UNIT 2 –THEORETICAL APPROACHES
AGENDA
Agency Theory
Stewardship Theory
Shareholder Vs Stakeholder Theory
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AGENCY THEORY
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AGENCY THEORY
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AGENCY
THEORY
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AGENCY
THEORY
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AGENCY
THEORY
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AGENCY
THEORY
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AGENCY THEORY
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STEWARDSHIP THEORY
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STEWARDSHIP THEORY
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SHAREHOLDER VS STAKEHOLDER THEORY
Shareholder theory suggests that the sole responsibility of corporations is to maximize
profits for shareholders.
Stakeholder theory, in contrast, is the idea that stakeholders should have priority and
that the relationship between stakeholders and the company is more complex.
A shareholder can be an individual, company, or institution that owns at least one
share of a company and therefore has a financial interest in its profitability.
A stakeholder has an interest in the performance of a company for reasons other than
stock performance or appreciation.” Stakeholders can be people, organizations, or the
environment, and are affected by the activities of a company or its projects
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SHAREHOLDER VS STAKEHOLDER THEORY
• Stakeholder theory argues that a firm should create value for all
stakeholders, not just shareholders, because of the interconnected
relationships between a business and its customers, suppliers,
employees, investors, the environment, communities and others who
have a stake in the organization.
• Historically, shareholder theory has been widely accepted and used,
noting that a corporation’s duty is to maximize shareholder returns.
• However, the emergence of corporate social responsibility (CSR) and
environment, social, and corporate governance (ESG) has begun to
shift the public view of the duty companies have to their stakeholders.
SHAREHOLDER VS STAKEHOLDER THEORY
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The stakeholder theory of the firm explains the interconnected relationship
between the different stakeholders of an entity like the suppliers, creditors,
employees, community, etc.
The evolution of the theory dates back to 1983 when Freeman first coined the
concept of the theory in his article. In 1995, Thomas Donaldson published an
article named “The Stakeholder Theory of the Corporations: Concepts, Evidence,
Implications” in the Academy of Management Review with Lee Preston.
The stakeholder theory of the firm brings together the concepts of market and
resource utilization and its socio-political impact. It defines how managers should
understand and treat the stakeholders so that stakeholders’ interests come above
all other interests.
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SHAREHOLDER VS STAKEHOLDER THEORY
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PRINCIPLES OF STAKEHOLDER THEORY
1. Principle of Entry & Exit – An entity should have clear rules for hiring, firing,
and the work profile of the employees with no ambiguity.
2. Principle of Externalities – The decisions taken by an entity may affect
people who have no relations with the entity. The theory suggests that
people who may be affected by the findings of a business are also to be
treated at par with other stakeholders.
3. Principle of Agency – The shareholders appoint the company’s management
to run the entity’s business. Management is not the owner of the entity but
an agent acting on behalf of the company.
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PRINCIPLES OF STAKEHOLDER THEORY
4. Principle of Governance – Any changes affecting the relationship between
stakeholders and the company need to be approved by them unanimously.
5. Principle of Contract Cost – The stakeholder should bear any cost equally, i.e.,
one should not pay more than another. Furthermore, the cost-sharing should be
similar or proportionate to the advantage gained.
6. Principle of Limited Immortality – The firm should operate with long-term
objectives at focus and not the motivation of short-term perks. Longevity ensures
confidence in the stakeholders of the entity. A stakeholder is concerned with the
long-term goals of the entity.
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Stakeholder Theory Shareholder Theory
It deals with the interest and relationship It deals with the interest and relationship
of all stakeholders with the entity. of only shareholders in an entity.
Management’s duty is to benefit
Management’s duty is to earn a
stakeholders economically, socially, and
maximum return for shareholders.
morally
Stakeholders have various types of Shareholders have ownership of the
interests in a company. company.
Their interests are mostly for the long Their interests are relatively for short
term. term like buying and selling shares.
