Framework

Shareholder, stakeholder and market-failures views

The question it answers

When a safety or environmental decision sets profit against the interests of staff or the community, do executives owe their duty first to shareholders or to all stakeholders?

Origin
Friedman, 1970; Freeman, 1984; Heath, 2014
Diagram type
Comparison table
Level of analysis
Firm
Topics
Ethics & corporate governanceStrategy & leadership
Clay balance scale with two level glass pans, icon for business ethics

Diagram

Shareholder, stakeholder and market-failures views

CriterionShareholder (Friedman)Stakeholder (Freeman)Market failures (Heath)
Managers oweThe ownersEvery affected groupMaximise profit but never exploit market failures
Main reasonProperty rights and the fiduciary contractEvery group's right not to be treated as a mere meansEfficient allocation of resources
Who balances conflictsThe democratic governmentManagers too when the state failsAn institutional division of labour: markets enlarge the pie, the state distributes
Main weaknessIgnores others' rights when law is weakManagers can invoke 'stakeholders' to escape accountabilityExposed to the second-best objection

When to use it, and when not to

Use it when

Advising on safety, environmental and ESG decisions.

Pitfalls

Pitfall

Claiming 'doing good pays' without an evidence check.

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Freeman, R.E. (1984) Strategic management: a stakeholder approach. Boston: Pitman.doi:10.1017/CBO9781139192675Source page
  2. Freeman, R.E. and McVea, J. (2001) A stakeholder approach to strategic management. SSRN (Darden Graduate School of Business Administration Working Paper No. 01-02).doi:10.2139/ssrn.263511Source page
  3. Friedman, M. (1970) The social responsibility of business is to increase its profits. The New York Times Magazine.No DOInytimes.comSource page
  4. Heath, J. (2014) Morality, competition, and the firm: the market failures approach to business ethics. New York: Oxford University Press.doi:10.1093/acprof:osobl/9780199990481.001.0001Source page