Stakeholder

4051 Words17 Pages
Stakeholders, Shareholders and Wealth Maximization
V. Sivarama Krishnan, University of Central Oklahoma
ABSTRACT
This paper attempts reconciliation between the two somewhat extreme views espoused by the shareholder wealth maximization paradigm and the stakeholder theory. The stakeholder theory challenges the basic premise built into corporate finance theory, teaching and practice. Corporate finance theory, teaching and the typically recommended practice are all built on the premise that the primary goal of a corporation should be shareholder wealth value maximization. Extant theoretical and empirical research in financial economics also generally accept shareholder wealth maximization as the normative and ideal goal on which all
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This paper is an attempt at reconciling the two somewhat extreme views espoused by the shareholder wealth maximization paradigm and the stakeholder theory. It aims to provide a fair and balanced review of the two approaches to corporate goal setting and their respective implications to business decision making. We also attempt to address what is felt as a lack of dialogue between the two camps. The paper is organized as follows. The first part provides a summary view of the shareholder wealth maximization approach, which we call the traditional finance paradigm. This is followed by a review of the current research and the salient parts of the stakeholder theory. The following section presents a summary of the critique of the stakeholder theory by two of the most eminent and perhaps the strongest critics of the theory, Michael Jensen (2001) and Elaine Sternberg
(1999). This is followed by what we consider as our own insight into the stakeholder theory and our attempt at reconciliation between the two approaches. The last section provides summary and concluding comments.
THE FINANCE PARADIGM
The traditional finance paradigm puts the shareholder wealth maximization as the primary goal of corporate management. This paradigm is built upon the classic competitive markets assumption. Essentially, it is assumed that all participants who have transactions with a firm employees, suppliers, customers, lenders, etc. - are

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