Arguments and Concerns against Stakeholder Theory

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It remains likely that the pre-eminence of stakeholder theory threatens the Anglo-American theory of corporate governance. The latter has, for a long time, dominated the corporate world; however, the stakeholder theory has overtime taken hold despite its branding as being unrealistic, superficial and naïve. According to Sternberg (1997), unlike the Anglo-American theory, the stakeholder theory is “deeply dangerous and wholly unjustified” in that it undermines intellectual property, limits the roles played by agents and principals and limits an enterprise’s ability to generate wealth. To others, the theory is not founded on the normative assumptions to qualify its justification. Compared to the shareholder value maximization theory, the stakeholder theory does not identify the various players; thus, stakeholders’ lack the moral basis by which they can engage with each other. The theory also ignores or fails to explain the concept of distributive justice that entitles stakeholders to a part of the company’s earnings and the overall enjoyment of the organization’s success. Hence, it is arguable that the theory is based on the foundation of philanthropy or servicing societal common good – which entails benefiting those linked with the organization and the facilitation of the attainment of their personal goals.(OrderCustomerPaper from us)

Arguably, unlike the Anglo-American model of shareholder primacy, the stakeholder model lacks clarity. That is, the model lacks breadth, is vague, and has ambiguity. It is hence, according to Humber (2002), “a collage of elements that are at odds with one another, thereby producing no systematic coherence.” The most critical of the challenges facing the stakeholder theory, compared to the Anglo-American theory is in defining who stakeholders are. The application of the theory requires the identification of the stakeholders. In essence, stakeholders consist of persons and entities the organization cannot do without. This narrow description covers the society, lenders, customers, employees, and shareholders. However, according to Freeman (1984), stakeholders refer to “any group or individual who can affect or is affected by the achievement of the organization’s objectives.” By this definition, the group expands to include the government and its agencies. Despite the contention, companies in Germany consider stakeholders as groups and people with a long-term relationship with the organization. In addition to these concerns, the theory assumes that an organization’s management makes decisions by balancing all stakeholders’ interests – an impossible fete.

 Arguments for Shareholder Theory

            Opponents of shareholder maximization and by extension, the Anglo-American theory of corporate governance argue that directors do not have to and should not maximize the wealth of its investors. This follows the fact that directors are not liable to losses; however, these arguments fail to acknowledge the arguments by the courts that the standard of conduct does not require financial performance –meaning, directors, cannot occur liability for loss to the organization resulting from actions pursued in an attempt to maximize shareholder’s value. This means that managers are not required to succeed but must attempt to maximize shareholder’s value. The legal rule thus becomes the standard by which shareholder maximization becomes a norm in the American corporate world. The fact that managers are protected from losses means that the Anglo-American theory does not increase or maximize shareholder’s wealth. It also means that managers could favour non-shareholder interests at the expense of the shareholder; consequently, leading to a blurred line between the stakeholder maximization theory and the shareholder’s primacy theory. (HireEssayWriter for a similar paper)

The close relationship between the principals and the shareholders in the Anglo-American model leads to investments. However, unlike the stakeholder’s theory, this relationship is optional as evident in the case of Air Products and Chemicals v. Airgas Inc. (2011), in which the court held that a company does not have “per se duty to maximize shareholder value in the short term.” However, the court held that the organization is mandated to commit to its responsibilities in the long-term to it. The ruling confirms the threshold that shareholders are considered in the U.S., being that “modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the communities within which they operate” (AP Smith Mfg. Co. v. Barlow, 1953). In all, not all shareholders are after financial gain. In the U.S., different states have expanded shareholder freedom legally. For instance, in Delaware, the state included a new form of corporation, the public benefit corporation that “makes it legal for corporations to act morally, ethically and responsibly regarding society, the environment, the natural world and the world at large” – that is, an organization that is “managed in a manner that balances the stockholders’ pecuniary interests, the best interests of those materially affected by the corporation’s conduct, and the public benefit or public benefits identified in its certificate of incorporation” (8 Del.C. § 362(a), n.d.).

Arguments against Shareholder Value Maximization

 Citing Masulis, Mullineux (2010) contends that “corporate governance is seen as a problem of preventing investor (‘outside’ shareholder) expropriation by managers or controlling (‘inside’) shareholders through self-dealing.” Following the passing of the Sarbanes Oxley Act in 2002, Mullieux contends that there has been a consistent search for a solution to the events witnessed during the 2008 financial crisis. Available evidence suggests that even after the passing of the law, executive compensation in the U.S. has been rising and is now considered to be out of control (Clarke, 2009). The author argues the following; “the disparity created with the rewards of other company workers is both morally unconscionable and functionally damaging; executives are taking an increasing share of the earnings of corporations, and are becoming significant shareholders in their own right; executive compensation in the past has often not been due to achieving results but has amounted to rewards for failure, and the elaborate structures designed to link executive reward to performance has often compounded the problems rather than alleviating them. The author also posits that “there is a real danger that the excessive compensation secured by U.S. executives will become the benchmark for executive reward in other regions of the world where up till now executive rewards have remained modest in comparison.” The high compensation of American CEOs makes the most significant arguments against the Anglo-American theory of corporate governance.

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