Question

What should the purpose of the firm be? Should managers strive to maximise shareholder value or stakeholder values? Discuss in the context of the shareholder value versus stakeholder values perspectives.

Answer 1

Answer:

akeholder theorists smell blood. Scandals at Enron, Global Crossing, ImClone, Tyco International and WorldCom, concerns about the independence of accountants who are charged with auditing financial statements, and questions about the incentive schema and investor recommendations at Credit Suisse First Boston and Merrill Lynch have all provided rich fodder for those who question the premise of shareholder supremacy. Many observers have claimed that these scandals serve as evidence of the failure of the shareholder theory — that managers primarily have a duty to maximize shareholder returns — and the victory of stakeholder theory, which says that a manager’s duty is to balance the shareholders’ financial interests against the interests of other stakeholders such as employees, customers and the local community, even if it reduces shareholder returns. Before attempting to declare a victor, however, it is helpful to consider what the two theories actually say and what they do not say.