Lesson 4 of 7 · All lessons in this module
- Debt and equity: two different claims
- Leverage: higher return, higher riskVideo lesson
- Payoffs and conflicts between lenders and shareholdersVideo lesson
- Shareholder versus stakeholder theory
- The stakeholder groups in detail
- ESG factors: environmental, social and governance
- Evaluating ESG risks and opportunities
Lesson 4 of 7 · 12 min
Shareholder versus stakeholder theory
Shareholder theory runs the company for its owners and weighs others only through their effect on share value; stakeholder theory makes all stakeholders' interests (including ESG) explicit objectives, at the cost of complexity.
In short
- A stakeholder is any person or group with a vested interest in the company: investors, the board, managers, employees, customers, suppliers, governments, society and the environment.
- Shareholder theory: the board and managers serve shareholders; other groups count only as far as they affect shareholder value.
- Stakeholder theory: governance should consider all stakeholders, often with ESG as an explicit objective.
- Challenges of stakeholder theory: balancing many objectives; defining and measuring non-shareholder goals; competing with less constrained rivals; direct costs of higher ESG standards.
- The two theories often converge in the long run: treating employees, communities and customers well can raise profits.
- Managers are agents of shareholders; performance- and share-based pay and independent boards help align interests.
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