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Shareholder
Shareholder and stakeholder and stakeholder
theory: after the financial crisis theory
Terence Tse
ESCP Europe, London, UK 51
Abstract
Purpose The recent financial crisis has restarted the debate of the value of both shareholder and
stakeholder theories. This paper aims to continue this discussion.
Design/methodology/approach The paper reviews existing literature and examines the benefits
and problems associated with these frameworks through the lens of the recent events which have taken
place during the financial crisis.
Findings The main assertion of this paper is that shareholder theory is in itself a sound theory. Yet,
some executives following this theory could have brought disrepute to it. In contrast, the stakeholder
theoretical framework has yet to assert its influence because the concept is not yet unambiguously
defined, which makes it difficult for the framework to become operational in practical business settings.
Research limitations/implications Future research should seek consensus on the scope and
definition of the stakeholder model, as well as who the stakeholders should include. It should also
focus on developing the tools and techniques necessary for the incorporation of stakeholder theory into
business operations.
Social implications Policy makers could work with industry bodies and business leaders to
encourage them to place greater emphasis on the interests of non-shareholders and encourage
collaboration between various groups of stakeholders to achieve corporate goals.
Originality/value The paper continues the shareholder and stakeholder theory debate in light of the
recent economic crisis.
Keywords Shareholder value analysis, Stakeholder analysis, Financial services, Economic theory
Paper type Research paper

1. Introduction
In June 2009, more than 1,000 MBA students from several top business schools signed
an oath that declared the rejection of the shareholder-oriented business approach and
vowed to give equal importance to shareholders, co-workers, customers and the society
in which we operate (Skapinker, 2009). Whether this is a knee-jerk reaction of MBA
students to mitigate the blame of the latest economic crisis on senior executives or the
pursuit of a new ideal is beyond the scope of this paper. However, it is clear that these
students, among many corporate executives, are opting for the main contending
alternative to shareholder- stakeholder theory. The debate between these two theories is
not unprecedented. The scandals at Enron, Global Crossing, Tyco International and
WorldCom sparked fierce debate as to which of these two theories is superior to the other
(Smith, 2003). The decline of many seemingly successful UK banks before the latest
financial crisis such as Northern Rock, Royal Bank of Scotland (RBS) and Halifax Bank
of Scotland (HBOS) reminded us that this debate is far from over. Indeed, in view of the Qualitative Research in Financial
various characteristics of the crisis, there is an urgency to continue this discussion. Markets
Vol. 3 No. 1, 2011
This paper aims to serve this purpose by reviewing some of the existing literature of pp. 51-63
both shareholder and stakeholder theories and discussing the benefits and problems q Emerald Group Publishing Limited
1755-4179
associated with these frameworks through the lens of the recent financial crisis. DOI 10.1108/17554171111124612
QRFM It concerns particularly the UK banking and financial services sector because this
3,1 industry is considered to be one of the primary catalysts of this crisis. Perhaps, more
importantly, the problems that plague this sector seemingly epitomise the misguided
use of shareholder theory. The main assertion of this paper is that shareholder theory is
in itself a sound theory and it is likely that some executives following this theory, rightly
or wrongly, have brought disrepute to it. The stakeholder theoretical framework, on the
52 other hand, has yet to asset its influence. It has not managed to supplant shareholder
theory because the concept is not yet unambiguously defined, which makes it difficult
for the framework to become operational in practical business settings.
This paper is organised as follows: Section 2 first highlights the advantages of
shareholder theory. It then discusses the disadvantages of the theory, primarily from the
perspective of how this framework has been misused. Since executive remuneration and
earnings benchmarks are connected to the creation of shareholder value, this section
also examines how they could have further exacerbated such misuse. In Section 3, the
advantages and disadvantages of stakeholder theory are subsequently discussed. The
final section provides some concluding remarks, implications to policy makers and
practitioners as well as recommendations for future research.

2. Shareholder theory and its criticism

2.1 Benefits of the shareholder approach
Shareholder theory asserts that the primary responsibility of a firm is to maximise the
wealth of its shareholders (Friedman, 1962). Using the capital that these fund suppliers
have advanced, managers should invest in those projects which seek to create the
maximum value for these investors. In the past 40 years, shareholder theory has enjoyed
widespread support in the academic and industrial communities. One reason for this
success is agency cost. Put forward by Jensen and Meckling (1976), the agency cost
concept postulates that managers often fail to maximise profits unless shareholders
invest time and money to create appropriate incentives and monitor the resulting
behaviour. A generally accepted method to align the interests of managers with those of
the owners is to measure the performance of management team against share price[1].
This can be achieved by supplying them with financial incentives (such as stock options)
to commensurate their efforts in raising the value of the firm, and subsequently its share
price. The problem, however, is that managers actually control neither the value of the
firm nor share prices. Instead, they have control over those drivers which only indirectly
affect share prices, such as strategy, costs, capital investment and human resource
deployment, which, in turn, influences revenue, profits and returns on capital, as well
as growth (Beinhocker, 2006). As a result, maximisation of shareholder value is often
operational in the form of maximisation of the present value of all future cash flows. This
can be demonstrated as equation (1) below:
CFn
V0
r2g
where V0 represents the value of the firm today, CFn all future cash flows, r the required
return of the funds supplied or cost of capital and g the constant average growth rate.
This equation suggests that managers can increase the value of the firm by either:
.
increasing future cash flows; or
.
lowering the cost of capital and/or improving growth.
Given that the model has a lengthy time horizon, it implies that shareholder theory Shareholder
carries a long-term goal of creating benefits (Danielson et al., 2008). In this respect, and stakeholder
it supports Smiths (2003) claim that the shareholder model is not, as some critics
have claimed, geared towards short-term profit maximisation. This is perhaps why theory
Rappaport (1997) argues that the ultimate test of corporate strategy as well as the only
reliable measure of corporate performance is whether a company creates economic
value for shareholders. 53
Critics of shareholder theory often point to the fact that this model is restricted to
generating benefits for shareholders; it effectively neglects the important role of those
players in or around a firm, including employees, suppliers, customers, the government
and society as a whole, all of which concurrently contribute to the success of any
organisation. Advocates of stakeholder theory, such as Freeman (1994) and DesJardins
and McCall (2004), stress that corporations should be managed in a way that serves the
interests of all contributors, not solely the shareholders. Countering this proposition,
proponents of the shareholder-oriented view, including Sundaram and Inkpen (2004),
state that the aim of shareholder value maximisation can be manifestly advantageous
to all stakeholders. This is because the cash flows from share ownership are strictly
residual claims which are due only after all committed corporate obligations (such as
payments to suppliers, wages and salaries to employees, interest and repayments to
creditors and taxes to the government) have been met. Moreover, given that only
residual cash flow claimants i.e. shareholders have the incentive to maximise the
total value of the firm, it is natural for managers to obtain the maximum possible value
for them. In the process, these managers effectively increase the size of the pie for all the
stakeholders, thereby benefiting all constituencies (Sundaram and Inkpen, 2004).
Furthermore, since shareholders are residual claimants, they bear most of the business
risk within a firm. Consequently, it is perhaps most logical for managers to concentrate
on creating value for these investors.

2.2 Problems with the shareholder approach

Even though the shareholder model seemingly brings such superior benefits, there has
been renewed criticism questioning its value after the financial crisis. As cited in the
Financial Times (2009), Jack Welch describes it as a dumb idea, whereas Martin (2008),
the Dean of the Business School at the University of Toronto, calls for the abandonment
of the shareholder value framework. This paper argues that there is no inherent problem
with the theory; rather the problem lies with its deployment. Recall equation (1) above,
which shows two possible ways of increasing firm value:
(1) expand future cash flows; and
(2) lower the cost of equity and/or boost growth.
Nevertheless, at the same time, as the model indicating to managers how to create
shareholder value, it also exposes to them areas of exploitation for potential misuse, if not
self-serving purposes.
Expanding future cash flows. One of the most popular methods among the UK banks
for augmenting future cash flows before the crisis was to increase revenues. Revenue
improvement can be achieved in a number of ways, such as expanding asset-base
organically and making acquisitions. Aggressive expansion in size for numerous major
UK banks was made possible by the availability of easy and inexpensive credits.
QRFM For example, the total assets of Northern Rock grew from 17.4 to 113.5 billion
3,1 between 1998 a year after its demutualisation and 2007, the eve of the credit crisis
(Shin, 2009). This represents an annual growth rate of 23.2 per cent.
Northern Rock was not alone. The use of cheap credit enabled HBOS to be among
the fastest growing banks in the world in the past several years (Armitstead, 2009)
and become an established player in the UK mortgage market. By 2006, the bank
54 held as much as 20 per cent of this market (HBOS Annual Report, 2007). These two
examples highlight an important growth strategy for many UK banks before their
collapse: over-dependence on the use of debt to fund revenues growth. According to the
Bank of England (2008), through the use of leverage, major UK banks somewhat tripled
their assets between 2001 and 2007. The use of debt therefore plays a fundamental role in
the decline of many UK banks, which is discussed next.
Lowering cost of capital and/or boosting growth. As shown in equation (1), debt
allows companies to lower the cost of capital, leading to an increase in firm value. Fuelled
by cheap and easily obtainable credits, banks substantially increased their leverage as a
result. For instance, the debt-equity level of RBS increased from 60.1 per cent in 2005 to
86.2 per cent in 2008 (RBS Annual Report, 2008). On the other hand, HBOS raised its debt
to equity ratio from 7.5x to 10.6x between 2004 and 2007. In monetary terms, the bank
almost doubled the size of its debt between 2003 and 2007, with 112 and 231 billion,
respectively. In the same period, total equity rose only from 296 to 436 billion (HBOS
Annual Report, 2007), representing an increase of 47 per cent. In other words, growth in
assets was not keeping up with the ever-increasing level of debt. In the case of Northern
Rocks aggressive expansion strategy, retail deposit accounted for 60 per cent of
the banks liabilities (10.4 billion) in 1998. However, by 2007, it had dropped to only
23 per cent (24 billion), with the funding gap made up of securitised debt and lending
(Shin, 2009). Before its collapse, Lehman Brothers debt level rose from $484.3 to
$668.6 billion (a difference of $184.3 billion) between 2006 and 2007. At the same time, its
level of equity only went up from $19.2 to $23.5 billion, representing a mere $3.3 billion
increase (Lehman Brothers Annual Report, 2008).
These examples illustrate some of the many cases in which banks were keen to use
debt for funding growth. The enduring problem resulting from this is that while the
increase in corporate size and cash flows could have created much value for their
shareholders in the past decade, these banks appeared to have become overly dependent
on credit markets to do so. For instance, HBOS was over-reliant on the debt markets for
its growth, particularly the wholesale funding markets (Aldrick, 2008). The bank fell
into what Huang and Ratnovski (2008) called the dark side of wholesale funding. In this
scenario, banks use wholesale funds to aggressively expand their capabilities to lend,
but, in turn, the expanded lending compromises credit quality. When the market is calm
and measured risks are low, creditors will continue to provide the funding. However,
these banks will suffer from liquidity problems when the market turns hostile news of
deteriorating asset quality and questionable longevity of the banks among others as
the wholesale funders withdraw their funding (Shin, 2009). As the markets shut, banks
will struggle to make up of the financing gap. This eventually led to the demise of
various UK banks, most notably HBOS (Aldrick, 2008; House of Commons Treasury
Committee, 2009).
A logical question to ask at this point is that given the risk to which the banks
are exposing themselves, why have shareholders failed to identify such risk before
the financial crisis? One possible explanation is that shareholders are reluctant to Shareholder
question the actions of the managers when they are gaining substantial returns. This and stakeholder
implies that investors are not always rational. Contrary to traditional economics that
assumes investors are perfectly and deductively rational, recent studies have argued that theory
investors do not always behave rationally (Lo, 2005). De Bondt et al. (2008) have
demonstrated that investors have various biases regarding risk and different behavioural
preferences. Basu et al. (2008) further argue that greed, exuberance, fear and herding 55
behaviour have led investors to act in an irrational manner and make irrational decisions.
All these observations may explain the fact that 94.5 per cent of the shareholders at RBS
approved the banks disastrous acquisition of ABN Amro, even though both the acquirer
and the target companies had already been in precarious financial situations at the time of
entering the transaction (House of Commons Treasury Committee, 2009).

2.3 Incentives and adverse managerial behaviour

As stated above, a fundamental mechanism of aligning the interests of shareholders
with those of the executives is to link their remuneration to corporate performance.
However, the effect of such incentive scheme remains unclear. For instance, prior
research including Low (2008) has shown that executives tend to be more risk averse
when their incentives are linked to the performance of the firm. In contrast, others such
as Rajgopal and Shevlin (2002) and Sanders and Hambrick (2007) have indicated that
incentive schemes such as stock options could induce managers to make not only larger
bets but also high-variance bets. A corollary of these findings is that in their pursuit of
higher share prices, incentive system may lead some managers to seek maximising their
own personal gains and disregard the risk to which shareholders are exposed.
The case that corporate performance-linked incentives may lead to adverse
managerial behaviour can be illustrated by a simple example. Suppose a manager faces
two investment opportunities. Both of these opportunities require a 10 investment at
t 0. However, their outcomes in t 1 are potentially very different: investment A has
a 16 per cent chance of obtaining returns of 150; otherwise, she will gain nothing.
Investment B, on the other hand, yields a return of 30 with a 90 per cent probability of
success and nothing otherwise:
( (
15016% 3090%
IA ; IB
084% 010%
Calculating the expected returns for each investment opportunities, investments A and
B will produce 14 (150 16%-10) and 17 (30 90%-10), respectively.
Investment B is a more preferable choice since the expected profit is higher. What would
happen if the manager receives a 30 per cent bonus of the profit? In this circumstance, the
manager may be tempted to choose investment A over B, even though it is not in the
shareholders interest to do so, because the potential personal gain is much higher. If it
turned out to be a success, investment A will provide the manager with a bonus of
42 [(150-10) 30%], whereas in investment B, the most managers can obtain is
6 [(30-10) 30 per cent]. Given the higher level of personal enrichment garnered by
investment A, the manager may choose to take more risk[2]. This illustration may
explain why executives in numerous UK banks and even building societies could have
greater incentive to make large bets even though it may not be in the interest of
shareholders to do so.
QRFM 2.4 Over-confidence and adverse managerial behaviour
3,1 A further complication is that managers may be more inclined to gamble if they are
overly confident about their own abilities. Prior research has suggested that managers
often display over-confidence when it comes to difficult tasks and over-estimation of their
own abilities (Shefrin, 2007). Self-attribution can also reinforce individual confidence.
Self-attribution refers to the better than average effect, suggesting that individuals
56 believe they have above-average abilities (Taylor and Brown, 1988). A study by Russo
and Schoemaker (1992) has demonstrated that managers have the tendency to believe
that they actually possess more knowledge than their counterparts about their respective
industries or companies. One potential problem with managerial over-confidence is
that executives may have a higher tendency to engage in takeovers in order to expand
revenues and pursue growth (Malmendier and Tate, 2008). Such inclination, in addition
to the belief of their own capabilities, can be reinforced by their more optimistic
predictions of outcomes, particularly when these executives believe that they hold control
of these outcomes (Weinstein, 1980). Over-confident executives may also feel that they
have superior skills and are more competent than others in extracting value from their
acquisitions, which may lead them to either under-estimating the risks or over-estimating
the synergistic gains associated with mergers (Doukas and Petmezas, 2007). The two
authors further propose that executives with a successful history in acquiring companies
may think that they are more experienced in managing acquisitions, which, in turn,
might reinforce their tendency towards over-confidence.
The financial crisis has shown that the shareholders may also be excessively
confident over the abilities of the managers whom they hire. For instance, they may
over-estimate the abilities of those managers who have a successful history in acquiring
and integrating new firms. Consequently, they grant them more latitude to pursue future
acquisitions. One of the best illustrations of over-confidence is RBSs takeover of ABN
Amro. The ability to cut costs in the previous merger of RBS and NatWest had awarded
the necessary credentials to Fred Goodwin, then CEO at RBS, to follow an aggressive
expansion strategy through acquisitions. The successful acquisition and integration of
the three-times larger NatWest enabled the CEO to persuade shareholders to stretch the
banks capital reserves to absorb ever-larger acquisition targets (Larsen, 2009).
Aiming to repeat the success in the merger with NatWest, Goodwin decided to launch
the ill-fated takeover bid for ABM Amro in 2007 (Larsen, 2007). An investigative report
on the catalysts of the financial crisis by the House of Commons Treasury Committee
has cited that such managerial hubris at RBS as a major reason for the disastrous bid for
ABN Amro. At the time of the transaction, RBS had failed to recognise the scale of credit
problems, as well as the amount of poorly performing assets in the target company.
In short, RBS did not conduct proper due diligence and under-estimated the difficulties
of absorbing the much larger bank. The ill-conceived takeover of ABN Amro was also
attributable to RBSs over-reliance on debt. Soon after the acquisition, the debt market
dried up, leaving the acquirer with a severe funding problem. Previous studies have
shown that over-confidence could lead managers to increase leverage (Heaton, 2002;
Malmendier et al., 2006). Gombola and Marciukaityte (2007) further suggest that when
managers are optimistic with their assessment of the investment outcomes, they are
more inclined to finance with debt rather than equity.
All these problems point to the fact that lucrative incentives, compounded by
over-confidence and managerial hubris, can induce managers to make large and
risky bets. This implies that as long as managers are only lightly punished for doing so Shareholder
(such as merely losing their jobs but retaining all the compensations and bonuses, as in and stakeholder
the case of Fred Goodwin) i.e. a morally hazardous situation there really is no
particular reason for managers to put shareholders interest before their own. In other theory
words, the shareholder framework can be opened up for misguided use as these
managers can take the model as a convenient pretext to seek personal enrichments, all in
the name of shareholder value maximisation. 57
3. The stakeholder approach
3.1 Benefits of the stakeholder approach
The MBA oath mentioned at the beginning of this paper represents a shift from the
shareholder-centred view to the stakeholder-centred one. Whereas, in shareholder
theory, managers should take decisions that seek to create the most value for equity
capital suppliers, the stakeholder framework places shareholders amongst the multiple
stakeholder groups that managers must involve in their decision-making process
(Clarkson, 1995; Donaldson and Preston, 1995). These stakeholder groups include
internal, external and environmental constituents, who, like shareholders, can place
demands upon the firm (Ruf et al., 2001). Prior studies have cited various benefits accrued
to firms that pay more attention to all stakeholders rather than simply shareholders.
For instance, as Choi and Wang (2009) point out, employees will work harder to enhance
the firms effectiveness in stakeholder-orientated organisations. They also suggest that
customers will increase their demand or pay premium prices for the firms products,
while suppliers will be more willing to engage in knowledge sharing with the firm.
Moreover, good relationships with stakeholders can be a valuable source of competitive
advantage. Firms that follow the stakeholder approach are likely to develop firm-specific
management practices that are customised to their stakeholders and organisational
objectives (Russo and Fouts, 1997). As a result, stakeholder relationships are
idiosyncratic to individual firms, making it difficult for rivals to imitate them in the short
run, effectively boosting their competitiveness (Hillman and Keim, 2001).
In contrast, managers who fail to establish good relationships with their stakeholders
may suffer from certain financial repercussions. For example, companies that fail to
fulfil their pension liabilities the most senior liabilities in a firms capital structure
may deprive shareholders of any value created, since any cash generated would go into
meeting such liabilities prior to being distributed to the residual claiming shareholders.
This is likely to be particularly important after the financial crisis as the shortfall in
pension liabilities in many corporations has widened. In this case, firms would need to
maintain, if not strengthen, good relationships with all stakeholders to ensure they work
harder and collaborate well to generate strong cash flows, which can subsequently be
used to fund any pension gaps. All these observations suggest that firms that manage
stakeholders will be well-rewarded financially. Findings from past research are also
consistent with this view. Reviewing ten studies that tested the stakeholder theory,
Laplume et al. (2008) have found seven of them reporting stakeholder management to be
positively related to firm financial performance. This contrasts with the remaining
three with one reporting negative relationship and two carrying mixed evidence.
Additionally, in a more recent study, Choi and Wang (2009) have demonstrated that
stakeholder relations are positively associated with the persistence of superior financial
performance.
QRFM 3.2 Problems with the stakeholder approach
3,1 Nevertheless, stakeholder theory is not without its problems. For a start, managing
multiple stakeholder relations implies the need to have multiple constituencies and
simultaneously juggle several goals. This is problematic because having more than one
objective is a recipe for potential confusion (Sundaram and Inkpen, 2004). Jensen
(2002, p. 238) goes even further and argues that numerous objectives is equal to having
58 no objective at all, because:
[. . .] telling a manager to maximise current profits, market share, future growth in profits, and
anything else one pleases will leave that manager with no way to make a reasoned decision.
In effect, it leaves the manager with no objective.
The second problem is that while there has been extensive research describing and
discussing stakeholder theory, there remains a dearth of studies showing managers
how they can make it operational. This is an arduous task, not least because there is
uncertainty regarding the actual scope of the stakeholder model. As Phillips et al. (2003)
put it, despite the fact the term stakeholder is an all-encompassing one, it means different
things to different people due to its conceptual breadth. For example, traditionally,
stakeholder theory is viewed from the corporate perspective, i.e. taking care of the
stakeholders is a managerial issue (Donaldson and Preston, 1995). Yet arguably,
unlike the shareholder theory, the stakeholder framework does not necessary rely on a
uni-directional relationship. For instance, Frooman (1999) suggests that stakeholders
can also manage a firm to enable themselves to achieve their interests, rather than
simply responding to the management of the firm. In other words, management does not
have a monopoly on the strategy design: the stakeholders can also influence the
formulation of a firms strategies.
In addition to shareholders and stakeholders, it has been proposed lately that there
can be a third dimension to consider. This involves viewing and analysing the theory
from different vantage points, ranging from the perspectives of the philosophy of
Aristotle and the Common Good, human rights, environmental protection (Streuer,
2006), social issues (Wood, 1991) and sustainable development (Sharma and Henriques,
2005; Streuer et al., 2005). A conclusion drawing from this cursory inspection of existing
literature is that the actual scope of the theory is far from properly defined. Indeed, it is
not only troublesome to establish the scope of stakeholder theory, it is also difficult to
identify who the stakeholders should actually be. For example, in their comprehensive
survey of academic literature on stakeholder theory in the past 20 years, Laplume et al.
(2008) have found that there is a wide spectrum as to who the stakeholders ought to be.
The range stretches from those who yield power over firms (Frooman, 1999) to
non-human entities such as trees (Starik, 2005) and religious Figure (Schwartz, 2006).
A further challenge is that even if the scope and the stakeholders are clarified, it remains
unclear as to how value created by an organisation can be fairly distributed to the
constituents and how to avoid the aforementioned managerial opportunism and adverse
behaviour under the rubric of shareholder theory.
While these different dimensions of viewing stakeholder framework offer a
rich ground for debates, they show that there remains a lack of consistency within
stakeholder theory. Consequently, unlike shareholder theory that has a clear recipient
and a well-defined goal, it is yet unclear as to how managers can best put stakeholder
theory into practice. Indeed, the need to serve the interests of multiple stakeholders
makes this framework inherently difficult to implement (Gioia, 1995; Kaler, 2006; Shareholder
Kochan and Rubenstein, 2000). This is further complicated by the fact that most and stakeholder
management tools today are designed for creating shareholder value through direct and
indirect control of the drivers that affect share price (Grant, 2009). On the contrary, the theory
necessary tools and techniques to implement and monitor stakeholder management in
real business situations are yet to be developed. As Phillips et al. (2003) suggest, it is
necessary to introduce new methods to help align the interests of practicing stakeholder 59
managers with those of their stakeholders. These tools and methods are important
because without them, there is no guarantee that managers will respect obligations to
their stakeholders. Table I summarises the benefits and problems of both theories
discussed above.

4. Implications, future research direction and concluding remarks

This paper revisits the continuous debate of shareholder and stakeholder approaches.
Similar to major corporate mistakes in the past, the scandals in the midst of the latest
economic crisis raise questions about the validity and value of shareholder theory.
In many ways, the decline of the major banks in the UK has led many critics of
shareholder theory to call for it to be rendered obsolete. This is not surprising as the
theory has the potential to encourage managerial hubris, reckless decision making and
the excessive use of leverage. Nevertheless, this paper argues that while such a theory
has many flaws, it still has validity. It also proposes that the concept of shareholder value
itself is not a perpetrator in the financial crisis; instead, the origin of the crisis lies with
those managers who misused the concept (Maubossin, 2009). Therefore, to restore
confidence in shareholder theory, managers need to reflect on their own mistakes.
This does not mean that stakeholder theory is by comparison flawless. It is
incontestable that to maximise shareholder value, companies must maintain good
relations with all of their stakeholders; however, difficulty remains in applying this

Shareholder theory

Benefits
Clearly defined recipients shareholders as the All constituents of an organisation not simply
residual claimants its shareholders can benefit from the value
created by the corporations
Clearly defined goal for the managers maximise
shareholders value
Problems
Temptation for empire building (especially with Multiple recipients require multiple
the use of debt) organisational objectives, which can create
confusion for managers
Reckless use of financial leverage Scope of the theory remains ill defined
Excessive risk taking by executives induced by It is unclear who the recipients are
managerial compensations, compounded by
managerial hubris and over-confidence in ones
own abilities
Current management tools and techniques are Table I.
developed for the shareholder value framework Benefits and problems
new ones for stakeholder theory need to be of shareholder and
developed stakeholder theories
QRFM theoretical concept to an actual business setting, not least because the scope of the theory
3,1 is yet to be properly clarified and the stakeholders themselves identified. Consequently,
the tools and mechanisms needed to put the stakeholder theoretical framework into
practice are yet to be developed.
It must be stressed that the need to combine shareholder and stakeholder theories is
not merely an academic issue. As Beinhocker (2006, p. 409) said:
60 Questions over whose interests corporations should serve lie at the heart of heated debates over
corporate governance reforms, corporate social responsibility initiatives, antiglobalization
protests, and the future of the European Unions economic model.
This suggests that the debate is not only relevant to business executives, but also policy
makers. Without properly taking both shareholders and stakeholders into account in the
pursuit of company goals, it is possible that improvement in corporate governance and
social responsibility, in particular the financial services sector, would be impeded. If this
is the case, another financial crisis may occur in the future.
To prevent the disaster from repeating itself, policy makers could work with industry
bodies and business leaders to encourage them to place greater emphasis on the interests
of non-shareholders. They would also do well to develop more collaboration between
various groups of stakeholders to achieve corporate goals. Given its broader social
implications, especially in the wake of the financial crisis, the effort to try and advance
the field would be well spent.
Indeed, even though this paper has drawn examples from financial services, the
debate should not be confined to this sector; others may also benefit from the inclusion of
the stakeholder perspective. For example, of late there appear to be signs that companies
can improve corporate performance by taking the stakeholders interests into accounts.
Paul Polman, the CEO of Unilever, recently commented that, I do not work for the
shareholder, to be honest; I work for the consumers, the customers [. . .] I dont drive this
business model by shareholder value (Stern, 2010). Despite this claim, Unilevers share
price went from 13 to todays approximate price of 20 during his last year in power.
Taking this at face value, it seems possible for company executives to blend both the
shareholder and stakeholder values, thereby creating benefits for all involved.
The academic community can also play a vital role in bridging the
shareholder-stakeholder gap. Future academic research should seek to develop a
specific research agenda that calls for a consensus on the scope and definition of the
stakeholder model, as well as an agreement on whom the stakeholders should include.
Only then will it be possible to answer other prominent questions such as how to balance
and prioritise the interests of different stakeholders. Moreover, as one of the major
appeals of the shareholder framework is that it is easily quantifiable and measured
through share price, researchers should explore new ways to better quantify stakeholder
performance. These figures are likely to be important prerequisites for the development
of the tools and techniques necessary for the incorporation of stakeholder theory into
business operations.
These are undoubtedly enormous undertakings for policy makers, practitioners
and academics. However, this may very well be the price of the progress needed to
integrate the two theories. It is hoped that the financial crisis and the attempts of MBA
programmes to focus their attentions on serving the greater good will take us a step
closer to completing this goal.
Notes Shareholder
1. Technically, it should be the value of the firm. However, investors tend to use share prices as and stakeholder
proxy as the information related to the latter are much more convenient to obtain.
2. The opposite can also be true: the manager may refrain from undertaking investment
theory
A because investment B provides more certainty that she would be obtaining the bonus.

References 61
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Terence Tse can be contacted at: ttse@escpeurope.eu

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