THE SHAREHOLDER-STAKEHOLDER PARADOX

There is one rule for the industrialist and that is: Make the best quality of goods possible at the
lowest cost possible, paying the highest wages possible. - Henry Ford
Compare this statement to Wal-mart, one of the most successful companies of the modern
day and age. Henry ford believed in the concept that is Stakeholder Capitalism and
Shareholder Capitalism
1
is the "Walmartian" way of doing business. Every executive has a
fiduciary duty towards the shareholders. Now this concept of fiduciary concept springs from
the economic theory of the firm itself.
The concept leads to dangerous implications as the companies are supposed to work in the
interest of shareholders without regard to impact on anyone else. All company activities must
be aimed at benefiting the shareholders, so long as the activities are legal.
2


But the stakeholder theory asks the firm to make a big commitment. The primary distinction
is in this setup the interest of all stakeholders have to be given importance even at the cost of
company profitability.
3
So while in shareholder theory, the stakeholders are just a means to
the end, in the stakeholder theory they might be an end in themselves.
THE PSEUDO IDEAL WORLD
In the modern world a lot of failures have been attributed to the shareholder primacy. It is
believed that companies like Enron fell because of extreme shareholder interest. But the

1
http://bluehampshire.com/2013/11/05/stakeholder-capitalism-vs-shareholder-capitalism-how-workers-lost-
everything/ (Accessed 7th October, 2014)
2
http://hearinghealthmatters.org/hearingeconomics/2011/who-ya-gonna-serve-shareholders-or-
stakeholders/ (Accessed 7th October, 2014)
3
http://sloanreview.mit.edu/article/the-shareholders-vs-stakeholders-debate/ (Accessed 7th October, 2014)
shareholder primacy does not argue for illegal or wrongdoings. It instead argues that
everything should be done in shareholder interest but within the framework of the law. The
incentive for establishment of firms comes from the desire to get highest returns from
invested capital not from a sense of social responsibility. It is argued that in companies like
Worldcom much of the recent bad behaviour was grounded in human weakness and not
inherent in the shareholder theory.
4

Further on shareholder theory does not focus only on short term growth and profits. It focuses
on profits for the owners and that does have trickle down effects. Only if the company is
doing well in the market can it do anything significant for the other stakeholders.
Furthermore we see that only if customers are happy can a company survive. Therefore it is
crucial that a company focuses on shareholder primacy and everything else will fall into place
automatically.
Dushyant Panda
13PGP078



4
http://sloanreview.mit.edu/article/the-shareholders-vs-stakeholders-debate/ (Accessed 8th October, 2014)