Stockholder theory vs. stakeholder theory

Written by stephen byron cooper Google
  • Share
  • Tweet
  • Share
  • Pin
  • Email
Stockholder theory vs. stakeholder theory
Unethical behaviour can damage the share price. (Jupiterimages/Photos.com/Getty Images)

Most businesses exist to make money. Even not-for-profit organisations are meant to at least cover their costs through income. Stockholder theory expresses the classic business ethos: the company's shareholders own the company and so the business should be run to please them and give them a return on their investment. Stakeholder theory examines the different types of people that are impacted by a company’s operations and gives those groups a say in the running of the company.

Other People Are Reading

Shareholders

Large businesses rarely achieve their size by remaining exclusively in the ownership of their founders. Even family owned businesses that have evolved over generations, like Sainsbury’s grew by listing on the Stock Exchange and issuing shares.

Shareholder benefits

Issuing shares and inviting in investors has several benefits for a company. The shares would not achieve their full value if the majority of the company remained in the hands of one entrepreneur who ignored the wishes of fellow shareholders. Thus, “going public” usually introduces a separation of management and ownership. This state requires formal procedures of oversight and governance which do not need to exist in private companies. The company may use its own shares as security to raise capital through loans and banks prefer to loan to publicly listed companies with clear reporting procedures than to private companies.

Shareholder rights

The management of the company is duty bound to organise the operations of the company to maximise return to the shareholders. Although shareholders rarely get an opportunity to dabble in the day-to-day operations of the company, they have the right to periodically remove directors who do not perform well. Thus the board of directors of a company has to pay close attention to the wishes of shareholders.

Stakeholders

A stakeholder is anyone who is impacted by the operations of the company. Stakeholder groups include employees, suppliers and customers. The company’s management and shareholders are also stakeholders. Stakeholder theory even extends out the definition of invested parties to the families of employees, government and regulators and the community in the neighbourhood of the company’s premises.

Profitability

Stockholder theory focuses on profitability of the company as the main goal of the organisation’s existence. All decisions the company’s management make should be subordinate to that goal. Prioritising other goals, like environmental considerations, and workers’ safety can only reduce profitability, because they involve extra expenses that cannot be recovered through sales.

Interaction

Theory rarely survives reality intact. Therefore, focusing on profit as the only goal of the company can actually reduce profitability and the share value. A company that behaves unethically can suffer from the negative impact of public opinion and lose customers. The general public and investment houses may be unwilling to be associated with the company and refuse to buy its shares, thus depressing the share price despite high returns.

Improvements

Stakeholder theory proposes that the company benefits and makes more profit if it pays attention to the various groups in society with whom it interacts. Investing in workers increases productivity, because a better-trained workforce makes fewer mistakes. Partnerships with suppliers and customers can improve the supply chain and enable cost reduction methods through timing of purchasing and sales and consolidation of transport and distribution methods. A company that has a high standard of ethics wins support and loyalty from its customers and attracts awards and free publicity from governments and the media. So companies can improve their profitability, thus pleasing their stockholders, by prioritising the needs of everybody but the stockholders.

Don't Miss

Filter:
  • All types
  • Articles
  • Slideshows
  • Videos
Sort:
  • Most relevant
  • Most popular
  • Most recent

No articles available

No slideshows available

No videos available

By using the eHow.co.uk site, you consent to the use of cookies. For more information, please see our Cookie policy.