Stakeholder Value: An Alternative to Shareholder Value?

Friday, 25. January 2013

It is no longer only opponents of capitalism who are rejecting the shareholder value approach as it has been practiced over the past 25 years. Since the outbreak of the financial crisis, more and more politicians and members of society, but also scientists and business people have been questioning the way corporate management focuses exclusively on the interests of shareholders and ruthlessly pursues quick profit. According to the widespread believe, this does not only harms consumers and the general public in the long-term, but also the business and the shareholders themselves. Meanwhile, even former staunch supporters are now distancing themselves from the once popular shareholder value doctrine. The statement made in the Financial Times by Jack Welch, the former head of General Electric and father of the shareholder value approach, has become almost legendary: "On the face of it, shareholder value is the dumbest idea in the world.“

Some critics believe that Welch has gone too far with this 180 degree turn (The Economist, 2012). Instead of rejecting the shareholder value approach entirely, they advocate a return to its original ideas, as had been formulated by Alfred Rappaport in the book "Creating Shareholder Value.“ According to this, the objective of the shareholder value approach is not a short-term increase in share prices but a long-term improvement in the competitiveness and profitability of the business. Fundamentally, they argue that the shareholder approach has simply been misunderstood by many businesses and merely needs to be practised correctly to achieve sustainable success. Some large businesses such as IBM, L’Oréal or Google already seem to be adopting an appropriate change of course by creating incentives for managers and investors to think in the long-term (The Economist, 2012).

Welch himself qualified his statement once again in a later Interview with the Handelsblatt by saying that shareholder value is not a strategy but rather the "result of good management." He emphasized: "Strategies drive a business, not the objective of rising share prices. With the latter, nobody can initiate anything in business. Nobody knows what to do on a day-to-day basis. This does not motivate anybody. Strategies, on the other hand, are clear guidelines. I can try to be the supplier with the lowest costs or the technology leader or a company which plays to its strengths on an international level."

For other critics, this "back to the roots" approach does not go far enough. Instead, they advocate replacing the shareholder value approach of recent decades with the stakeholder approach (Ulrich, 2001; Malik, 2002; Martin, 2011; among others).

The stakeholder approach is based on the assumption that a business does not act in a social vacuum but rather in a direct interactive relationship with different stakeholder groups. These stakeholder groups are, on the one hand, directly or indirectly affected by business activity, on the other hand they themselves exert an influence on the decisions and actions of the business (Freeman, 1984). In addition to the stakeholders who provide capital, other groups are also included. For example the employees, who implement their knowledge and skills, the suppliers who provide the required raw materials, the retailers who sell the products to the customers, and the customers who, finally, buy or do not buy the product. The ability of the business to consider, reconcile, and satisfy the interests and needs of all stakeholder groups when developing and formulating its business objectives is viewed as a condition of sustainable success. An exclusive focus on the interests of the shareholder, as envisaged in the shareholder approach, is thus rejected.

An important aspect of this approach is also that the relationships between the individual stakeholder groups are not static, but constantly developing. This means that businesses can only survive in the long-term if they continually take account of interests and show they are able to adapt accordingly.

The stakeholder approach is hardly new. Its fundamental idea of including the entire socio-economic context has long been incorporated into some widespread management systems and theories. The balanced scorecard and the ideas of corporate social responsibility and corporate social performance, for example, show a strong consideration for the interests of stakeholder groups.

Practical implementation of the stakeholder approach is, however, not without difficulties. The first question to be asked is who is to be considered as a stakeholder. Representatives of the normative-critical or even ethical concept of stakeholder groups (Ulrich, 2001) essentially advocate the consideration of all groups of people, organizations, and institutions who are affected by business activity in one way or another. These kind of broad definitions which seem to include "all people and things" are, in fact, of little use in everyday business. The second pressing question which emerges is which stakeholders to prioritize when there are inevitable conflicts of interest. Doing right by everybody is rarely possible. Mitchell et al. developed an approach (1997) which provides managers with a way of identifying and prioritising stakeholder groups. The key criteria are:

  • Power: How likely is it that a stakeholder group will be able to get its way in the face of resistance from others?

  • Legitimacy: Are the claims of a group legitimate within the context of the accepted system of social norms and values?

  • Priority: Do the claims require immediate attention on the part of the management of the business? This criterion takes into account the dynamic interplay of relationships. An example of this would be a strike which can force a business to act immediately in the interests of those concerned.

Even with these criteria to hand, the balancing of conflicting interests remains a difficult, occasionally insoluble task. Nevertheless, it is to the credit of the stakeholder approach that it recognizes the complexity and divergence of claims and does not turn a blind eye to them. The analysis of the differing interests allows opportunities and risks for entrepreneurial activity to emerge and enables more robust strategies to be developed than can be the case with a one-sided shareholder value approach.


Freeman, R.E. (1984). Strategic management: A stakeholder approach. Boston: Pitman.

Graham, J.R., Harvey, C.R., & Rajgopal, S. (2005). The economic implications of corporate financial reporting.

Jung, J. (2012). Shareholder Value and Workforce Downsizing, 1984-2006.

Malik, F. (24.01.2002). Perpetuierung falscher Corporate Governance. Manager Magazin Online.,2828,217433,00.html

Martin, R.L. (2011): Fixing the game: Bubbles, crashes, and what capitalism can learn from the NFL. Harvard: Harvard Business Review Press.

Mitchell, R.K., Agle, B.R., & Wood, D.J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), S. 853 – 886.

Ulrich. P (2001). Integrative Wirtschaftsethik: Grundlagen einer lebensdienlichen Ökonomie. 3. überarbeitete Aufl. Bern: Haupt.