28.1 Shareholders vs. Stakeholders

To understand social responsibility, it is essential to distinguish between shareholders and stakeholders:

Shareholders are individuals or entities that own shares in a company. Their primary interest is the financial return on their investment. Shareholders have a direct financial stake in the company’s profitability and are mainly concerned with how business decisions affect their returns.

Businesses have long operated according to the principle of fiduciary duty, meaning that corporate executives and managers are legally obligated to act in the best interests of the shareholders. This principle emphasizes that the primary focus should be on maximizing shareholder value. Milton Friedman, a renowned economist, famously argued that “the social responsibility of business is to increase its profits” within the bounds of the law and ethical customs. He believed that by focusing on profit, businesses contribute to economic efficiency and overall societal wealth.

However, taken to the extreme, the principle of fiduciary duty can be used to justify harmful and unethical behavior in the pursuit of maximizing profit.

Stakeholders, on the other hand, encompass a broader group of individuals and entities affected by the company’s operations. This includes not only shareholders but also employees, customers, suppliers, communities, and the environment. Stakeholders have varied interests and are concerned with how the company’s actions impact their well-being and the broader society.

While shareholders focus on financial performance, stakeholders consider the overall impact of the business, including social and environmental factors. Recognizing the importance of stakeholders is a key aspect of the Triple Bottom Line, as it promotes a more inclusive and sustainable approach to business practices. Companies can make decisions that serve both shareholders and stakeholders, ensuring long-term success and positive societal impact.

References

Friedman, Milton. 1970. A Friedman Doctrine: The Social Responsibility of Business Is to Increase Its Profits. New York Times, Sep 13.

Savitz, Andrew W., and Karl Weber. 2014. The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social, and Environmental Success–And How You Can Too. Jossey-Bass.