Explain the key differences between the shareholder and stakeholder models of corporate governance. Describe the legal, organizational, social, and individual changes that would facilitate a shift in corporate governance behaviors from the shareholder to stakeholder mentality.

Question

What will be an ideal response?

Answer 1

The traditional shareholder model of corporate governance places the primary, if not exclusive, responsibility of managers on ensuring firm profitability. The shareholder perspective is based on utilitarian and libertarianism ethical views as well as a legal view of corporate governance based mainstream economic models. Firms that are not focused on profits, will not lead to the "greater good." The stakeholder model, on the other hand, criticizes the shareholder perspective as too narrowly focused on short-term financial results that treat employees as labor costs and denies meaningful input into business decisions. This perspective does not deny the importance of shareholder rights but also recognizes that these rights are granted by governments and society. As such, the stakeholder model suggests that corporations have other obligations that are necessary to meet the needs of society. Specifically, corporations should consider the needs of all stakeholders - employees, customers, suppliers, local communities, and others - in addition to shareholders. The stakeholder model advocates organizational change in governance goals but also greater legal changes in corporate governance that would reinforce the importance of other stakeholders' interests.