Comparing shareholder and stakeholder models of corporate governance

There are two distinct, conflicting models involved in corporate governance. One is the stakeholder model, while the other is the shareholder model.

Below, we’re going to examine both and assess their various pros and cons—then decide which model is the better choice for organizations.

What is the Stakeholder Model (Stakeholder Theory)?

It should come as no surprise that the stakeholder model prioritizes how corporate activity affects all identifiable stakeholders of a corporation.

Officers and directors involved in a company following this model must primarily contemplate the various interests of every possible stakeholder throughout its governance process.

So, they need to strategize over matters such as reducing stakeholder interest conflicts. The purview of board directors eclipses the more traditional focus of its corporate managers. They should now be far more concerned with other third parties that could depend upon the corporation in any way, instead of merely profits.

Specifically, stakeholders are often divided into internal and external categories.

Internal stakeholders are the board’s directors and employees involved in corporate governance. Whereas external stakeholders might be creditors, auditors, customers, suppliers, government agencies, and the surrounding community.

Most vital to the stakeholder model is abiding by the idea that all stakeholders engage with the corporation in some way, shape, or form. Their expectation is for the corporation to adhere to a distinct and desired set of values.

Dividends, salary, bonuses, additional orders, new jobs, tax revenue, etc. are some of the benefits that come from the stakeholder model.

Pros of the Stakeholder Model:

• Promotes fairness and ethics
• Gives directors and objective
• Creates an environment of social wealth
• Combines ethics and economy

Cons of the Stakeholder Model:

• Stakeholders aren’t necessarily altruistic and may represent their own interests
• Due to being self-interested, internal and external stakeholders can block progress
• Boards might get pulled into too many directions due to the magnitude of stakeholders

What is the Shareholder Model (Shareholder Theory)?

The thought process behind the shareholder model is for a board to center its approach around maximizing profits accruing to its shareholders.

Compared to the more socially forward stakeholder model, this more traditionally corporate methodology values the fact that people buy shares to earn money.

These companies operate under the principle that shareholders will sell shares or try to remove the board of directors if the organization does something not associated with profit margins.

The shareholder model demands dividends, increased share price, and other factors involved with making money.

Corporate managers ethically, in this scenario, must do everything in their power to generate significant value for the owner.

Pros of the Shareholder Model

• Increased returns
• Singular, streamlined focus
• Avoids impulses and emotional decisions

Cons of the Shareholder Model

• Lacking in social conscience
• Misses out on the big picture
• One dimensional approach

The Verdict:

Really, choosing the ideal model of corporate governance primarily depends on the people involved as well as what kind of organization is being discussed.

A company selling shoes that only uses recycled, sustainable material would benefit from the stakeholder model. Whereas, a more rigid, corporate company selling accounting software, for instance, would likely prefer the shareholder model.