Shareholders vs stakeholder capitalism

      With the growth of the economies worldwide the debate between shareholder and stakeholder capitalism has never been more intense than nowadays. Each country though incorporates this debate differently in its interior market since its corporate governance's structures present distinguished characteristics. Thus, by bringing into this debate countries like Germany and the USA, the distinction between into this debate countries like Germany and the USA, the distinction between shareholders and stakeholders' interests becomes clearer. Countries based on the Anglo-Saxon business model like the USA are in favor of a "shareholder primacy" based system setting as their optimal goal the maximization of shareholder value. On the other hand, countries like Germany seem to have a stronger preference for a stakeholder based system. Both countries though throughout the years have been tested to incorporate into their corporate governance structure models stemming from the opposite side. 

      Thus, the USA despite its stable preference for satisfying fiercely its shareholders' interests have recently started to embrace views stemming from satisfying stakeholder value, adopting notions such as codetermination and public benefit corporation. At the same time, Germany despite its rigid stakeholder prefernce, for improving its position in the global business arena has been proposed to become more tolerant versus shareholders' needs. Finally, in both countries efforts are made to satisfy both shareholders and stakeholders' interests. However, the percentage of this satisfaction defers based on the needs of the corporations of each country.

What is shareholder capitalism?

The term shareholder theory or also shareholder value approach can refer to different ideas. The term shareholder value approach is a term out of the field of business economies and refers to a particular way of dynamic investment calculation. Shareholder value is oriented towards an average diversified shareholder who wants maximum profit from his investment in shares. Still in other fields than business economics the term shareholder theory usually means something different, namely a guiding principle for operating a business, which gives the interests of shareholders the highest priority. Therefore the objective is to maximize the value of the corporation's shares because that is obviously the main interest of shareholders.

This concept of the shareholder approach is mainly concerned with the principal-agent-relationship between shareholders and management. The standard argument for the need to prioritize the shareholder interests is the fact that investors (shareholders) are not protected by contracts like all other corporate units dealing with the corporation. For the purposes of this paper the term shareholder capitalism or approach will refer to a system, which gives the interests of shareholders the highest priority and will therefore first and foremost try to create maximum value for them. 

What is stakeholder capitalism?

Even more than the term shareholder approach the term of stakeholder approach is highly ambiguous, if not controversial. There are multiple theories and concepts involving the term stakeholder, which come to different conclusions and have accentuations. The term surely is multi-dimensional and can be described as having descriptive, instrumental and at core normative levels.

The fundamental idea of the stakeholder approach is to consider interests of corporate groups other than just those of shareholders. These interests do not need to be considered for the sake of the shareholders but for their own sake. They have an own intrinsic value. For that reason stakeholder capitalism judges the performance of a corporation by a broad spectrum of parameters, and not only by the performance of the shares. The subsequent question which interests need to be considered, ergo who the stakeholders are is answered inconsistently. Freeman defined stakeholders very broadly as "any group or individual who can affect or is affected by the achievements of the firm's objectives". It is with no doubt still necessary to further differentiate between different stakeholders since their interests and influence can vary heavily. 

In spite of the multi-interest considerations the stakeholder approach is not necessarily dealing with social issues. Broad social concerns and stakeholder considerations do not have to be the same and stakeholder theory is actually not an underlying concept of Corporate Social Responsibility (CSR). The stakeholder approach is thought to be a strategic approach to business making. So it is not about taking the interests of the whole society into consideration and assuming a responsibility towards it, but about understanding and using the relationships between the corporation and the groups that have a stake in it so that the best possible economic result can be reached. 

So the stakeholder approach at core requires decision makers to identify the legitimate stakeholder and their interests first, then weigh and balance the latter against each other and finally make their choice on that basis. How to finally make those choices is up to the decision makers. There also is no overall agreement on what the overall goal of stakeholder theory is. One idea is to make long term value maximization the goal since only by means of pursuing maximization of value created all corporate units and society as a whole can benefit. 

Another idea puts the balancing of stakeholder interest in the center and makes the coordination of those interests the objective of the corporation. For the purposes of this paper stakeholder capitalism will refer to the strategic multi-interest consideration for the sake of corporations and not to an idea how to bring ethical values into business. So in short it will refer to the broad idea that a firm can and will be run more efficiently if not only the interests of its shareholders but also of other parties which have a legitimate interest in the corporation are taken into consideration. No interest is predetermined to be more important than another. The decisions are based on a complete consideration of all interests or rather stakes, what includes identification, analysis and making the necessary trade-offs.