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Shareholder Primacy And The Stakeholder Model

2119 Words9 Pages

Introduction In an incorporated company, the interests of shareholders are often at odds with the interests of other stakeholders. When making a decision under such circumstances, I will show that the business should balance each group’s interests equitably in order to determine how to act, as a result of a duty owed to each group for their contributions to the company. I will also critique some popular arguments in favour of the commonly held belief that a business should act primarily in its shareholders’ interests. The two competing models The debate about whose interests businesses should act in is dominated by two theories: Shareholder Primacy, and the Stakeholder Model. Under the Stakeholder Model, to answer the question of whose interests …show more content…

Arguments for Shareholder Primacy A common argument in favour of the opposing view – Shareholder Primacy – is that shareholders have rights of ownership, and therefore the business should be run in their interests (Stout, 2002). The complete argument is as follows: shareholders are the owners of the company, and it is wrong to use someone’s resources in ways that conflict with their interests (Fried et al., 2014). It is therefore wrong to use a company’s resources for purposes that do not further shareholders’ interests. However, there is a major problem with this argument: there are no legal grounds for the claim that shareholders own companies (Stout, 2002). Since companies are regarded as autonomous legal persons, they cannot be owned by any group of individuals (Heracleous & Lan, 2010). As a result, the claim that shareholders are the owners of companies is simply not true. Nonetheless, a proponent of this argument may attempt to show that this is just a legal technicality, and that shareholders do own the company in substance, or should be considered the owners of the company (Fried et al., 2014). One such argument attempting to show this is as …show more content…

One argument, by Milton Friedman, is that employees do not have the necessary skills or experience to do so (Friedman, 1970). Specifically, Friedman argues that a business manager is not “an expert in inflation” and thus does not have the required knowledge to fight inflation (ibid.). In a similar fashion, because employees of a business are not experts in achieving socially desirable goals, businesses cannot be morally obliged to contribute towards those goals (ibid.). A second argument, from classic economics, is that businesses operating in a competitive environment cannot afford to do anything other than maximise profits (Fried et al., 2014). Any business that fails to do so will not be able to sustain its existence, and hence businesses cannot have a duty to do anything other than maximise

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