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Stakeholders vs. Stockholders

The increasing presence of Socially Responsible Businesses in the marketplace, over the past decade and a half, has placed the stockholder theory under harsh scrutiny from not only the Socially Responsible Business community but also from leading business ethicists, who are questioning the very premise of the theory.

The descriptor "socially responsible" when added to "business" indicates a measure of inequity present within the traditionally held concept of business. This is most definitely the case and one of the main practices that differentiates ethical businesses from conventional ones is that forward thinking companies take their stakeholders into account and operate their businesses in consideration of all those who are affected by its operations. According to the stakeholder business theory, if stakeholder interests conflict, the business should be managed in such a way as to balance the conflicting claims of the multiple stakeholders. This implies that there will be instances when management is obligated to sacrifice the profit interests of stockholders for those of other stakeholders. This theory operates based on the implicit assumption that businesses have responsibilities to all those affected by the business itself.

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This holistic approach to business sharply contrasts with the traditional stockholder based business model which operates on the assumption that business' only responsibility is to amass wealth for its stockholders. The stockholder theory is the basis for Neo-Liberal economists' claims that businesses are not bound by social responsibilities because a businesses' only legal responsibility is to honestly create value for their shareholders by generating a profit. Milton Friedman, a Nobel Prize winning economist, defends this theory in his statement:

"There is one and only one social responsibility of business- to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud."

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