Stockholder Management vs. Stakeholder Management

The Dominant View: The Business of Business is Profits

Ever since the modern corporation took shape in the form that it is now, there has been an overriding consensus that the corporation exists to serve its shareholders or stockholders. The late legendary economist of the Chicago School, Milton Friedman remarked that the “responsibility of business is to make profits”. He also added that the “business of business is profits” and hence, according to this school of thought, there can no two ways about where the priorities of the corporation and its managers or owners must lie.

These priorities towards the shareholders and the stockholders meant that corporations for a long time did not consider any social or environmental impacts of their operations and instead, basely continued to insist that they were in business to make profits. This meant that the bottom line requirement for businesses was to make as much money as possible and to satisfy their shareholders and stockholders at the expense of all other interests.

Indeed, many businesses did not even think about what are now known as stakeholders and instead, took many of them for granted. The thinking was that once a corporation attained a certain size and a measure of profitability, it could command respect from its constituents and hence, the primary objective was to grow as fast and as large as possible.

The Alternative View: Including Externalities

This state of affairs continued until the mid 1980s when there was a growing realization that the corporations and their pathological pursuit of profits meant that the environment was being impacted along with the social costs of uprooted communities and disadvantaged groups being affected the most. This led to the formation of many activist and advocacy groups who took it upon themselves to petition the courts, lobby the politicians, and protest against the unfair business practices of the corporations. Slowly, the term stakeholders were being used to denote the multiple constituents that a corporation has to manage instead of just its shareholders alone.

Indeed, until the 1980s the environmental costs of business were simply written off as externalities that were outside of the costs that a product entailed. For instance, if a corporation was polluting the environment, the effects of the pollution were considered to be external to the cost of doing business and hence, the corporation was not liable to pay for them. However, this was contested by the social activists and the environmentalists who protested against the rapacious practices of corporations and demanded that these corporations be made to pay for the effect that they have were having socially and environmentally.

The Present Situation

If we turn to the present, it is evident that the effects of continuous and relentless growth are climate change, deforestation, loss of biodiversity, uprooted communities, and large-scale income inequalities. Therefore, the point here is that we have reached a situation where the corporations cannot go on in a business as usual mode as their actions have imposed such a cost on society that even its shareholders/stockholders have started to be alarmed. This is the reason why it is no longer fashionable to talk about stockholder management alone and the term stakeholder management has come into vogue.

If we compare the perspectives on stockholders and stakeholders, we find that the former are all about money whereas the latter are the humane side of business coupled with money. This means that corporations cannot ignore the stakeholders in the same way they cannot cater to stockholders alone. This is the key aspect, which must be considered when talking about stockholder management and stakeholder management.

Business as Usual cannot be go on

As mentioned earlier, we are at a stage where we have imposed too much costs on the world with our paradigm of unrestrained growth and hence, the time has come where we talk about all stakeholders instead of just interests who own the company.

In other words, we have to accommodate the concerns of all groups who have a stake in the operations and the success of an organization, which extend farther than monetary aspects alone.

Further, we need to consider all people as stakeholders of our activities and not only those who are paid a dividend annually. Corporations have a social and environmental responsibility towards the former, which is ethical, humane, and just in the interests of humanity instead of being obsessed about profits and money alone. In this respect, the governments of several countries (including developing countries) have mandated that corporations must set aside a portion of their revenues towards CSR or Corporate Social Responsibility. This means that its stakeholders have to be paid a social and ethical in addition to environmental dividend, which is not monetary along with the monetary dividend they pay out to the stockholders.

Conclusion

Before concluding this article, it must be noted that all of us feeling the impact of the social and environmental costs of doing business as usual. Hence, it is high time all of us as future corporate managers, working managers, and concerned citizens have to ensure that corporations for whom we would work in the future or working already have to manage stakeholders instead of stockholders alone.

In conclusion, stakeholder management is the way forward and stockholder management cannot suffice anymore. Corporations do exist for profits but at the same time, they cannot ignore the loss of profits that the larger society foregoes because of their actions. Indeed, sometimes these losses may be more than the profits that corporations make.

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