Shareholder Theory

• Corporations must decide whether to direct their resources towards promoting social good or increasing firm profitability and shareholder wealth.

The Shareholder Theory

• A company exists for its shareholders, who own and control it.
• The company should serve the people who elect its board of directors, which selects management.
• A corporate executive's responsibility is to conduct business according to the owners' desires.
• The owners generally want to maximize profit while conforming to basic societal rules, including laws and ethical customs.

Rationales for the Shareholder View

• If all corporations maximize profits in a free market, overall good/happiness will be maximized (utilitarian argument).
• A business is private property, and owners typically want to make as much money as possible as the agent of the owners, a business executive's responsibility is to maximize profit (property-right/ownership argument).
• Executives engaging in CSR are "effectively" imposing taxes, which they lack the authority or expertise to do (tax argument).

Challenging the Utilitarian Reasons for the Economic Model

• Even if the theory is valid, it's not guaranteed that the free market always maximizes the overall good.
• Market failures include coordinating efforts between parties.
• Market failures include long-term impacts on people and public goods.
• Satisfying consumer demand is not always ethically sound.

Challenging Property-Right Based Reasons

• Corporate property rights differ from personal property rights.
• Corporate shareholders/stockholders are more like investors than owners, with limited rights and legal liability.
• Besides investors, employees, suppliers, lawyers, and consumers are also important to a business.
• Property rights aren't absolute and are constrained by other rights and interests.
• Shareholders own the capital (money) that can be transformed into the means of production.
• Managers are hired to make the capital productive in order to maximize shareholder wealth.
• Discussion questions include, do shareholders only want managers to maximize their wealth? Is that what managers promise to do as a condition of their employment?

Challenging the Tax Argument

• Executives engaging in CSR are "effectively" imposing taxes, which they lack the authority or expertise to do.
• CSR imposes costs on shareholders, employees, customers, etc, and goes against society and benefitting the public.
• Discussion question: Should decisions about public benefits be made through democratic processes rather than by corporate executives?

The Stakeholder Theory

• Managers should balance the interests of all stakeholders.
• Stakeholders (narrow) are vital to the firm's survival and success (employees, suppliers, local community, consumers, shareholders, etc).
• Stakeholders (wide) are groups and individuals who benefit from or are harmed by corporate actions, and whose rights are violated or respected.
• Sometimes managers should prioritize the interests of other groups over shareholders.

Arguments and Criticisms

• Rational people would prefer the stakeholder theory behind "the veil of ignorance" because stakeholders have rights.
• Those who prefer the shareholder theory would argue we should not use the "veil of ignorance." because the issue is about interests.
• Firms managed according to the stakeholder principles will perform better
• There is risk the performance may decline because of incompatibility with this theory.
• Vagueness is a criticism (e.g., What is "balance"? Which stakeholders' interests matter and why?).

Discussion

• CSR can be viewed through the lens of beneficence.
• Corporations must decide whether to act beneficially.
• Examples used to debate include the drowning child case and the Merck case.