From Shareholder Theory to Stakeholder Theory

This theory has further made way for the theory of financialization. Both these theories
emphasize on a single point agenda to maximize shareholder value. Accordingly
the corporation is supposed to bear the interests of its shareholders as
supreme. The corporate law commits managers solely to the maximization of
profits for the benefit of the firm’s owner/shareholders. Shareholders are the
residual owners of the firm’s assets. Maximizing their returns should provide
the most efficient outcome for the firm and society. According to shareholder
theorists such as Nobel laureate economist, Milton Friedman, managers ought to
serve the interests of the firm’s owners the shareholders. In fact the Chicago
school of corporate social responsibility of which Friedman is one of the
pioneers categorically asserts that the only business is to do business. Social
obligations of the firm are limited establishing contractual relations, obeying
the law, and adhering to ordinary moral expectations. 

The growth of industries from technological age to information age has produced large
business enterprises, but it has also spawned the social problems that are
associated with industrial firms, such as deforestation, environmental
degradation, urban blight, unemployment, migration. Sweatshops and child
labour. Most economists focused on the economic benefits of these enterprises,
but they could not explain why they caused such social upheaval, at least not
in rational economic terms. For many, these social dislocations were simply the
price of progress. The manifestations of the above events put the relationship
between managers and other firms and constituencies including the public in
particular focus.