Stakeholder vs. Shareholder Theory: A Comparative Analysis of Business Social Responsibility

The thesis of this essay is that the stakeholder theory of the modern corporation is a superior approach to the social responsibility of business than the shareholder theory espoused by Friedman. The stakeholder theory posits that businesses have a responsibility to consider the interests of all stakeholders, including employees, customers, suppliers, and the wider community, in addition to the shareholders. In contrast, the shareholder theory argues that the sole responsibility of businesses is to maximize profits for their shareholders.

Freeman's article, 'Stakeholder Theory of the Modern Corporation', supports the stakeholder theory by arguing that businesses operate in a complex environment where they have social, ethical, and moral responsibilities beyond just making profits. Freeman suggests that businesses should take a broader view of their responsibility and consider the interests of all stakeholders. He argues that this approach is more sustainable in the long run since businesses that prioritize the interests of all stakeholders are more likely to build trust and loyalty among their customers, employees, and the wider community.

In contrast, Friedman's article, 'The Social Responsibility of Business is to Increase its Profits', supports the shareholder theory by arguing that businesses have no social responsibility beyond maximizing profits for their shareholders. According to Friedman, businesses that focus on social responsibility are essentially acting as agents of their shareholders and are not accountable to society at large. He argues that businesses are not equipped to make social decisions and that doing so would be an infringement of individual freedom.

While Freeman and Friedman present opposing views on the social responsibility of business, the stakeholder theory has gained more traction in recent years. Many businesses have recognized that prioritizing the interests of all stakeholders is not only the right thing to do but also makes good business sense. For example, companies that prioritize the well-being of their employees and customers tend to have higher productivity, better customer satisfaction, and increased profits in the long run.

In conclusion, while the shareholder theory espoused by Friedman has its merits, the stakeholder theory of the modern corporation is a more comprehensive and sustainable approach to the social responsibility of business. Businesses that prioritize the interests of all stakeholders tend to build trust and loyalty among their customers, employees, and the wider community, which ultimately leads to increased profits.