Shareholder v. Stakeholder: Whose Company Is It?

Last Updated Oct 17, 2007 6:43 PM EDT

Shareholder v. Stakeholder: Whose Company Is It?Yesterday we asked whether your business has good karma. At the heart of the question is the shareholders v. stakeholders debate. Or to put it another way: for whose benefit does your company exist? The shareholders alone, or a more expansive group including employees and customers?

Some in the US have argued that the debate is closed and the "shareholder" camp has emerged victorious. Not so fast, respond Wharton finance professor Franklin Allen, and his co-authors Elena Carletti and Robert Marguez, in their new study "Stakeholder Capitalism, Corporate Governance and Firm Value." The study shows that,

The issue is not as settled as some researchers and business people in the United States, United Kingdom and other shareholder-oriented nations might think.
The researchers used mathematical models "to explore the advantages and disadvantages of stakeholder-oriented firms." They found:
  • Stakeholder-oriented companies have lower output and higher prices, and can have greater firm value than shareholder-oriented firms.
  • Firms may voluntarily choose to be stakeholder-oriented because it will increase their value
  • Consumers who prefer to buy goods and services from stakeholder firms can increase the number of stakeholder-oriented companies in a society.
  • With the rise of globalization, domestic companies (both the stakeholder and shareholder types) earn more profits when stakeholder-oriented firms from foreign countries, rather than foreign shareholder-oriented firms, enter those domestic companies' markets.
All good reasons to give the stakeholder approach another look. The researchers did find a downside, however. "Consumers can be harmed by the higher prices charged by stakeholder firms. Higher prices enable these firms to put into practice the often-costly governance structures that benefit people other than stockholders."

For more on the debate, as well as additional details on which countries favor which approach and the results of these choices, check out Knowledge@Wharton's in-depth look at the study.

(Image of 'We Love Our Customers' hanger by Flashfonic, CC 2.0)

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    Jessica lives in London where she works as a freelance writer with interests in green business and tech, management, and marketing.