Shareholder Value theory
has argued that managers' primary responsibility is to shareholders and to maximise the profit of the firm that they have been entrusted to run by the shareholders. The relationship between managers and shareholders is traditionally seen as a fiduciary one. A fiduciary is:
An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another's benefit. (The Free Dictionary)
This means that managers have an ethical responsibility to the shareholders whose property and valuables they have been entrusted with. In other words they have a Fiduciary Duty
to the shareholders.
On the other hand Edward Freeman
argues that managers also have responsibilities to other stakeholders like employees, customers, suppliers
and so on. (Palmer, 2015, ch1
What is the Stakeholder Paradox?
defines stakeholders as:
“any group or
individual who is affected by or can affect the achievement of an organization’s
objectives”. (Freeman, 1984).
This means that managers must have multiple fiduciary responsibilities. As Daniel Palmer explains, stakeholder theory says that managers must consider the interests of all stakeholders not just shareholders (Palmer, 2015, ch1
). This extension of fiduciary duties
presents a problem which Kenneth Goodpaster has described as the Stakeholder Paradox
"It seems essential, yet in some ways illegitimate, to orient corporate decisions by ethical values that go beyond strategic stakeholder considerations to multi-fiduciary ones" (Goodpaster, 1991, p63).
Goodpaster describes this as a paradox because there is ethical problem which ever approach you take (Goodpaster, 1991, p63
). It makes sense that the manager has duties to more than just the shareholders, this seems ethical. However, this would seem to require the manager to break their fiduciary responsibility to the shareholders because they would sometimes have to put stakeholders needs above those of shareholders.
As Palmer explains that for managers to fulfill their fudiciary responsibility and consider stakeholders
they would have to
"put the needs of shareholders above other stakeholders and at the same time place other stakeholders interests above shareholder interests, which is logically impossible" (Palmer, 2015, ch1).
Solving the Stakeholder Paradox
Goodpaster suggests a solution to the paradox
which is to accept that managers have duties to all stakeholders, but a fiduciary duty only to shareholders (Goodpaster, p. 67 and 69
). He uses the example of General Motors who in the 1980s needed to replace two plants in Detroit with the loss of 500 jobs, with a new assembly plant in Poletown which would require the acquisition and clearing of an area of 500 acres. He argues most people would agree that General Motors had an obligation of the people of Detroit and Poletown 'to take their (non-fiduciary) interests seriously'. He concludes that while managers have an obligation to stakeholders it must be understood to be different from a fiduciary one:
"Management may never have promised customers, employees, suppliers, etc. a "return on investment", but management is nevertheless obliged to take seriously its extra-legal obligations not to injure, lie to or cheat these stakeholders quite apart from whether it is in the stockholders' interests" (Goodpaster, 1991, p69 - 70).
Stakeholder Paradox bibliography and further reading
Stakeholder Management resources
Stakeholder analysis templates in Word, Visio and Excel.
Edward Freeman on Stakeholder Theory
- How to analyse stakeholders
- how to identify your Internal Stakeholders
Stakeholders - who are the Key Players?
- Some Stakeholders are really important. How do you find them and get them on your side before they can do any damage?
Project stakeholders - typical stakeholders on a project
- a mindmap showing stakeholders for an IT project.
- an overview of the stakeholder salience model