Question

identify the primary justifications underlying shareholder theory and stakeholder theory. Thereafter, discuss and analyze the strengths and weaknesses of these competing theories. Additionally, you may, but are not required to render a reasoned opinion as to whether you deem the shareholder theory of stakeholder theory as best addressing how the corporation can pursue an ethical course of business. Alternatively, you may reject both theories as to the best course of action and propose a hybrid theory of corporate governance that you conclude best fulfills the goal of private corporations acting ethically.

Answer 1

Shareholder theory has the primary justification that responsibility of the managers is to generate profit for the owners or shareholders and take action that caters the best interests of the owners. In contrast to it, stakeholder theory has the justification that a business affects different parties and all these parties have their stakes and become stakeholders. Now, the business has the responsibility to take action that is suitable for the best interests of all the stakeholders.

Strengths of the shareholder theory are its clarity of command to the managers where they work for the owners or shareholders and profit making motive for the business that encourages many private players to enter the business and jobs are also created. Though, it has weaknesses also such as it creates a negative externality and harm to the community and the environment.

In contrast to it, strengths of the stakeholder theory is that it benefits different stakeholders, it is not excessively profit oriented and resolves the market failure. Further, stakeholder theory, focuses to create wealth for all the stakeholders and it drives the organization towards the sustainability. As such, there is no apparent weaknesses other than the delay in operations or in decision making process as there are different interests of the stakeholders to be taken care of.

The best and ethical way to operate a business is to follow the stakeholder approach, as it focuses upon environment protection, work for the community and create value for the customers. It is the stakeholder approach where the different aspects of the business and its impact upon different stakeholders are well taken care off.