Abstract
European Commission (2011) defines Corporate Social Responsibility (CSR) as ‘the responsibility of enterprises for their impacts on society.’ By addressing the claims of the stakeholders, CSR aims at enhancing the economic, social, and environmental welfare of the society. In parallel, there goes a debate over the shareholder vs stakeholder supremacy; whether corporations should have the sole responsibility to their shareholders or to all stakeholder groups. The shareholder or stakeholder supremacy is a long standing debate, but no definitive consensus has been reached yet. The debate continues, but proponents of both theories also have agreements on many areas. For example, they agree that corporations should create wealth and consider their stakeholders’ concerns in making decisions. However, disagreements remain with important implications. The main disagreement is about the purpose of the firm; ‘What should be the corporate objective function?’ By discussing the shareholder and stakeholder theories to construct an explicit corporate objective function, the article aims at identifying the conditions under which the two theories converge. This also sheds light on why each theory advises management to act different in similar business conditions. The structure of the paper is as follows. Following a brief overview of each theory and key criticisms they receive, the paper addresses three areas of particular concern: (i) treatment of stakeholders under the two theories, (ii) wealth creation and allocation from the perspectives of both theories, and (iii) the ‘problem of justification.’ In the final section, we will construct the corporate objective function in three stages.
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Notes
- 1.
Negotiation capacities (i.e. power, legitimacy and urgency of stakeholder claims) will be discussed in Sect. 3.2.
- 2.
- 3.
Note that the corporate objective function is ‘maximization of’ another function, such as profit function.
- 4.
As we will discuss later in detail, classification of stakeholders and how their claims are viewed will fundamentally impact the analysis.
- 5.
‘Why should the stakeholder theory be accepted or preferred over alternative conceptions?’ (Donaldson and Preston 1995: 73).
- 6.
each stakeholder group has a right to be treated as an end in itself, and not as means to some other end (Donaldson and Preston 1995: 73).
- 7.
Such as; primary or secondary stakeholders; as owners and non-owners of the firm; as owners of capital or owners of less tangible assets; as actors or those acted upon; as those existing in a voluntary or an involuntary relationship with the firm; as rights-holders, contractors, or moral claimants; as resource providers to or dependents of the firm; as risk-takers or influencers; and as legal principals to whom agent-managers bear a fiduciary duty.
- 8.
Shareholders are a corporation’s ‘residual claimants’ in the sense that they are entitled to appropriate all (and only) the net assets and earnings of the corporation after all contractual claimants—such as employees, suppliers, and customers—have been paid in full (Armour et al. 2009: 25).
- 9.
Externality is a phenomenon that arises when an individual or firm takes an action but does not bear all the costs (negative externalities) or receive all the benefits (positive externalities) (Kaul et al. 1999: 509).
- 10.
It is possible to release that assumption and analyze its impacts, but this would be beyond the scope of this paper. We could call it as strong form of stakeholder theory. For example, are the wages paid to workers ‘fair’?
- 11.
In the case of subsidies, even when an action is not profitable in itself, outcome may change.
- 12.
β can be considered as accounting profit, (total revenue minus total costs), or economic profit (where cost of capital is also factored in), as we will discuss later.
- 13.
To the extent we release this constraint, the shareholder value adherents will converge to stakeholder approach.
- 14.
However, there might be negotiation due to relative increases in wealth. Wealth allocation may depend on the proportional wealth increase on the corporation versus the stakeholders. In the above example, if α is, say, 0.001, and β is 1, then the corporation may be asked to provide extra benefits to the stakeholders. For an interesting analysis on the impact of relative income, see Layard et al. 2009.
- 15.
This is the same logic where Jensen (2001) terms enlightened value maximization or enlightened stakeholder theory.
- 16.
Urgency by itself is not sufficient to guarantee high salience in the stakeholder—–manager relationship. For example, neighbors of a nuclear power plant that is about to melt down have a serious claim on that plant, but they may not be aware of the time pressure and criticality and, thus, may not act on their claim. (Mitchell et al. 1997: 870).
- 17.
Neighbors also tried to earn legitimacy and power by buying stocks in the corporation. When the cooling system in one of the Daini reactors malfunctioned in 1989, they sued Tokyo Electric as shareholders to shut it down. Only then, they argued could the firm avoid irreparable harm to itself. The court dismissed their claim. Whether to restart a damaged reactor was a question on which the firm's board could turn to specialists. If those specialists thought it appropriate to restart the reactor, it could properly restart it (Ramseyer 2011: 9).
- 18.
Coase Theorem is the assertion that if property rights and liability are properly defined and there are no transaction costs, then people can be held responsible for any negative externalities they impose on others, and market transactions will produce efficient outcomes. (Kaul et al. 1999: 509). Coase Theorem holds that regardless of the initial allocation of property rights and choice of remedial protection, the market will determine ultimate allocations of legal entitlements, based on their relative value to different parties (Parisi 2007: 1).
- 19.
Other hypothetical exercises can also be made. For example, how would you react to such a manager (who decided not to build the factory) if you were the shareholder of the corporation?
- 20.
Jensen (2001: 11) provides a general outline of a possible multiple objective functions; however his variables are not stakeholder oriented, such as cash flow, risk and so on.
- 21.
Stern Steward & Co, intellectual property owner of EVA, defines it as a measure of economic profit.
- 22.
EVA defines the cost of capital as the weighted average cost of Debt and Equity Capital (“WACC”), but this does not change our analysis.
- 23.
Note that it is possible to analyze the portion of internality stakeholders’ interests under two sub-portions based on explicit and implicit contracts.
- 24.
We follow the parallel logic for ‘adjustment for external costs’ graph (Musgrave and Musgrave 1989: 51).
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Kucukyalcin, E. (2018). Converging the Shareholder and Stakeholder Theories. In: Gal, G., Akisik, O., Wooldridge, W. (eds) Sustainability and Social Responsibility: Regulation and Reporting. Accounting, Finance, Sustainability, Governance & Fraud: Theory and Application. Springer, Singapore. https://doi.org/10.1007/978-981-10-4502-8_9
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