Shareholder theory

Shareholder theory is the view that the only duty of a corporation is to maximize the profits accruing to its shareholders. This is the traditional view of the purpose of a corporation, since many people buy shares in a company strictly in order to earn the maximum possible return on their funds. If a company were to do anything not associated with earning a profit, the shareholder would either attempt to remove the board of directors or would sell his shares and use the funds to buy shares in some other company that is more committed to earning a profit.

Under shareholder theory, the only reason management is working on behalf of shareholders is to deliver maximum returns to them, either in the form of dividends or an increased share price. Thus, managers have an ethical duty to the owners to generate significant value.

To take this concept one step further, a corporation should not engage in any type of philanthropy, since that is not its purpose. Instead, the corporation can deliver dividends to its shareholders, who then have the option to donate the money for philanthropic purposes, if they choose to do so. The only case in which a corporation should donate money is when the amount of the donation creates a benefit that is approximately equivalent to or greater than the amount of the donation.

When a corporation is owned by just a few shareholders, any attempts by management to engage in significant amounts of philanthropy can cause turmoil among the owners, if they are not all supportive of this alternative use of company earnings.

Related Courses

Behavioral Ethics
Ethical Frameworks in Accounting