Shareholder vs Stakeholder Theory

Today, the word shareholder and stakeholder are often used interchangeably by most individuals. However, while some relationship exists between the concepts, in fact, they are distinct. Generally, a shareholder involves a person owning a stock within a company. On the other hand, a stakeholder is one with interest – whether financial or otherwise – in an enterprise.

Noteworthy, this distinction connotes a distinct level of responsibility to both divides. It is in this light that the shareholder theory and stakeholder theory emerged in a bid to identify the level and ambit of responsibility on each theory. In a bid to contribute to this discourse, this essay examines the shareholder vs. stakeholder theory. It takes a cursory look at its root concept – shareholder and stakeholder – to achieve this.

Shareholders are individuals or corporate entities with stock or share ownership in a private or public corporation. They have a financial interest in the company and view their shares or stocks as investments. As such, they focus on the profitability of the company and expect the managers to reward their investments with dividends (Landau, 2019).

Also, subject to the prevailing laws within their state, they have various rights over the shares. They include the right to sell the shares, the right to nominate directors, the right to receive dividends, and the right to a fiduciary duty of care.

Noteworthy, the priority of shareholders usually revolves around results that increase stock prices and provide dividends. Their priority remains their financial interest and issues like growth, acquisition, mergers, expansion, and other efforts that are likely to improve profitability (Landau, 2019).

Further, it is as an extension of this relationship that the stakeholder theory emerged. Noteworthy, the shareholder theory posits that directors of an enterprise have sole responsibility to them. Noteworthy, this responsibility is to drive profitability, and in turn, ensure maximum returns for shareholders (Landau, 2019).

Similarly, this theory emerged thanks to the efforts of Milton Friedman around the 1960s. He stated that a corporation has one primary duty to reward the shareholders for their investment by focusing on profitability and responsibility towards them (Landau, 2019).

Noteworthy, although the shareholder theory posits that profitability should be the goal, this does not connote disregard for the law. As such, its ambit falls within all legal and acceptable practices directed towards profitability. It does not extend to unacceptable practices and illegal activities (Landau, 2019).

Stakeholders are individuals, groups, or organizations with significant interest in an entity, enterprise, or organization. Noteworthy, their importance is borne out of the fact that the enterprise can impact them. Examples of individuals who qualify as stakeholders include project leaders, senior management, resource managers, line managers, and customers (Landau, 2019).

Noteworthy, stakeholders include a wide range of people interested in the success or failure of the enterprise. As such, it necessarily contains shareholders who have a financial investment and will be impacted financially by the project (Landau, 2019).

Similarly, stakeholders also extend to individuals who do not have a direct relationship with the enterprise but are likely to be affected by the project. As such, stakeholders can extend to community members within the area where the enterprise is located and public groups with interest in the sector (Landau, 2019).

Noteworthy, stakeholders prioritize the longevity of existing relationships with a focus on quality service delivery rather than only profitability. Their range of priorities might also extend to the sustainable exploitation of resources (Landau, 2019).

Further, it is as an extension of this relationship that the stakeholder theory emerged. Noteworthy, it posits that the responsibility of managers and directors is to both the stakeholders and enterprise' shareholders. As such, while profit is a priority, an enterprise must hope to remain profitable while focusing on activities beneficial to society at large (Landau, 2019).

Shareholder Theory vs. Stakeholder Theory

The debate around the shareholder and stakeholder theory begs the question of who should be the focus of organizations and enterprises. Noteworthy, both approaches explore the role of the corporation within its environment. As such, it is generally considered to be a normative theory of business ethics and corporate social responsibly (Smith, 2003).

Further, while the shareholder theory posits that the shareholders should be the directors' or managers' priority, the stakeholder theory promotes prioritizing stakeholders. Hence, the shareholder theory establishes that the only right thing to do is to focus on profitability to reward shareholders' investment (Smith, 2003).

However, this debate is sometimes misconstrued. Noteworthy, in analyzing the stakeholder theory, it is sometimes misunderstood that focus is not placed on shareholders. Yet, the fact is that shareholders are also stakeholders in the company or organization. As such, the stakeholder theory also considers the interest of shareholders, albeit my balancing it with the interest of other stakeholders (Smith, 2003).

In this instance, it requires that a company be accountable to its stakeholders and consider the interest of all stakeholders in decision-making processes. Precisely, it recognizes the responsibility to shareholders but requires that the public be considered a stakeholder whose interest must be protected (Smith, 2003).

For instance, the stakeholder theory will require managers and directors to consider the environmental impact of a venture before proceeding. Rather than looking towards making profit alone, it looks towards achieving profitability without harming other stakeholders (Smith, 2003).

Also, this debate between both theories has led to the emergence and increased relevance of Corporate Social Responsibility (CSR). As against the shareholder theory, which focuses primarily on shareholders, the stakeholder theory posits that every organization has a corporate social responsibility (Smith, 2003).

Historically, the priority of corporations within the United States of America's economic system was to prioritize the stakeholder theory (Smith, 2003). However, thanks to the opinions of Milton Friedman and subsequent financial circumstances, the shareholder theory gained considerable traction (Smith, 2003).

Regardless, the stakeholder theory remains preferable as not only does it consider the interest of shareholders; it also considers that of stakeholders – an approach more likely to promote continuity.