Critically discuss the assertion that shareholders' interests should not take priority over the interests of all other stakeholders.

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IBO2002AS2: Strategic Business Analysis

Anthony Silk (20079491)

Critically discuss the assertion that shareholders' interests should not take priority over the interests of all other stakeholders.

In modern day business, companies tend to fall into one of the following categories; those which are shareholder driven and believe that it is their mission to maximise shareholder wealth, or those which are stakeholder driven and attempt to also satisfy the needs of the organisations other stakeholders such as employees, customers, suppliers, governments and labour unions.  In the USA, businesses have been overwhelmingly shareholder driven for the last 15 years, with virtually all Directors of publicly traded companies acknowledging that creating value for shareholders is a key corporate objective.  Alternatively, in countries such as Japan and Germany, many companies are successfully managed using stakeholder centred methods.  The argument as to whether modern companies should be shareholder or stakeholder driven is therefore one that provokes much debate and in the following report we shall try to explore both sides of the argument, discussing whether or not the shareholders interests should or should not take priority of the interests of all other stakeholders.

There are many people that would argue against the idea of shareholder wealth being the number one priority, suggesting that other stakeholder's interests are more important.  One of the first people to popularize this idea was R. Edward Freeman, who said that business must work in the best interest of all those affected by the business, including customers, suppliers, employees, and of course, stockholders.  He also stated that 'each person deserves respect because of their dignity as individuals and should be treated as ends not as means'.  Known as the 'Stakeholder Theory', Freeman established the following principles as the foundation of his theory;

         (i.)        'Principle Corporate Right (PCR):  The corporation and its

                  managers may not violate the legitimate rights of others to

                 determine their own future.'

         (ii.)        'Principle of Corporate Effects (PCE):  The corporation and

                 its managers are responsible for the effects of their actions

                 on others.'

                                [http://home.comcast.net/~nelson1397.stockstake.htm]

This point of view is now widely supported by many, with the following, more recent quote, once again suggesting that other stakeholders should be treated with greater attention than shareholders;

        

        'Many managers in the USA still operate under the twin fictions that

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         their most important stakeholders are shareholders, and that their

         primary purpose in management is to enhance shareholder value…

         …but from a strategic and operational perspective, it is dead wrong

         for any firm - publicly or privately held.  A business does not exist

         for the benefit of the investor, nor should it be run under that premise'

                                                         [McTaggart JM & Kontes PW, 1993]

The author of this quote went on to suggest that it would be in the best interest of a company ...

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