Do All Stakeholders Benefit From Profit Maximization?

Do All Stakeholders Benefit From Profit Maximization?

LG Blog Post 4 23 2018

Dealing with multiple stakeholders is a given for any organization, either operating in the private or public sector. Stakeholder management is a critical component to the successful delivery of any project, program or activity.

A stakeholder is any group or individual who can affect or is affected by the achievement of the organization’s objectives (Freeman, 1984)

Simply put, the main reason for any commercial organization’s existence is to generate profits for its shareholders (e.g. economic rents). This holds that the strategic aim of a business is to maximize the return of capital for its owners – the dominant stakeholders – who assume risks and deserve rewards as a consequence. However, it is important to consider not only the outcomes, but also the holistic ecosystem which contributes to generating these outcomes.

One key question relates to how success is (re)distributed or shared among the various stakeholders, and in that context, who benefits from profit maximization.

Do all stakeholders benefit from profit maximization?

Maximizing profits does not necessarily mean maximizing shareholders’ dividends in the short term, but possibly increasing the value of the organization, reinvesting into business development and growth – from which the owners / shareholders are likely to benefit in the long term (e.g. through share value increase as a way of measuring profit realization). Most successful commercial organizations include the notion of value maximization in their mission statement and are seeking further to achieving normal profits. Shareholders can influence the organization’s strategy by having profit maximization as a source of purpose; the stakeholder value perspective challenges the notion of profit.

Stakeholder vs shareholder theory

  • Stakeholder theory asserts that firms should focus on their impact upon a wide range of stakeholders and account for negative externalities arising from their pursuit of profits. Stakeholders can be categorized as external and internal, primary and secondary, those who must carry out the actions necessitated by the strategy and those who have a stake in the outcome.
  • Shareholder theory advocates that a well-run company that is making money is more likely to treat its employees well and contribute to the local community. It asserts that all stakeholders benefit if for-profit firms pursue a single objective of profit maximization. Shareholders are a key group of stakeholders – external short or long-term investors to the organizations or internal owner-employees.

Businesses have responsibility to satisfy multiple stakeholders in addition to seek profits. Making profits do not only concern maximization for shareholder-investors, neither be at the expense of other key influential stakeholders – this is in the interest of the organization itself. Some support that it must also be in the interest of the society, but this is difficult to generalize for all businesses. Some sort of Corporate Social Responsibility (CSR) – depending of the business – and a clear ethical approach should be defined to avoid externalities at the expense of the society.

In conclusion, the single-minded pursuit of any objective – whether profit, charitable purpose or protection of the general public’s well-being – will inevitably conflict with the objectives of another organization and/or stakeholder group. Therefore, it is impossible to answer the question “do all stakeholders benefit from profit maximization” in the affirmative. The reality is that the best an organization can do is satisfy as many stakeholders as possible most of the time, while pursuing its stated mission and purpose. In the real world of the 21st century, to do so is simply good for business.

What are your thoughts?

Reference:

  • Freeman RE (1984) Strategic Management: A Stakeholder Approach, p46, Boston, MA: Pitman. Latest edition
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