Shareholder Value v. Stakeholder Value

• One thought is that the role of a corporation is to maximize shareholder value - Milton
  • This is the only moral thing to do given the principle-agent relationship between shareholders and the corporation
  • It is morally wrong to use someone's money for a purpose that they have not given it to you for (property theory)
  • It is wrong to break someone's promise that you will use their money for profit maximination (fraud theory)
  • Profit maximization will make sure that technology and productivity grows at a fast rate
• Issues with this reasoning
  • What if the principle wants people to be killed? The agent would not have to follow this. Therefore we know that some moral imperatives take priority over pursuing shareholders' interests
  • Friedman would respond to this and say that managers should increase profits as long as the actions stay within the rules of the game (both legal and ethical)
  • Response? What if shareholders do not care for conforming to rules of society?
    • Most people would say that agents do not have to break the rules/morales even if the agents want them to.
  • What if we decide that the principles should follow the morals believed by the majority of society?
• Merk case - should you make a drug that will cure an illness if the illness only inflicts poor people who cannot pay for the drug
  • The shareholder primacy theory would say that the shareholders want to pursue the drug such that increases the goodwill of the company and motivates employees.
  • This theory, however, makes it seem like there is no conflict? What would you do if there was no benefit to shareholders for pursuing the drug?
• Other, better arguments
  • The shareholders do not have to be shareholders; maybe they bought stock knowing that Merk would do socially responsible things with the stock
  • The shareholders can sell at any time if they think that their values are not being well represented.
  • If we think that shareholders actually value saving the poor rather than profit, then this makes an issue with the shareholder primacy theory.
• Stakeholder theory
  • Limitations
    • Who are the stakeholders (everyone that is affected by the business -> competitors, advocacy groups, employees, etc.)
    • Different stakeholders have different objectives --> how do we maximize all of them
    • There are only a few opportunities when thinks will be pareto efficient. At all other times there have to be tradeoffs between stakeholders that have to be made.
    • The stakeholder theory does not teach us much
• How can we supplement the stakeholder theory to allow decisions to be made?
  • Aristotelian approach
  • Consequentialist - how to get a best outcome
  • Delineation of special areas where managers might act
  • Total market value of the firm - for all financial claims