Shareholder and Stakeholder Theories of the Firm Essay

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Appropriate Objectives: Managers in Accounting and Finance

According to the classical theory of the ethical responsibilities of a firm, the sole obligation of the firm is to shareholders and the need to make a profit to sustain them economically. However, this classical theory has since been challenged by arguments that sustainability, obligations to employees and the community, and professional and social ethics must also influence firm decision-making. Particularly in the wake of a rash of corporate scandals, there have been calls to reevaluate the focus on profit-making alone, particularly profit-making with a single-minded focus on the short term.

According to Jensen (2010) “at the heart of the current global corporate governance debate is a remarkable division of opinion about the fundamental purpose of the corporation” (p.32). Managers, particularly in the realm of accounting and finance, may find themselves in the thick of such debate as the formerly single-minded focus upon the balance sheet has since shifted. One solution which has been advocated is that of stakeholder theory which suggests that rather than solely focusing on the needs of shareholders, managers must instead take into account all individuals that have a stake in the firm’s success or failure, not simply shareholders who are the technical owners of the firms but employees, customers, the community as a whole, and even the larger political climate.
Jensen (2010) counters that stakeholder theory is fundamentally flawed because it fails to take into consideration the reality of day-to-day objective-setting within organizations which require a clear and coherent objective.

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“To put the matter more concretely, whereas value maximization provides corporate managers with a single objective, stakeholder theory directs corporate managers to serve ‘many masters’” without a clear sense of how to prioritize these different interests, many if not all of which conflict (Jensen, 2010, p. 32). A good example of this is the question of modifying certain products to be more environmentally-friendly. From the perspective of the community, this may be beneficial in the long run because of the desire for products which have a minimal environmental impact. But from a consumer’s perspective, environmental reforms may generate products which are more costly. Some employees may benefit from expanded research and development in environmentally-friendly products while others may not if demand decreases.

Jensen (2010) argues that firms must have a single objective; he similarly argues against ways of achieving value for a firm using multiple perspectives which are alternatively used to stakeholder theory such as the Balanced Scorecard perspective. Even the Balanced Scorecard suggests that the financial value of the firm is only one way among many of determining firm value. But Jensen (2010) states that having multiple objectives….....

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