IntroductionAdvancing the interests of shareholders only as suggested by the shareholder theory embrace Milton Friedman’s perspective that suggests that businesses are socially accountable to enhance business and ensure the interests of the shareholders in terms of value in their shares are basis for the goals and the objectives of the organization (Sumanjeet, 2011, p. 1). Although stakeholder theory suggest that the management should consistently and fairly favor all the interests of all stakeholder groups other than the shareholder group, organizations are still split in deciding which argument to prefer and inform their systems, processes and work processes.
Collison (1998:7) states that “Attention to the interests of shareholders above all other groups is implicit in much of what is taught to accounting and finance students. The very construction of a profit and loss account is a continual, and usually un-stated, reminder that the interests of only one group of stakeholders should be maximised. Indeed it may be very difficult for accounting and finance students to even conceive of another way in which affairs could be ordered, even at the algebraic level, let alone the moral. ” Therefore, this report seeks to critically analyze this statement and provide current examples of companies that support the report’s point of view.
Critical analysisIt is important to note that the interests of both the shareholder group and the stakeholders group are attuned and they both are responsible for the sustainable efficiency and development of an organization and therefore both need to be integrated in corporate governance and should both be used as financial performance indicators. Nevertheless, there are valid and relevant arguments in support for either.
Historically, shareholders have been at the receiving end of the effects and impacts of accounting and financial malpractices in corporations where they have been subjected to corporate and financial fraud (Sumanjeet, 2011, p. 2). Since, they born the highest risks, legal and regulatory systems both within the organizations and by the government have been designed in such a way to cushion shareholders from such risks, which have in effect caused corporations, seem or in real sense become biased towards maximizing the interests of shareholder group alone. This has resulted in greater emphasis on profits as a performance indicator and more significantly, influencing accounting and finance students into perceiving that the interest of only one group of stakeholders, the shareholders, should be maximized (Sumanjeet, 2011, p.
2). Among recent corporate and financial frauds that can be linked to the increased application of shareholder theory or the maximization of only the interests of shareholders in expense of other stakeholder group. These includes the Nugan Hand Bank in Australia, Robert Maxwell in the UK, Barings Bank in the UK, Xerox in the USA, Enron in the USA, Bristol- Mayers Squibb in the USA, and Global Crossing in the USA.
Others include Computer Associates in the USA, El Paso Corporations in the USA, Adelphia in the USA, Kmart in the USA, Dynegy in the USA and Qwest Communication in the USA among others (Sumanjeet, 2011, p. 3). I agree with Collison. More often than not, shareholders bears the greatest risk as the main people that contributes the equity capital of the organization and who have the undisputed power on how resources are allocated through variables set out in official documents such as memorandum of association and official approvals they give to decisions made by the management.
According to Alchian and Demsetz, (1972, p. 777), shareholders are responsible for the most fundamental process of an organization such as selecting the company’s directors and they often are the group of stakeholders to be the last in pecking order during the allocation of surpluses in case of winding up after all other claims have been met. This makes shareholders as the residual claimant in the corporate hierarchy eligible to having the organization and its management exclusively answerable to them as supported by the residual claimant theory (Demsetz, 1967, p.
347). Therefore, the fact that the highest risks and the most crucial responsibilities in the organization are taken up by the shareholders makes the interests of this group which is profit maximization, of utmost significance and thus, almost all actions and plans by the organization are meant to maximize the interests of this one group of stakeholders.