Question

According to Joseph Heath, some understand shareholder theory as “more realistic,” treating firms like self-interested individual market actors? What major issue(s)does this understanding miss? Why is this mistake important?

Answer 1

This understanding (shareholder theory) allows us to believe that the role of a business is just to cater to the interests of the shareholder and that is the primary value that should drive the business. Although, this is true to some extent, what this theory/view fails to understand is that the business is operating in an external environment which affects and influences the environment that the company works in and therefore, since there are a cause and effect at a place here. Such views cannot be used in isolation of the larger picture. As a business, it is important to have a driving value whether it is shareholders, stakeholder, profit, economic stability, the benefit of humanity etc. A goal essentially allows a company to create a direction without which they cannot survive. Yet, choosing one point of center limits our perception of the larger picture and all the external factors that come to play. This theory also states that unethical conducts in the view of the greater good of the shareholders do not present a challenge to businesses which is debatable. A business needs to be able to sustain itself but also needs to be able to handle the situations which arise due to the way they conduct a business and also, need to be able to sustain the business harmoniously and not just think about shareholder value.

If you think this answer has helped you, help me by giving a positive feedback.