Over recent times, the conflict between both the shareholder and stakeholder conceptions has grown. The shareholder model maintains that a firm must prioritize its shareholders’ concerns which is a “dominant principle in corporate law.” Instead of only taking into account the interests of shareholders, the stakeholder approach holds that the management would balance the interests of various stakeholders that make up the team.

The Shareholder Approach

The fundamental idea behind the shareholder approach, also known as the shareholder primacy model, is how a company’s main goal should be maximizing shareholders’ wealth. This idea was previously present in Dodge v. Ford Motor Company, the case that served as the main source of authority for the shareholder primacy paradigm.

Professor Berle also supports requiring directors to only act in the best interests of shareholders, which is “the content of the corporate fiduciary obligation.” You can generally find three main justifications for the shareholder primacy paradigm.

The main defence of such a tactic is that if a corporation is healthy, stockholder are the “Residuary applicant.” Given that shareholders, who bid to raise, have the “highest stake in the result of the organization,” it is thought that a corporation must be responsible for the benefit of the remaining claimants.

They may profit from the company’s surplus. Still, they also run a higher risk than some other constituents because, in most cases, their interests are not sufficiently secured by legal mechanisms. Since their values are tied to every choice they make for the company, they must be granted the power to dictate over other stakeholders.

The other is the decrease in agent expenses. According to the agency theory, the managers, who serve as agents, must represent the stockholders when managing a company’s affairs. However, without shareholder primacy, it is conceivable that executives will refuse their responsibilities.

Additionally, it is believed that directors who are solely focused on shareholder interests could produce wise company decisions. Directors cannot balance the conflicting interests as if they had obligations to other non-shareholder groups.

The Stakeholder Approach

According to Professor Freeman, a well-known supporter of the stakeholder theory, stakeholders are “groups and persons who truly can impact, or are impacted by, the attainment of the organization’s aim.”

As a result, the directors of a company should administer it for the advantage of all prospective stakeholders, including employees, customers, creditors, suppliers, and the local community, in addition to the shareholders’ profit. The next sections will examine the significance of considering stakeholder interests.

 Creditor’s interest

Unlike most other stakeholders, the corporation only considers creditors’ interests when it is experiencing financial distress or insolvency since there’s a significant risk that it would not be capable to give off its indebtedness.

Numerous common law decisions support the idea that, in such a scenario, the obligation of directors would change from being owed to shareholders to creditors.When a firm is insolvent or even questionably solvent, as Nourse L.J. stated in Brady’s case, “the interests of the company are in actuality the interests of current creditors alone.”

However, creditors’ rights will only take precedence when the corporation is bankrupt or on the verge of bankruptcy. Thus, it is doubtful that the corporation would exclusively focus on protecting the interests of its creditors under normal circumstances, and a director’s obligations are more prepared to protect than to advance those interests.

 Employee’s interest

Employees are considered as having a stake in the commercialism of the company because they currently provide the labour, knowledge, and experience in exchange for future rewards like payments from the corporation. Additionally, it’s common to see individual capital as a type of corporate investing. It is particularly true for several high technology companies, as technical progress necessitates large staff contributions.

Consequently, directors must consider workers’ liking because they are an important stakeholder group that could help the companies they serve become more competent and sustainable. If you want to know about this topic in more detail, you can approach law coursework writing services to get related articles about this debate.

 Customer’s interest

The directors should not disregard the customers’ needs because they are valuable resources for the business. The success of Toyota in the American auto market is a good illustration of how important it is for a business to take the interests of its customers into account.

Customers subsequently switched to smaller and more fuel-efficient Japanese models as American automakers failed to fulfil shifting consumer demands by continuing to create huge and inefficient vehicles. As a result, as of 2005, the market value of the major three American automakers was more than double that of Toyota. Customers are a significant stakeholder group because they are essential to a company’s success.

Other stakeholder group’s interests

Suppliers, for example, have a stake in the business since they invest in the company to meet the demands of specific clients and are likely to receive a portion of any profits the business makes.

Companies must have solid trading connections within the supply chain since suppliers are essential components of production. The assumption that under this situation, directors’ duty would shift from being owed to shareholders to creditors is supported by a number of common law decisions.

Criticisms of the two approaches

Several problems with the stakeholder approach and the shareholder primacy model make them less effective overall.

It is incorrect to suggest that the shareholders are the company’s only “residual claimants” under the shareholder primacy model since it is not bankrupt. In contrast to other stakeholder groups, the shareholder’s position was not more susceptible because of investments made in the company.

Customers, suppliers, and other stakeholders have helped make the company successful, and they also suffer when it performs poorly. A public company’s BOD determines whether net profit must be salaried to the stockholder or reinvested to increase profits for things like personnel pay or other uses. Thus, the claim that shareholders are the only remaining risk-bearers does not justify a sole emphasis on protecting their interests.

The majority critique of the shareholder concept reported in different research papers is that it does not talk about the problem of levelling the possibly competitive benefit of every constituent.

The stockholders possess no legal aid against the BOD because of any failure. Professor Sternberg has addressed the problem of a firm being accountable to everyone but being answerable to no one. In addition, there is no defined limit for the stakeholder groups that a company should consider. Students learning law courses can hire experts from different online law coursework writing service to get authentic and referenced-based information from them.