Where the Law Ends. 1975, pp. 80-87. Rpt. in Honest Work: a Business Ethics Reader. By Ciulla, Joanne B., et al. Third ed. New York: Oxford University Press, 2014. pp. 254-257. Print.