Should Managers Be More Loyal to Shareholders or Greater Stakeholders?

INTRODUCTION

One of the most intense discussions in today's corporate world is on what should be the corporate objective, whether it should be based on shareholder wealth maximisation or on stakeholder interest. No doubt it is generally agreed that the financial goal of the firm is shareholders wealth maximisation, but stakeholder's interest can also influence the future of the company. With the changing business environment such as increasing competition, increasing awareness among customers, increase in consciousness regarding environment and government interference in business compel managers to consider their interest while setting corporate goals a question surfaces – whether shareholder wealth maximisation or stakeholder interest is more important? Many experts argue that shareholder wealth maximisation theory as manager's primary goal is more important. However, some experts also argue that stakeholder interest is more precise than shareholder's. Before declaring which is superior, it is useful to examine both theories to understand what they say about corporate goals.

DIFFERENCE BETWEEN BOTH THEORIES

The shareholders theory state that equity holders are real owners of the business and managers are agents, who act on behalf of shareholder that means they should fulfill their expectations. In other words, it says that Managers have only one responsibility and that is towards the owners of the business. On the other hand, stakeholder theory states that business has responsibility towards everyone, who is directly or indirectly related to the company. It refers that the main purpose of the managers is value creation and that is only possible when managers take stakeholders interests into consideration. According to stakeholder theory, manager's action should be behalf of all stakeholders; their main aim should be to ensure that the stakeholders' ethical rights are not violated and consider the interest of all stakeholders while taking the decision. The fundamental difference between both these two theories is that the shareholder theory is based on wealth maximisation and stakeholder theory is grounded on value creation.

Now, since this assignment is based on my judgement of whether managers be more loyal to shareholders or stakeholders, I personally believe it is the greater stakeholders to whom a manager should be more loyal to. Since, businesses operate in a dynamic market; loyalty aimed just towards the shareholders who doesn't take into account of anything else other then wealth maximization is not feasible. To operate effectively and efficiently and to have a competitive edge in a constantly changing market, it is extremely essential for a business to take stakeholders interests into consideration. The various stakeholders are shareholder, employees, customers, government, lenders and others and they all