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Shareholder Value Perspective

Stakeholder Theory

This unit examines two perspectives on the bigger-picture issue of making ethical decisions in the context of corporations.  The traditional view is that corporations should maximize shareholder value within legal and moral constraints, which requires working successfully with a variety of constituencies.  The stakeholder theory argues that, instead, corporations should focus on balancing the needs and desires of those constituencies, even at the expense of profit.

Corporate Responsibility
Corporations: The Fundamentals
• Definition: “Legal entity chartered by the
state with rights and responsibilities apart
from the persons running or working for the
corporation” (Scalet)
• Separation of ownership and control
• Shareholder rights vs. managerial
• What are the roles and responsibilities of a
Two Perspectives
• Shareholder Value: Maximize profits
within the law (and morality)
• Stakeholder Theory: Advance the
interests of all stakeholders (even at
the expense of profit)
Shareholder Value Perspective
What do Shareholders Own?
• At IPO, shareholders invest in the promise
of maximum shareholder value within
legal and moral constraints, in exchange
for taking on the firm’s residual risk
• That promise stays with shares as they
change from hand to hand over time
(Easterbrook & Fischel,
Shareholder Value Perspective
• Maximize profits within the law (and
Arguments for Shareholder Value
• Legal argument
• Economic imperative
• Ethical justifications
– Efficiency—resources pulled to their most
valued uses
– Liberty—individuals are free to participate
or not
Challenges to Shareholder Value
• Difficult to rely on self-interested
businesspeople to act on others’ behalf
(including shareholders’); market
mechanisms are required to rein them in
• Shareholder value proponents think that
corporate responsibility lies in devising
effective corporate governance
mechanisms to protect the long-term
interests of shareholders
Corporate Social Responsibility
• “Commitment to corporate actions
beyond maximizing profits within the
law” (and morality)
“Instrumental” vs. “Normative” CSR
• Instrumental/Strategic: How
corporations should engage in CSR
programs in order to maximize profits
within legal and moral constraints
• Normative: How corporations should
engage in CSR programs because it’s
the right or moral thing to do, even at
the expense of profits
Arguments against Normative CSR
• Violates owners’ property rights
• Presumes that managers have better
moral skills than shareholders
• Weakens management’s
accountability to shareholders
• Distracts management from its primary
Impact of Normative CSR
• Going Concern: Shareholders’
expectations are undermined, and
owners of record at announcement
pay for entire CSR redirection
• Startup: Investors purchase IPO shares
with full knowledge of potential for
lower market price
Stakeholder Theory
Stakeholder Theory
• Stakeholders: “Entities significantly
affected by the firm’s activity, such
as employees, customers,
shareholders, the community or
broader society, the environment,
and suppliers”
• “The debate is not whether management bears ethical
responsibilities…[it] is about the reach
and scope of these responsibilities.”
Ethical Justifications
• Powerful corporations can help alleviate
global inequalities
• Stakeholder approach leads to greater
liberty for the vulnerable
• Capitalism will only be efficient if the
masses buy into it
• Shareholders don’t do the real “work”
• Consider non-Western values: Economic
actors should pursue what is sufficient
The Power Argument
• A corporation’s purpose is to “use its
resources to advance the interests of all
those who are most affected by its corporate
• “With great power comes great
• “The limited capacities of government and
the power and influence of corporations
require that the corporations address these
social problems”
A Key CSR Distinction
• Repair externalities/“do no harm,” but
not responsible for general social
• Advance the common good,
“whether or not it’s directly related to
their core business”
Evidence of CSR Popularity
• Socially responsible investing
• CSR-related shareholder proposals
• Nongovernmental organizations
• Benefit corporations: Special legal
status for for-profit businesses that
include social responsibility in their core
Government Intervention
• Limited intervention
– Top-down process: International
organizations (e.g., the UN) specify norms
endorsed by executives
– Bottom-up processes: “Ethical norms are
rewarded by the purchasing decisions of
consumers and investors”
• Significant intervention: CSR as legal
mandate (e.g., codetermination laws)
Corporate Responsibility
• Shareholder Value: Maximize profits
within the law (and morality)
• Stakeholder Theory: Advance the
interests of all stakeholders (even at
the expense of profit)

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