Stockholders Theories and Stakeholders

All prospective stakeholders must work together to ensure that corporate operations run smoothly.

The relationship between stakeholders allows the organization to thrive efficiently while also catalyzing the rate at which certain established goals wish to be attained. The managerial setting is one facet that comprehensively addresses this fact.

Freeman's stakeholder theory

According to Freeman's stakeholder theory, managerial systems should establish fiduciary ties with all stakeholders involved in a firm. He contends that managers should consider the interests of all stakeholders, whether customers or suppliers, because doing so will boost profit, which will then be dispersed among the same stakeholders. A stakeholder, according to Freeman, is someone who has an interest in how a company operates. A company should be managed not for the benefit of the owners and the stockholders but all to the benefit of customers, employees, suppliers, and the community among others. Freeman argues that every stakeholder has a role to play in the operations of a company hence the consideration and if the same is not considered, then this may lead to the downfall of a corporation.

Freeman's theory and its impact on managerial decision making

Freeman's theory is revolutionary because it gives a whole diverse perception of how corporations should operate. The integration of his theory in managerial decision making will create a comprehensive change. Freeman believes that stakeholders are people who are vital in a corporation. Involving them in decision making will create a broader impact since different stakeholders have separate issues. In this, the company accepts every challenge presented as well as opinion and then values the relevance of the same. This move will help an enterprise take useful steps alongside the decisions unlike when selected stakeholders make decisions. When the issues of every stakeholder are considered then a corporation will be able to operate from a diverse point hence increasing profit. Besides, Freeman's theory is revolutionary in managerial decision making because it will help a corporation identify the weak areas or those areas that need more attention or even those that might have been neglected. For example, a company can determine what customers need, the different desires of the employees, and the community's cautiousness about the environmental damage caused by the waste from production. When all these factors are considered, a company is able to make necessary adjustments which will later result in increased profit.

Comparison of stockholder and stakeholder theories

The stockholder and the stakeholders’ theories have a complete twist since they advocate for different things. This means shifting from Friedman's theory to Freeman's theory would force managers to reconsider their actions and change them.

Friedman's theory

Friedman suggests that managers and employees have a responsibility to owners. This is to say that managers ought to "conduct the business in accordance with the owner's desires". In this case, maximizing profit is the rule of this theory since it is the sole reason or expectation of company owners. To add on to that, Friedman's theory clearly states that the owner's interests come first. Hence, the interests of stakeholders are not necessarily considered here. The contribution of the stakeholders is not recognized.

Freeman's theory

On the other hand, Freeman's theory suggests that managers should create a fiduciary relationship with stakeholders first as this will help increase the profit. The interests of the stakeholders are placed before those of corporate owners. While Friedman advocates for profit maximization for the owners, Freeman suggests that the gains should be distributed with the aim of meeting the interests of all the prospect stakeholders. That means that if managers shift from Friedman's theory to Freeman's, then they ought to reconsider their actions as they are not directed to meet the same motive. For example, a manager working under Friedman's theory will be required to find strategies that will improve sales so that profit can increase, this might include shifting from one supplier to another. However, if the same manager shifts to Freeman's theory, the focus moves to creating a strong and a fiduciary relationship with all stakeholders which will mean staying with the same supplier and in this case, which will then help in the aspect of profit increase.