What is Shareholders Theory?

SHAREHOLDERS THEORY.

Ans.    The word ‘stakeholder’ was first coined in 1963 and tried to differentiate it with the word ‘shareholder’. Accordingly, ‘shareholder’ meant one who has invested money in a company while ‘stakeholder’ meant who who has stake in the company and its performance. Initially, the concept of stakeholder theory defined stakeholders as including “those groups without whose support the company would cease to exist.”

In the olden days, the company was considered as ‘input-output model’ where the company was responsible to convert the inputs of investors, employees and suppliers into outputs like goods and services, which are bought by customers, thereby earning some capital profits for the company. Here only four type of customers viz, investors, employees, suppliers and customers needs are considered. Whereas, in the stakeholder theory other party such as government, trade union, trade associations, community, society, prospective consumers, prospective employees, etc. too are included in the concept of stakeholders.

Thus, as per this theory stakeholders are large and diverse group. The constituents of stakeholders can be viewed as in different ways for e.g. one can use the term ‘stakeholder’ as primary stakeholder (investors, employees, suppliers, customers etc.) or secondary shareholders (government, society, competitors etc.) or long term stakeholders (equity investors, employees, customers, .i.e. current and prospective, suppliers, government, society etc.) or in a broad sence the term ‘stakeholder’ may include any group or individual who affected by the company’s activities e.g. customers, employees, suppliers, stockholders, communities, society, government etc. and in a narrow sense it includes only employees, investors, customers, suppliers etc.

However, this theory has been criticised on the following grounds :

1.      It can only identify the various stakeholders who have vested interest in the company but fails to identify who actually runs the company.

2.      There is no common voice amongst the stakeholder and hence often the strongest group prevails.

3.      It fails to reflect the link between stakeholders and the company’s performance.

4.      It may lead to corruption and mismanagement as the agents (managements) gets an opportunity to direct the wealth from shareholders to other parties, thereby going against the fiduciary obligation towards the shareholders.