The Conflict between Stakeholder Theory and Shareholder Value Theory

“[W]hile it remains incomplete in its current form, stakeholder theory is undeniably instrumental in steering the path for businesses in their goal for value creation, be it for shareholder or societal good.”

A reflection paper by Tan Chun Hsien Shawn, as partial fulfillment of a BBA (Honours) module, “Measuring Success in Philanthropy and Impact Investing”.

For decades, the maximisation of shareholder wealth has been the dominant objective of capitalists and corporations (Lazonick & O’Sullivan, 2000). This objective has been an inextricable component of our laws in modern society, the management practices that govern businesses, and even forms the basis of rational economic theory (Saint & Tripathi, 2006). More recently, this view has been challenged with the growing popularity of stakeholder theory. This paper thus seeks to introduce and identify the conflict between the two concepts, to explain how stakeholder theory has been crucial in causing the gradual transition away from shareholder value theory toward a new equilibrium.

Shareholder Value Theory

Shareholder value theory proposes that the primary duty of management is to maximise shareholder returns (Smith, 2003). The roots of this view can be traced back to Adam Smith and the central tenets within his book The Wealth of Nations (Pfarrer, 2010). The theory was framed in its current form by Milton Friedman, who argued that the only social responsibility of businesses was to increase its profits (Stout, 2012). This thought was further reinforced by a paper by Michael Jensen and William Meckling, who described the firm as a legal fiction in which shareholders were principals and managers were their agents (Jensen & Meckling, 1976), and managers who pursued goals other than maximising the wealth of shareholders were reducing social good by imposing agency costs. Such academic backing led shareholder primacy to achieve dominance by the end of the millennium.

However, in the wake of global scandals and crises, the premises of the shareholder-oriented perspective have been increasingly questioned (Smith, 2003). In particular, Enron, exemplary in its corporate governance for maximising shareholder value by fixating on its stock price, inadvertently collapsed due to bad business decisions and accounting fraud (Stout, 2012). A recent article by Forbes also documents the denouncement of shareholder value maximisation by a number of prominent CEOs and top management (Denning, 2015), citing problems such as a focus on short-term returns, a diversion of resources away from innovation, and causing economic stagnation and inequality. It is against the backdrop of the gradually receding prominence of shareholder value theory that stakeholder theory can be discussed.

Stakeholder Theory

In comparison with shareholder value theory, stakeholder theory has a far shorter history. The term stakeholder was first used within an internal memorandum at Stanford Research Institute in 1963. While it received initial flak by Igor Ansoff, who viewed stakeholders as a secondary constraint on the main objective of the firm, the stakeholder concept surfaced in the 1970s in several instances of strategic planning literature (Freeman, Harrison, Wicks, Parmar, & Colle, 2010), with the popularisation of the concept ascribed to Richard Edward Freeman in 1984. Since then, the theory has risen in prominence since 1995 (Laplume, Sonpar, & Litz, 2008), and currently represents a shift in perspective within the on-going debate on corporate purpose.

The stakeholder of an organisation can be defined as a group or individual who can affect or is affected by the achievement of organisational objectives (Freeman, 1984). As such, stakeholder theory suggests that the purpose of the corporation should take into consideration all who have an interest in an organisation’s activity (Greenwood, 2008), including shareholders, customers, employees, and the general public (Fontaine, Haarman, & Schmid, 2006). Thus, the objective of management should be to balance the competing interests of these stakeholders (Sternberg, 1996). As such, the theory is seen as a holistic approach to corporate purpose and provides strategic depth to the management of interests through three different approaches: descriptive (explaining corporate behaviour), instrumental (finding links between stakeholder strategies and performance), and normative (interpreting organisational function from a moral standpoint) (Donaldson & Preston, 1995). These theoretical approaches frame the issue on stakeholder interests for further analysis.

While once dominant, shareholder value theory is now contested by the premises of the stakeholder approach. It is in this light that both can now be compared, assessing the factors for change.

The Conflict

Many arguments have been put forth by proponents of stakeholder theory, countering implications of shareholder value theory. One competitive analysis revealed that companies[1] focusing on stakeholders outperformed others even during times when the focus was on shareholder wealth (Pfeffer, 2009), suggesting practical effectiveness of the theory. Furthermore, as the range of performance measurement tools increases, there is reduced need to rely solely on financial measures as well.

In assessing the arguments for shareholder theory, Lynn Stout pointed out in her book that despite the pervasive extent of shareholder value ideology, it remains a managerial choice, rather than a legal obligation or practical necessity (Stout, 2012). Thus, with the exception of self-enrichment, there is much discretion provided by the law with respect to other corporate goals, such as employee protection and serving the community. These goals can and should be pursued by management.

Indeed, stakeholder theory offers a more holistic approach that includes more parties than shareholder theory. Yet it has its detractors as well. According to economist Michael C. Jensen, stakeholder theory should not be considered a valid competing theory since it does not provide a complete specification of the corporate objective function (Jensen, 2001). Unlike the clarity provided by the single objective of shareholder value theory, stakeholder theory directs managers towards many objectives, creating confusion, conflict, inefficiency, and competitive failure for the organisation (Jensen, 2001). Other authors have concurred with this view, stating that accountability to all stakeholders is not only unworkable, but also so diffuse that the accountability created is non-existent (Sternberg, 1996).

A final argument against stakeholder theory is that it undermines fundamental features of society (Sternberg, 1996). For one, it denies owners the right to dictate the use of their assets, stipulating that assets should be used for the benefit of all stakeholders. Due also to this feature and the added entrustment of assets by owners to managers, agent-principal relationships are compromised as well.


Despite the fervent propositions from both sides, the issue of whether the debate has real implications is a question in itself. A survey conducted in 2005 by the University of Melbourne revealed that ideological acceptance may not transit into practical managerial behaviour. Findings from the study showed that even though shareholder primacy had clout among managers, the proposition that directors will pursue shareholder’s interests at the expense of other stakeholders is illegitimate (Anderson, Jones, Marshall, Mitchell, & Ramsay, 2005). While shareholders continue to be seen as the most important of stakeholders, findings revealed that directors prioritise other stakeholders, such as employees, and their interests as well.

Notwithstanding this phenomenon, it is clear that the global business community is in transition to a new ideological consensus. Both the shareholder value theory and the stakeholder theory are theories of value creation, but with different prescriptions to that end. In evaluation, one of the strongest arguments for stakeholder theory is that taking additional stakeholders into account to some extent can be more financially beneficial for the firm in today’s economic landscape (Pfarrer, 2010), perhaps even more so than in shareholder theory. Although contentions remain that stakeholder theory prioritises non-financial market stakeholders at the expense of the firm, empirical observations through competitive analyses of profitable companies in recent years prove this view to be misconstrued (Pfeffer, 2009). Thus, there seems to be a shift not only in ideology, but also in successful managerial business practices, away from the notion of shareholder value maximisation.

That being said, stakeholder theory as it is forms an incomplete approach on both the firm’s corporate purpose and the measurement of its objectives. Thus, more recent theories on both sides of the argument have attempted to synthesize these two goals. For one, enlightened shareholder value theory proposes that companies should pursue the goal of shareholder wealth maximisation with a long-run orientation, seeking sustainable profits by paying attention to relevant stakeholder interests (Millon, 2010). Enlightened stakeholder theory, on the other hand, uses the premises of stakeholder theory, but uses the maximisation of the long-term value of the firm as a criterion for stakeholder prioritisation (Pichet, 2008). We can observe here that there is an apparent convergence from the initially opposing theories, which points to a potential equilibrium at some point between the two theories.

In conclusion, despite the long historical roots of shareholder value theory, we see that stakeholder theory has gradually yet fundamentally changed the perspective of owners, managers, and society. Thus, while it remains incomplete in its current form, stakeholder theory is undeniably instrumental in steering the path for businesses in their goal for value creation, be it for shareholder or societal good.

[1] E.g. Southwest Airlines, which never had layoffs despite an industry shutdown after the September 11 attacks.


Anderson, M., Jones, M., Marshall, S., Mitchell, R., & Ramsay, I. (2005). Evaluating the Shareholder Primacy Theory: Evidence from a Survey of Australian Directors. University of Melbourne Legal Studies Research Paper.

Denning, S. (2015, May 2). Salesforce CEO Slams ‘The World’s Dumbest Idea’: Maximising Shareholder Value. Forbes.

Donaldson, T., & Preston, L. E. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. The Academy of Management Review, 20(1), 65-91.

Fontaine, C., Haarman, A., & Schmid, S. (2006). The Stakeholder Theory. Edlays education, 1, 1-33.

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Freeman, R. E., & McVea, J. (2001). A Stakeholder Approach to Strategic Management. Darden Business School.

Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & Colle, S. d. (2010). Stakeholder Theory: The State of the Art. Cambridge: Cambridge University Press.

Greenwood, M. (2008). Stakeholder Theory. In R. Thorpe, & R. Holt, The SAGE Dictionary of Qualitative Management Research. London: SAGE Publications Ltd.

Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.

Laplume, A. O., Sonpar, K., & Litz, R. A. (2008). Stakeholder Theory: Reviewing a Theory That Moves Us. Journal of Management, 34(6), 1152-1189.

Lazonick, W., & O’Sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29(1), 13-35.

Millon, D. (2010). Enlightened Shareholder Value, Social Responsibility, and the Redefinition of Corporate Purpose Without Law. Washington & Lee Legal Studies Paper 2010-11.

Pfarrer, M. D. (2010). What is the purpose of the firm?: shareholder and stakeholder theories . In J. O’Toole, & D. Mayer, Good Business: Exercising Effective and Ethical Leadership (pp. 86-93). The Institute for Enterprise Ethics.

Pfeffer, J. (2009, July). Shareholders First? Not So Fast… Harvard Business Review: Corporate Governance.

Pichet, E. (2008). Enlightened Shareholder Theory: Whose Interests should be Served by the Supporters of Corporate Governance? Corporate Ownership and Control, 8(2-3), 353-362.

Saint, D. K., & Tripathi, A. N. (2006). The Shareholder and Stakeholder Theories of Corporate Purpose. Samatvam Academy.

Smith, H. J. (2003). The Shareholders vs. Stakeholders Debate. MIT Sloan Management Review, 44(4), 85-90.

Sternberg, E. (1996). Stakeholder Theory Exposed. Economic Affairs, 16(3), 36-38.

Stout, L. (2012). The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, And The Public. Oakland: Berrett-Koehler Publishers, Inc.

Stakeholder and Shareholder Value Theories in Developed and Developing Countries

“Although it is preferred that companies reconcile both theories as pursuing stakeholder theory is generally more sustainable than pursuing shareholder value theory, there are circumstances where it makes more economic sense for the company to prioritise shareholder value theory over stakeholder theory.”

A reflection paper by William Santosa Lim, as partial fulfilment of a BBA (Honours) module, “Measuring Success in Philanthropy and Impact Investing”.

By definition some people might find stakeholder and shareholder value theory to be mutually exclusive. But this paper argues mutually exclusivity of two theories depends on development state of countries where theories are applied. To facilitate this argument, the paper shall discuss support for either/both theories in context of sustainable environmental practise for traditional businesses[1] in a developed and/or developing country.

Figure 1: Flowchart on recommended theory(ies) to pursue for companies

Figure 1: Flowchart on recommended theory(ies) to pursue for companies

Developed Country[2]

This paper supports the reconciliation of both stakeholder and shareholder value theory in a developed country. Reasons for supporting this reconciliation are:

  1. Knowledgeable external stakeholders as a driving force to encourage businesses to embrace both theories.
  2. Capability of developed countries to pursue both theories in their businesses.

First, stakeholders[3] in developed countries have become more knowledgeable about sustainable environmental practise like green products. Due to their knowledge, businesses may find it wise to listen to stakeholders’ requests for sustainable business in order to maintain their profit growth. This is a sign that perhaps companies in developed countries can reconcile the two theories. By taking into consideration stakeholder theory[4] and listening to shareholders, company can maximise profits under shareholder value theory. After all without stakeholders’ support for the company, simply maintaining profit may be a challenge.

For example Unilever (single largest consumer of total palm oil supply at 4%) was targeted by green activists in 2008 about how their large use of palm oil in company products (e.g. Dove) causes environmental degradation. Following such activist action, Unilever committed to sourcing palm oil from sustainable sources by 2015. Rather than let protesters attract negative media attention on a company’s business practise, it may be wise for companies operating in developed countries to handle such complaints in early stages seriously. That way companies can appease stakeholders while protecting its brand reputation and profit in developed countries.

Second, while shareholder’s knowledge can ignite company’s willingness to reconcile both theories, ability of the companies to do so is another important factor. Without both willingness and ability, any attempt to reconcile both theories will be futile. For a company to pursue sustainable environmental practise, the company must have access to applicable technology or resources for them to do so.

Continuing with the case of environmental protection, companies operating in developed countries have better access to eco-technology than companies in developing countries. This is because developed countries have a larger eco-industry relative to developing countries. With a larger eco-industry, companies typically create more eco-innovation by working alongside the eco-industry more closely (Barsoumian, Severin, & van der Spek, 2011). A potential explanation of this observation could be as the eco-industry gains critical mass, cost of eco-technology investment may be reduced. This may encourage companies to further invest in eco-technology. But it must be noted that other factors like stakeholder’s priority on environmental protection could have affected pace of development of eco-industries in different countries.

Developing Country[6]

In a developing country, this paper supports prioritisation of shareholder value theory over stakeholder theory. Reasons for prioritisation are:

  1. Developing country consumers may have practical restrictions that do not encourage sustainable environmental practise.
  2. Government policy does not incentivise pursuit of sustainable business practise.

First, needs of developing country consumers may differ significantly compared to developed country counterparts. One possible contributing reason could be percentage of population living below poverty line. OECD countries (average 10%) tend to have lower percentages of population living below the poverty line than non-OECD countries (average 25%). For developing country citizens living below the poverty line, their priority may not be purchasing more expensive green products[7]. Rather, sustenance with basic goods may be their priority for survival.

Hence while developing country consumers may desire sustainable environmental practise, economic realities may ultimately be more influential on their decision to purchase green versus normal products (Burgess & Steenkamp, 2006). It is not that developing country consumers do not want to support sustainable environmental practise. Rather their financial status do not allow them to do so. After all a prerequisite to support such practise is that the consumer can survive to support it.

Second, while developed countries like the US has committed to environmental sustainability like emitting 26 – 28% less greenhouse has by 2025, a developing country Government may not prioritise environmental sustainability as much as growth. When that happens, companies may not be incentivised to pursue environmentally sustainable business practise. For example, China’s local Government officials have historically been told to prioritise economic growth above environment concerns. This may have encouraged companies like PetroChina[8] to dedicate little effort in environmentally-friendly business practise until recently.

As mentioned for a company to reconcile both theories, the company must be willing and able to pursue both theories for business. However in a developing country, the willingness of companies to pursue both theories are sorely lacking, due to a lack of consumer and Government directives. Hence for companies operating in developing countries, they might be better off pursuing shareholder value theory to maximise profit. This is because pursuing stakeholder theory may not be appropriate at stage of development of the country. Rather doing so might cause the company to lose market share if they for example, sold expensive green goods to consumers who cannot afford them in the first place.

Multinational Company (MNC) Operating Across Developed and Developing Countries

Previous sections of this paper focusing on companies operating in developed or developing countries had an important assumption: That the company’s business interest was focused solely on developed or developing countries only. However the situation may differ for MNCs that operate across developed and developing countries. This paper supports MNCs to err on the side of conservatism and reconcile both theories. This is because stakeholders from developed countries are more aware of worldwide happenings with the internet compared to prior times without the internet.

For example, financial investors like NBIM[9] regularly updates a list of excluded companies from their investment process (negative screening). These companies are screened out based on whether they conduct unethical business in any part of the world. Rio Tinto Plc. is a UK-based mining MNC. It was included in NBIM’s list of excluded companies as Rio Tinto Plc. had significant mining operation in Indonesia, which caused severe environmental damage. From this point, it can be seen that any MNC with business spanning across developed and developing countries should reconcile both theories. This is because sophisticated stakeholders from developed countries will expect the MNC to conduct business worldwide with similar standards to business conducted in developed countries. While reconciling both theories may reduce competitiveness of MNCs in developing countries, the loss of competitiveness may be outweighed compared to potential boycotts of the MNC’s products or services in the developed countries.


In conclusion, this paper would like to emphasize that there is no one-size-fits-all solution for a company on which theories to pursue. Rather, a business must consider the development stage of the country that they are mainly operating in. If a company is mainly operating in a developed or developing country, it would be wise for the company to reconcile both theories or prioritise shareholder value theory over stakeholder theory respectively. However for the case of MNCs operating across developing and developed countries, they should pursue reconciliation of both theories. As a final note, this paper observes that shareholder value theory may ultimately be a subset of stakeholder theory. Although it is preferred that companies reconcile both theories as pursuing stakeholder theory is generally more sustainable than pursuing shareholder value theory, there are circumstances where it makes more economic sense for the company to prioritise shareholder value theory over stakeholder theory.

[1] The term “traditional business” may be used interchangeably with the word “company” in this paper.

[2] This paper defines a developed country as any OECD member country in addition to Singapore, Hong Kong and Taiwan.

[3] For purposes of this paper, stakeholders refer to Governments, consumers and company shareholders.

[4] Specifically instrumental stakeholder theory (Donaldson & Preston, 1995).

[5] OECD countries in “Table 1. Global environment market” are shown to have significantly larger eco industry sizes than non-OECD countries as measured by OECD standards.

[6] This paper defines a developing country as any non-OECD member country, excluding Singapore, Hong Kong and Taiwan.

[7] Generally, green products are more expensive than conventional counterparts as ingredients for green products tend to cost more than conventional counterparts.

[8] Land owned by PetroChina in Lanzhou, China was found to be contaminated with benzene.

[9] NBIM is an abbreviation for Norges Bank Investment Management, one of the largest sovereign wealth funds worldwide owned by Norway by Asset under Management.


Barsoumian, S., Severin, A., & van der Spek, T. (2011, July 1). Eco-innovation and national cluster policies in Europe. Retrieved from European Cluster Observatory Web site:

Burgess, S. M., & Steenkamp, J.-B. E. (2006). Marketing renaissance: How research in emerging markets advances marketing science and practice. International Journal of Research in Marketing, 23 (4), 337-356.

Donaldson, T., & Preston, L. E. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications. Academy of Management Review, 66 – 67.

“Learning by Investing @ NUS” Grant Presentation Event

37 BBA students saw their hard work come to fruition at the Asia Centre for Social Entrepreneurship & Philanthropy’s (ACSEP) “Learning by Investing@ NUS” grant presentation event on 23 April 2015.

As part of the BBA (Honours) module, “Measuring Success in Philanthropy and Impact Investing”, the students had to identify the most investment worthy social enterprises based on assessment metrics learned in class. And at the April event, each of these social enterprises were awarded a grant of S$5,000, with an additional S$5,000 going to the social enterprise voted top by the whole class. The translation of classroom learning to actual financial impact was  made possible through the generosity of Mr. Keith Chua, Executive Chairman of ABR Holdings and Chairman of ACSEP’s Advisory Board.

ACSEP first introduced this approach to learning last semester. At the November 2014 “Learning by Giving” grant presentation event, the students identified the most donation-worthy charities. This year, we focused on social enterprises to help our students build capacity in social investing across the spectrum, moving beyond philanthropic giving to venture philanthropy and impact investing. The skills of socially responsible investing, impact investing and venture philanthropy also bear more direct relevance for our business school students’ career options.

The five selected social enterprises are:

  •  Backstreet Academy
  •  Green Prints
  •  Daughters of Tomorrow
  •  Wateroam
  •  Blue Impact

Daughters of Tomorrw came up top in voting by class and received additional S$5,000 grant.

Learning the Art of Philanthropy


29 BBA students recently saw their hard work come to fruition during The Asia Centre for Social Entrepreneurship and Philanthropy’s (ACSEP) “Learning by Giving at NUS” event.

As part of a course, “Measuring Success in Philanthropy and Impact Investing,” the students had to identify the most donation-worthy charities in Singapore by adapting and using frameworks and tools created by Northeastern University.  They had to use the RISE assessment framework to ascertain the Relevance, Impact,Sustainability and Excellence of the charities they were looking at.

According to Dr Tan Jee Peng, NUS Visiting Fellow who has had more than 40 years of rich experience with The World Bank, “young people should learn now to give by having actual dollars to give away.  By trusting students to make philanthropic investments… gives them a sense of agency and social responsibility.”

Through the generosity of Mr. Keith Chua, Executive Chairman of ABR Holdings and Chairman of ACSEP’s Advisory Board, the students were empowered to donate a total of SGD40,000 to charities that they identify as being the most donation-worthy.  They include:

  1. Care Corner Family Service Centre (Admiralty)
  2. Cerebral Palsy Alliance Singapore
  3. Singapore Red Cross
  4. Home Nursing Foundation
  5. New Life Community Services
  6. Kidney Dialysis Foundation
  7. Reach Community Services Society

Home Nursing Foundation received an additional SGD5,000 for being voted “Top of the Tops” by the class.

The identified charities were recognized through the award of a grant from the Mrs. Lee Choon Guan Trust Fund, a foundation that honors Mr. Chua’s late great grandmother.

Originally posted at:

Philanthropic Psychology

ACSEP Philanthropy Seminar: Philanthropic Psychology by Prof Jen Shang from Plymouth Business School and Lilly Family School of Philanthropy, Indiana University. People often have complex motives for giving. The new academic discipline of philanthropic psychology draws on theories from psychology to generate practical ideas that fundraisers can integrate into their professional lives. Prof Shang used evidence from field experiments to help the audience understand the “whys” in giving and how to enhance the donor experience. The seminar was moderated by Ms Jane Binks, and joined by panelists comprising Mr Keith Chua and Mr Chew Kheng Chuan.


Executive Programme by Prof Paul Brest

Measuring & Improving the Impact of Social Enterprises

ACSEP was privileged to have Prof Paul Brest from Stanford Law School, former President of the William and Flora Hewlett Foundation, to conduct a two-day Executive Programme on 3 and 4 September 2014. Before the programme began, Paul Brest provided an overview of good grant making practices from start to finish at a dinner session on 2 September 2014 where participants were able to interact comfortably with each other.

The 31 participants from various government agencies, foundations, corporates and grant makers thoroughly enjoyed the time spent learning and interacting with Prof Paul Brest.  The intensive programme focused on designing, implementing, and evaluating strategies for the delivery of social goods and services through non-profit organizations (NGOs) and for-profit enterprises (impact investees). To fully benefit from the programme, the participants were given pre-requisite readings comprising book chapters and case studies before the programme.

Community Consultative Circle

The Community Consultative Circle, was a day-long closed-door discussion with 24 individuals. Each of these participants was invited based on their knowledge of and/or involvement in the sector, be it in social enterprises and intermediary organisations, or as funders and investors.  These individuals discussed what they thought the fundamental characteristics of social enterprises were, and what role these organisations might play in addressing future unmet social needs in Singapore.

Landscape of Social Entrepreneurship in Singapore

ACSEP Social Entrepreneurship Series

Landscape of Social Entrepreneurship in Singapore by Pauline Tan and Roshini Prakash. Launched on 3 June 2014, this report described the diverse landscape and eco-system of social enterprises that has developed in Singapore since the 1925 registration of the first co-operative, the Singapore Government Servants’ Thrift and Loan Society. The launch event drew an audience of over 100 practitioners, academics and students, and was covered in the Straits Times and Lianhe Zaobao.

Virtuous Circles: New Expressions of Collective Philanthropy in Asia

ACSEP Philanthropy Seminar

 New Expressions of Collective Philanthropy in Asia. Rob John presented key findings from the research report. Thereafter, he was joined by giving circle members from India, China, Korea and Singapore for a lively panel discussion.