Question

Should a corporation manage their affairs to maximize SHAREHOLDER value, or maximize STAKEHOLDER welfare?

Answer 1

Lets first understand who a shareholder and stakeholder is.

A shareholder is one who has invested in the company and who owns the company. He gets directly impacted by the performance of the company. A stakeholder is any party who is interested in the company and his interest in the company’s performance are for reasons other than just capital appreciation or more profits. Employees, vendors, customers, government are all stakeholders of the company. Note that shareholder is, in a way, a subset of stakeholder.

Maximise shareholder value implies creating more profits and distributing to the shareholders through dividends, etc thereby increasing their wealth.

Maximising stakeholder welfare involves using the economic resources in a effective and efficient way so as to lead to a society's economic wealth.

Should a corporation manage their affairs to maximize SHAREHOLDER value, or maximize STAKEHOLDER welfare?

Across the world, shareholder’s value or wealth maximization is a well-accepted objective for majority of the corporates.However, such an objective does not address concerns of any of these parties except shareholders. But, how can a company maximise its shareholders value? It is only with the support and effective coordination of the other stakeholders like employees, customers, suppliers, etc. Maximising shareholder value involves employees working efficiently, suppliers providing quality goods or services, customers paying on time, government providing subsidies, etc.

As can be seen, to maximise shareholders value, help from other stakeholders of the business is critical and necessary. Also, these stakeholders do not support for free. An employee to efficiently work requires proper monetisation, good working conditions and better work life balance. Similarly, a supplier to supply quality goods or services will require payments on time. A customer will require quality products or services for them to pay. Government will expect regular payment of taxes and compliances with various rules and guidelines.  Thus, each of them would also look for their well-being. Even if any of the their objective is not fulfilled, thier interest in the company will start to diminish which will in turn affect shareholders value. In nutshell, without welfare of the stakeholders, maximising shareholder’s value is not possible.

Hence, in recent times, stakeholder’s welfare is evolving as a improved and wider corporate objective.