Shareholder (liberal market) vs stakeholder (cooperative market) views and economies review the surrounding theoretical debates as well as their practical implications in both the political and economic spheres

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Shareholder (liberal market) vs stakeholder (cooperative market) views and economies – review the surrounding theoretical debates as well as their practical implications in both the political and economic spheres

In the ever changing global business environment, the area of ‘business ethics’ brings one of the most hugely debated topic that involves the surroundings of the corporate objectives, whether the managers should base it on the interests of shareholders where their wealth is maximised or to balance the interests of all associated stakeholders. This in recent times has often been referred to as the Friedman (shareholder) vs Freeman (stakeholder) debate (Freeman, 2008). Conversely, it is the classical model of the Friedman’s Shareholder Theory that is the most influential of theories in corporate social responsibility to date. Nevertheless, with a dynamic business environment involving a vast growth of competitors, raising awareness and knowledge of customers about the environment and government intervention in markets forces, executives must consider all the interests of each group when establishing the business objectives. Yet, in the 21st century a number of global corporate scandals such as Enron, Global Crossing, Xerox, Worldcom etc. (, 2002) raises the question whether the shareholder theory of corporate governance leads to unethical behaviours amongst senior members of corporations thus ultimately leading to the failure of the fundamental role of maximising shareholder value. Many experts now advocate the stakeholder approach with a wider perspective to management. The two theories are normative theories in the theme of ‘Corporate Social Responsibility’ and dictates the roles a corporation must fulfill (Smith, 2003, p.85). Before proclaiming which of the two theories is most predominant at the present time, a thorough analysis of both theories would give a comprehending view of their fundamental involvement in the political and economic world.

A shareholder is defined as the “legal owner of a company, known as ‘members’ who enjoy rights such as receiving dividends and company profits” (Morrison, 2010, p.15). They are the actual owners of the company and are entitled to the profits if the firm performs well or face losses if the firm fails to create business. It is the individuals or corporations who take a calculated risk and invest their own capital into the business in the expectation of accumulating wealth over the long run. The significance of shareholder value maximisation is exhibited in the managers behavior on how they prioritise the increase the market value of shares and dividends. The shareholder theory states that and that managers are merely agents to stockholders who serves in their interest and to believe that business should pursue other objectives other than profits is to preach socialism and undermine the free society (Friedman, 1970). Therefore, the shareholder theory asserts that the underlying ethical principle is that executives have a legal fiduciary duty to the company’s owners, which requires managers to operate in the best interest of the stockholders by maximising the value of their stake in the business and not to employ strategies to fulfill the desires of other stakeholders i.e. employees, suppliers, community etc. The other group that is instrumental to the value of a company are stakeholders. A stakeholder can be defined as “…any group or individual who can affect, or is affected by the achievement of the organisations objectives” (Freeman, 1984, p.46). According to Freeman et al., (2010, p.9) the stakeholder theory is a fundamental theory of how business works at its optimum level and highlights the importance of creating value for stakeholders where a business cannot segregate any stake but to integrate all the interests of each stake. Werhane and Freeman (2003, p.7) states that, “[stakeholders] are important not merely because one could not exist or achieve profits without them, but also because they are individuals – human beings with rights and interests”. Putting this into a managerial perspective, each group of stakeholders are vital to the success of the business and it is their duty to figure out how to collaborate and respect all interests of each group. Over the last few decades, a strong polarisation of concepts have emerged between the two theories where the shareholder theory of Friedman focuses on wealth maximisation and the stakeholder theory of Freeman centres around the creation of value.

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The development the shareholder approach originated from the concept of individual liberty and private property operating in a legal democracy and is based on the influential liberal ideas from John Locke (Held, 2012, p.64-65). It can be extrapolated that from the basis of contractual rights, it is assumed that the approach should be directed and aimed primarily for the benefit of the owners of the property rights and prioritise on their decisions on how their assets are utilised correspondingly. According to Friedman:

“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. ...

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