The contemporary perception of shareholder theory: a discouse on the shareholder-stakeholder debate - Essay Example

These shareholders look forward to the maximisation of their investment (Husted & de Jesus 2006, p. 77). A management who is unable to increase shareholder wealth are disobeying and disregarding this expectation. This essay tries to prove that prioritising shareholder wealth or profitability to the detriment of other stakeholders (e.g. employees, communities, and the environment) is no longer a principle most people embrace. The Shareholder-Stakeholder Debate Financial economists usually place more importance on shareholder wealth and interests than those of the other stakeholders.

For these financial economists the main obligation of the management is to maximize the wealth or investment value of shareholders. The widely quoted statement from Milton Friedman presents the central idea: “There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it. engages in open and free competition, without deception or fraud” (Shaw 2010, p. 177). One of the determined supporters of Friedman’s shareholder theory is Michael Jensen, a financial economist.

He argued that maximisation of shareholder wealth does not imply that organisations should totally disregard other stakeholders (Freeman, Harrison, Wicks et al. 2010, p. . A shareholder-driven company doesn’t ignore its stakeholders. What it does is invest resources to benefit each of these constituencies to a point where the additional benefits to the company. exceed the additional cost. But at the same time Jensen opposes the practice of giving the management the power to decide whether to distribute resources so as to please or assure a wide array of stakeholders.

His warning is based on distrust of management and its tendency to distribute resources in line with their personal motives and interests to the detriment of productivity. In addition, Jensen claims that shareholders must be prioritised in managerial operations for they “are the only constituency of the corporation with a long-term interest in its survival” (Freeman et al. 2010, p. 128). However, this point is flawed because shareholders have the freedom to sell their stock whenever they want to.

On the contrary, employees do not have an easy way out, and, without a doubt, local communities are negatively affected if a company collapses; moreover, as clearly stated by Cloninger, “In the presence of asymmetric information, the avid pursuit of share price maximisation may lead managers to violate certain stakeholder interests and employ business practices that are unethical, immoral, or illegal” (Freeman et al. 2010, p. 129). Milton Friedman has been severely criticised by supporters of corporate social responsibility (CSR) because of his assumption that the sole responsibility of an organisation to society was to increase shareholder value.

He argues that any efforts by organisations to use resources for humanitarian purposes, or try to meet the demands of stakeholders aside from shareholders were mostly unwise. Yet, it is