Corporate Governance: Stakeholder, Shareholder, and Social Duties

This report provides an analysis of corporate governance, focusing on the contrasting approaches of shareholder and stakeholder theories. It examines the roles and responsibilities of directors, the importance of corporate social responsibility (CSR), and the impact of various stakeholders, including shareholders, employees, consumers, and the community. The report reviews the literature, including the viewpoints of Milton Friedman and R. Edward Freeman, and explores theories of justice and corporate governance. It also discusses the advantages of adopting a broader view in corporate governance and offers recommendations for directors to effectively implement corporate governance principles, ensuring the satisfaction of stakeholder interests through policy formulation, continuous monitoring, and adaptation to internal and external factors. The report highlights the shift from a profit-maximizing approach to one that considers the moral and ethical duties of corporations toward society.

Running head: CORPORATE GOVERNANCE 0
Corporate Governance and Social Responsibility

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Executive Summary
Corporate governance is guidelines and regulations that ensure that a company if fulfilling its
social duties towards the society. The directors are responsible for effective implementation
of corporate governance principles; there should be no discrimination between stakeholders’
interest. Many theorists argue that shareholder primacy is more benefited for a company and
focusing of stakeholders’ interest reduces the profit-making ability of a company. But, many
experts have denied this claim in their studies and provided that adopting a stakeholder
approach is more beneficial because it provides multiple advantages such as better brand
recognition, increased sales, easy availability of investment and positive reputation. A
company can fulfill their social responsibility by adopting a broader view approach in
corporate governance. As per the theories of justice, a company is an artificial person, and it
has several duties towards the development of society. There are multiple theories of
stakeholders’ approach that can be applied by the directors such as CSV, CSR, and circular
economy. Below are few suggestions that directors can apply to ensure satisfaction of
stakeholders' interest efficiently:
 The directors should analyse the number of stakeholders in a company and evaluate
their stake in the business.
 The directors should formulate policies of corporate governance to ensure that equally
preference is given to each of the stakeholders’. The directors should avoid any
discrimination while formulating corporate policies.
 After effective implementation of corporate governance policies, the directors should
continuously monitor the organisational environment.
 The directors should update the policies according to the internal or external factors in
the industry to ensure that stakeholders are satisfied by the actions of the corporation.

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Table of Contents
Introduction................................................................................................................................3
Purpose.......................................................................................................................................4
Scope..........................................................................................................................................4
Literature Review.......................................................................................................................5
Advantage of Adopting and Broader View................................................................................7
Justice Theories..........................................................................................................................8
Theories of Corporate Governance............................................................................................9
Conclusion and Recommendations..........................................................................................11
References................................................................................................................................12

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Introduction
Corporate governance is the set of activities and regulations by which board of directors
direct and manages the operations of a company and ensures fairness, responsibility, and
transparency in corporations while dealing with its stakeholders. The stakeholder of a firm
includes consumers, government, shareholders, investors, creditors, environment, community
and many others. Many modern organisations have adopted corporate social responsibility
policies to ensure the satisfaction of multiple stakeholders but, many experts believe that it
reduces a corporation’s performance and growth. The stakeholder approach is based upon
various theories of justice, ethics, and morality and it has a positive impact on the society.
Many experts support the stakeholder approach by stating that company is not a profit
machine, it has several moral duties towards society and stakeholders. There are several
stakeholders’ theories that can be applied by the directors; these theories focus on fulfilling
the requirements of multiple stakeholders. This report will analyse various articles on
shareholder and stakeholder approach to understand their influence and importance in a
corporation’s growth. The impact of stakeholder approach over society will be discussed in
the report as well. Further, the report will evaluate multiple theories of justice and corporate
governance to understand their impact on a company.

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Purpose
The key purpose of this report is to analyse the articles provided by multiple experts
regarding shareholder and stakeholder approach. The primary focus of the report will be in
the articles submitted by Milton Friedman and R. Edward Freeman (and others) regarding the
stakeholder and shareholder approach. Further, the report will also discuss benefits of
implementing a broader view by a firm. The report will evaluate various theories of justice to
determine the social role of a company towards the development of society. The report will
analyse multiple corporate social responsibility theories that can be applied by directors in a
firm for the fulfillment of their social responsibility. The report will provide few suggestions
that can be implemented by directors for effective implementation of corporate governance.
Scope
The report primarily focuses on articles, journals, books or studies provided by experts
regarding shareholder and stakeholder theory. The articles submitted by Milton Friedman and
R. Edward Freeman will be the primary focus of the report. Many other opinions and
researches conducted by theorist will be discussed to understand the role of corporate
governance in a firm.

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Literature Review
A shareholder is an individual, corporation or any other institution that invest its money in the
shares of a company, the shareholders are considered as the owner of an organisation, and
they benefit and loss based on the performance of the enterprise. As per Ayuson and
Argandona (2009), the directors are responsible towards shareholder, and they must
maximise the value of shareholders. Many theorists believe that the primary objective of a
company is to maximise the profits for its shareholders. However, many articles and
academic journal assert that modern corporations prefer to adopt a stakeholders strategy. The
shareholder theory has been widely challenged in previous few years; many experts believe
that solely focusing on profit maximisation is wrong and immoral. The concept of corporate
social responsibility is prominent in between modern companies; the CSR theory provides
that a company has moral duties towards its multiple stakeholders. Smith (2003) argued that
both stakeholder and shareholder theories are normative concepts that mean they contain a
provision regarding what corporation role ought to be. According to Cooper (2017), today’s
modern firms can expand their business in different companies and their actions considerably
affect various sections of society, therefore, implement stakeholder policy is an
oversimplification of the complex role of organisations.
Friedman (2007) argued that it is wrong to consider that a company has “social
responsibilities” towards the society, a firm is an artificial person and it has artificial
responsibilities. The primary role of a corporation is to satisfy their shareholders' needs
because they invest in the enterprise and face the risk of loss. The purpose of directors should
be clear; they should perform actions by complying with the common law to maximise the
value of shareholders. Friedman (2007) stated in his article that unless a company is
incorporated for a particular non-profit purpose, such as a hospital, welfare institute or
school, its primary focus should be profit maximisation. According to Fisch (2005), if
director implement the social responsibilities approach, then company’s primary focus shifted
from profit making to the welfare of society, which can be detrimental to the development of
an enterprise. The shareholders face major risk in an organisation because they invest their
capital in company’s stock. Therefore, the directors should only focus on enhancing the
shareholder value. As per Friedman (2007), the stakeholder's interest should be secondary in
a company because without fulfilling the benefit of the shareholder, the company cannot
satisfy its objectives.

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Friedman (2007) argued that the concept of corporation’s “social responsibility” is provided
by the trade unions and activist groups to justify the transaction of a company which will not
be otherwise benefited from its interest. Boatright (2006) provided that for achieving the
growth in business, it is necessary that the company fulfills the requirement of stakeholders,
but, he argued that it is not the duty of directors to create policies regarding the same. The
directors are an agent of shareholders, and their primary focus should be improving the value
of shareholders, the interest of other stakeholders should not be the concern of directors. If
the shareholders’ value increases in a company, the interest of other stakeholders fulfilled
through the market. According to Boatright (2006), the directors should not formulate
corporate policies for the stakeholders; they can achieve that by focusing on shareholders
interest. A different theory was given by Freeman, Harrison, and Wicks (2007); they
provided the importance of stakeholders in a company and its positive impact on the
company’s operations. The growth in corporations increased their impact on the society; the
companies have a moral duty to satisfy the interest of various sections of the community.
Freeman, Harrison, and Wicks (2007) stated that it is the responsibility of directors to ensure
that actions of the company are fulfilling the interest of various stakeholders. Effective
policies of corporate governance are necessary for a company to ensure satisfaction of their
stakeholders, and directors should formulate plans to ensure satisfaction of multiple
stakeholders. Many theorists have also provided different theories from shareholder and
stakeholder approach. Bainbridge (2005) presented a theory called ‘Director Primacy Model’
which provides that directors are responsible for the activities of corporate governance,
therefore, they should be in the center of a firm. To maximise shareholder value, directors
should be able to decide in a corporation without review from any other parties; the
shareholders should not have the power to review the decision of directors since it retrains
their power to operate a business efficiently. Another similar theory was provided by Million
(2010) called ‘Enlightened Shareholder Value’. The theory focus on improving the
shareholders’ worth by providing absolute power to the directors of a firm, the director’s
power is original, and it cannot be delegated to any other parties.
According to Parmar et al. (2010), the director’s best understand business, therefore, they
should be able to decide the relevancy of each shareholder and formulate policies according
to such relevancy. These theories did not popularise because there have several flaws, such as
the theory did not consider the interest of creditors or give them relevance. There is lack of
proper safety mechanism if directors decide to take unfair advantage of their powers and

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there is no method of measuring “good faith” of directors. As per Jensen (2002), it is not
beneficial and productive for a company to argue over the importance of shareholder and
stakeholders, both parties are depending upon the performance of an organisation which can
be achieved by implementing stakeholders’ approach. Stout (2013) argues that the directors
should focus on value maximisation of stakeholders and formulate policies achieve such
objectives. The role of modern corporations has increased due to the advancement of
technology, regulations, and governments. The directors should ascertain their moral duty
towards society and formulate corporate policies to achieve such objectives.
Advantage of Adopting and Broader View
Many theorists criticise the shareholder approach and enforce the implementation of
stakeholders approach in modern corporations and provide that without fulfillment of
stakeholder’s interest a company cannot achieve growth. As per Laplume, Sonpar, and Litz
(2008), a stakeholder includes individual, organization or any other institute that has a
financial interest in the operation of a firm or gets affected by the practices of the company.
The example of stakeholders includes employees, consumers, government, environment,
creditors, shareholders and many others. The stakeholders are categorised into three parts:
primary, secondary and territory. The primary stakeholder is an integral part of a company;
they have a financial interest in the performance of a firm and loss or gain based on the return
of an enterprise. The example of primary stakeholders’ includes consumers, employees,
shareholders, creditors, investors and many others.
The secondary stakeholders did not have any financial interest in business operations, but
they get influenced by the performance of a company, they are also called external
stakeholders. The secondary stakeholders include media, community, public and many
others. According to Sweeney and Coughlan (2008), the tertiary stakeholders’ neither have
any financial interest in a company, nor they get affected by its operations but their opinions
positively or adversely influence the company’s performance. The example of tertiary
stakeholders includes activist groups, government, environment and many others. A
significant part of society gets covered in primary and secondary stakeholders, which prove
that actions of a company influence a large section of society. Modern corporations are
focusing more on stakeholders’ interest due to the popularity of corporate social
responsibility provisions, the concept of a company being profit making machine is changing

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slowly in the market. The corporate social responsibility principles ensure that directors
formulate policies regarding the satisfaction of multiple stakeholders’ interest.
As per the study of Martin (2010), two variables cannot be satisfied at a single time that
means a company cannot meet consumer and shareholder interest at the same time. The
satisfaction of shareholders will hurdle in benefit of consumers and vice versa. Usually,
directors prefer to fulfill the interest of shareholders because it attracts more shareholders’
investment, but according to Martin (2010), that is a wrong approach. The dividend of
shareholders is provided after the reduction of statutory payments such as salaries, the interest
on loans and taxes. The shareholders focus on future profit of a company instead of present
value, for attracting a large number of shareholders the companies are required to sustain
their growth. As per Greenwood and Van Buren (2010), it is impossible for companies to
maintain their development for an indefinite period; therefore they should focus on improving
stakeholder’s value instead of enhancing shareholders worth. The improvement in
stakeholders’ value will allow the companies to attract a large number of investments from
the shareholders which will assist in sustaining the growth of the business.
Justice Theories
Manners (2008) stated that the normative ethics is related to the philosophical ethics which
focus on examine the moral and ethical practices. The normative ethics analyses the rightness
and wrongness of an ethical belief, it performs an empirical study into the view of peoples.
For example, if individual beliefs that conducting fraud is wrong that the normative ethics
evaluate that whether it is right or wrong to hold such an opinion by a person. The justices are
defined as “fairness” by Rawls (2009); he stated that justice is divided into two parts. The
first part provides that society should be strutted in a way to ensure that each section has
equal liberty; another party must not infringe the rights of a person. The second part prohibits
the discrimination between individuals in a society unless it is necessary to discriminate a
minority party to provide them benefits. Rawls (2009) also ensures that the person who
possesses power must not prohibit the opportunity of another party for gaining such strength.
According to Bowie (2017), the ‘Kantian View’ theory by given by Immanuel Kant which
focuses on the equal status of stakeholders’ in a company, the directors should ensure that
company is formulating necessary policies for the satisfaction of all stakeholders’. These
theories focus on director’s responsibility towards stakeholders and the requirement of better

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social responsibility policies in a company. The theories focus on the moral responsibility of
directors and the role of stakeholders’ in a company. Many theorists have provided opposite
views over the same matter, for example, Jeremy Bentham’s Utilitarian theory. As per
Renouard (2011), the Utilitarian theory provides an opposite view over the Kantian theory
which provides that instead of focusing on achieving stakeholders’ interest, the director
should perform their duties within the law. The maximisation of shareholders’ value assists in
satisfaction of the interest of other stakeholders; directors are not required to formulate
specific policies for different stakeholders. Numerous experts have criticised the Utilitarian
theory; they believed that this approach could not be applied to modern corporations since it
does not have any practical use.
According to Rawls (2009), by distributing the wealth more equally (not evenly) between
stakeholders’, a company can sustain their future development. If the company only focus on
improving shareholders’ value than the resources will only be provided to the shareholders,
and it creates a problem of discrimination. The discrimination between stakeholders’ reduces
the growth of a company because it reduces its reputation and business. By efficiently
implementing corporate governance principles, the directors can satisfy the interest of
stakeholders. As per Zakhem (2008), the directors have a duty of care toward multiple
stakeholders that means it is their responsibility to ensure that equal protection is given to
each stakeholder. The directors have a fiduciary duty towards the company which requires
them to perform their actions morally and in good faith of the corporation. Directors should
avoid the discrimination in an organization, and strict policies should be implemented to
prevent any mistreatment of stakeholder. Laczniak and Murphy (2012) stated that each
stakeholder is a crucial part of a corporate structure and directors are morally responsible
towards them; the corporate social responsibility principles ensure that directors analyse the
requirement of stakeholders and formulate policies to meet such requirements. The duty of
care must be fulfilled by the directors while performing their responsibilities of corporate
governance.
Theories of Corporate Governance
To ensure the fulfillment of their duty of care, the directors can implement various
approaches to corporate governance which provide proper achievement of stakeholder’s
interest. According to Lee (2008), in modern times, the principle of corporate social
responsibility is significantly popular between the corporations. The corporate social

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responsibility allows companies to incorporate policies of environmental and social welfare
into the business structure. The CSR policies are self-regulated by the enterprises and
directors construct such systems into corporation’s business structure. The CSR regulations
assist companies in complying with various national and international laws regarding moral,
ethical and legislative matters. Carroll (2008) stated that the CSR policies did not just focus
on compliance of statutory rules instead it emphasis on the social responsibilities of a
company towards the society. The CSR policy is benefited for international corporations
since they deal with different domestic and international regulations and it ensures that the
company fulfills each stakeholder's interest. Mele (2008) provided that by implementing an
efficient CSR model, a company can achieve various advantages such as positive reputation,
improved trading, international brand recognition, better financial performance, and
improved employees’ productivity. It also benefits enterprise in recruitment and retention
process since it attracts and retains talented employees, the procedure of accessing investment
also become more accessible for companies.
Bocken et al. (2016) provided that a company can adopt a 'circular economy' approach for
improvement of business operations; it benefits the company in various ways such as
reduction of wastage in raw material, saving of energy, and improved employees
productivity. The company can achieve that by implementing various methods such as
recycling, reuse of material, building long-lasting products, proper maintenance, and repair of
machinery. According to Porter et al. (2011), the ‘Creating shared value’ approach is another
theory which benefits directors into establishing a positive environment for the stakeholders.
The CSV policy creates a link between competitive strategy and CSR principles, it allows in
creating a healthy competitive environment in the industry. As per Banerjee (2008), the CSV
value creates equal opportunities for different stakeholders and develops each section of
society; it allows company into identifying and capitalise the financial and social
development in the industry. These strategies allow the companies to fulfill their moral duties
towards society and assist in the growth of the company. The role of modern corporations has
enhanced, and the directors are responsible towards multiple stakeholders, by implementing
these theories, the director can ensure the equal satisfaction of stakeholder’s interest in the
company which benefits the society as well.

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Conclusion and Recommendations
From the above observations, it can be concluded that the modern corporations have duties
towards different stakeholders’. The benefit of stakeholders can improve the growth of a
company, and it benefits various sections of society. Many theorists argued that stakeholders
approach is detrimental to the growth of a company since it shifts the focus from profit
maximisation. But, many studies have provided that stakeholder approach benefits enterprise
in several ways which sustain its development such as improved reputation, positive brand
recognition, and easy availability of investment. A company should adopt a broader view of
business structure because it benefits various parts of society and assists the enterprise in
fulfilling their social responsibilities. Various theories of justice also provide that directors
have a duty of care towards its stakeholders, and they should formulate policies to satisfy the
interest of stakeholders’. Directors can adopt many theories for the satisfaction of
stakeholders’ interest such as CSV, CSR, and circular economy. These approaches assist
modern corporations in fulfilling their social responsibilities and provide various benefits to
the section of society.
As per my recommendation, a company should adopt stakeholder approach rather than
shareholder primacy theory; it will assist in overall development of the firm and sustain
future growth of the business. Before implementing stakeholders’ approach, the directors
should analyse the number of stakeholders in the company and analyse their interest and
requirements. The corporate policies should be according to the interest of stakeholders; the
policies must equally cover the requirement of each stakeholder. Directors must ensure
proper implementation of policies in the corporations, and they have to monitor the
organisational environment constantly. The policies should be changed in case any external
or internal factors affect the interest of stakeholders’. By implementing this approach, a
company can fulfill its moral responsibility and assist in the development of society.

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