Lecture3.1

Question 1

What is Shareholder Theory?

Answer 1

Shareholder Theory
- Developed by Prof. Milton Friedman
- Definition: Shareholders are individuals who own shares in a company, gain profits, and vote on company decisions.
- Key Idea: Managers’ sole responsibility is to maximize profits, adhering to laws and regulations.
- Assumptions (neoclassical economics):
- Free market principles
- Existence of market prices
- Economic efficiency
- Profit maximization
- Criticisms:
- Focuses only on profitmaking
- Leaves social responsibility to governments, disregard social needs.

Question 2

What is Stakeholder Theory?

Answer 2

Stakeholder Theory
- Developed by Prof. Edward Freeman
- Definition: Stakeholders are individuals or groups affected by or affecting the organization’s goals.
- Key Idea: Create value for all stakeholders (internal and external) without trade-offs between stakeholders interests.
- Focus: Sustainable practices beyond legal requirements if they matter to stakeholders.
Stakeholders act according to their own perspectives, and their action can affect the
firm in terms of profit and reputation.

Question 3

Key Differences Between Shareholder and Stakeholder Theory?

Answer 3

Shareholder Theory vs Stakeholder Theory
- Profit Focus:
- Shareholder: Solely maximizes shareholder wealth.
- Stakeholder: Balances interests of all stakeholders.
- Scope:
- Shareholder: Narrow focus on profits.
- Stakeholder: Broader focus including sustainability and ethics.

Question 4

Compromise View: Shareholder vs Stakeholder Theory

Answer 4

Compromise View = No theory is right or wrong. Shareholder and stakeholder theory can be balanced, if time is taken into account.
- Short-term: Focusing on shareholder value can harm overall value.
- Long-term:
- Good stakeholder management aligns with long-term shareholder value. In long-term, stakeholder value often coincides (=zusammenfallen, alignen, übereinstimmen) with stakeholder value.
- Trade-offs between stakeholders interests should aim to maximize long-term value.

Question 5

Summary of Shareholder and Stakeholder Theories

Answer 5

Summary
- Shareholder Theory:
- Rooted in neoclassical economics.
- Sole responsibility: Profit maximization.
- Stakeholder Theory:
- Considers interests of all stakeholders.
- Promotes sustainable and ethical management.
- Insight: Long-term value requires balancing both theories.

Question 6

List internal and external stakeholders

Answer 6

Internal: employees, managers, shareholders, owners
External: suppliers, NGOs, governments, creditors, customers

Question 7

Should companies focus on profit maximization or do they also have moral
obligations and social responsibilities?

Answer 7

Two theories have opposing answers:
- Shareholder theory
- Stakeholder theory