Wednesday, 20 December 2017 08:37

Corporate Governance Featured

Written by
Rate this item
(1 Vote)


            The most contentious issue in the field of corporate governance is whether firms owe greater responsibility to shareholders who invest their money in the firm or to stakeholders who are affected by the activity of the firm. This paper examines these two corporate governance models. Specifically, the paper examines alternative goals for shareholder maximization; countries that have different goals from those pursued by U.S. firms, and differences between stakeholder-focused and shareholder-focused goals.

Alternative Goals for Shareholder Wealth Maximization

Adams (2008) also argues that organization can have alternative goals such as growth and sales maximization.  The shareholders’ wealth maximization theory assumes that shareholders are only interested in maximizing their wealth hence the objective of businesses is to maximize profits. However, Adams (2008) point out that, in many organizations, the management team controls the business and not the shareholders. These managers have little interest in maximizing profits. The managers are mainly interested in status, prestige, power, rewards and independence. Consequently, these managers seek to maximize sales and growth while making sufficient level of profit so as to keep shareholders satisfied. The stakeholder theory of corporate governance also proposed alternative goals to shareholder maximization. The stakeholder theory of corporate governance suggests that corporations should go beyond the goal of maximizing shareholders returns and consider other stakeholder groups such as employees, local communities and suppliers (Nwanji & Howell, 2011). This theory suggests that the goal of corporations should be to manage the well-being and interest of all stakeholders. Therefore, the goal of corporations are as diverse as delivering good pay packages, job security, maximizing government revenue, maximizing returns to suppliers, environmental protection, investment in local communities and many others.    

The executive power model suggests that the goal of organizations is to maximize corporate wealth rather than shareholders wealth ((Nwanji & Howell, 2011). The resource dependency theory suggests that the goal of organizations is to control its environment so as to reduce resource dependency. According to this theory, organizations tend to create partnerships with suppliers, local communities, government and other organizations in order to control their environment and reduce dependency (Hillman, Withers & Collins, 2009). Uhl-Bien (2006) proposes a relation-based approach of viewing organizational life. The relationship-based perspective views the organization outcomes as products of the interaction between various stakeholders including employees, customers, suppliers, local communities, the government and others. Employees contribute to the bottom line of the company by supplying skills, knowledge, time and effort. Suppliers contribute profits by supplying inputs while government contributes to the profitability of the firm by providing security and level playing field for the organization. Therefore, a given organization is equally responsible for promoting the wellbeing of all these stakeholders.  

Countries with Goals that Differ from the United States

            Shareholder wealth maximization is an Anglo-American concept. There are countries that are home to firms whose goals differ from the shareholder maximization goal. Japan and Germany are models of countries where firms have different goals from those of United States’ firm (Allen & Carletti, 2009). Firms in Germany and Japan utilize the stakeholders’ maximization model of corporate governance. This model of corporate governance seeks to maximize the wellbeing of the entire society rather than maximize the wellbeing of individual shareholders. In these countries, stakeholders are actively involved in the management of corporations by including their representatives in companies’ boards. In Germany, shareholders and employees have equal slots in the companies’ supervisory boards (Allen & Carletti, 2009). Firms in Japan and Germany have vast boards that incorporate all the major stakeholders.

Stakeholder Focus Goals vs. Shareholder Focus Goals

            There are significant differences between shareholder-focused goals and stakeholders focused goals. Shareholder-focused companies seek to make more profits, grow the company at a fast rate, pay large amounts of dividend and increase the value of the firm in order to maximize the wealth of shareholders. Conversely, stakeholder-focused company seek to act in a way that is responsible towards customers, the environment, local communities, government, suppliers, shareholders and other parties who are affected by the organization. The goal of stakeholder and shareholder maximization can merge in situation where maximization of shareholders wealth is dependent on the satisfaction of other stakeholders. In many cases, companies make high profits when they develop good relationships with suppliers, employees, local communities and governments (Allen & Carletti, 2009).

            There are problems associated with both the stakeholder and shareholder model of corporate governance.  The shareholder wealth maximization model is often constrained by the agency problem. Agency problem arises when the management of companies acts in their interest rather than the interest of shareholders (Rappaport, 2006). This situation often occurs because shareholders have less power, knowledge and information than managers. The stakeholders’ model is constrained by the challenge of balancing between the interests of stakeholders. In most cases, firms encounter stakeholders who have competing interest. For instance, employees may want an increase in salary while investors want increased dividends. Increasing employees’ salary compromises shareholders’ interest because salary increase costs hence reduce dividends. Similarly, customers may want a reduction in prices while suppliers may want high prices for their inputs. It becomes very difficult to balance these competing interests.


            The shareholder model of corporate governance suggests that the sole responsibility of firms is to maximize returns for shareholders who invested their funds in the company. Conversely, the stakeholder model of corporate governance suggests that corporations have the responsibility of maximizing the wellbeing of all stakeholders. The shareholder wealth maximization model is mainly practiced in the U.S. and other nations that are heavily influenced by the Anglo-American culture. The stakeholder maximization model is widely practiced in Germany and Japan. The shareholder wealth maximization suffers from agency problems while the stakeholder maximization model is affected by the problem of harmonizing the interests of shareholders.


Uhl-Bien, M. (2006). Relational Leadership Theory: Examining the Social Processes of Organizing and Leadership. The Leadership Quarterly. 17: 654—676

Adams, S. (2008). Fundamentals of Business Economics. Financial Management: 46- 48

Nwanji, T. & Howell, K. (2011). The Stakeholder Theory in the Modern Business Environment. Journal of Applied Institutional Governance. 1 (1): 1-12

Hillman, A. Withers, M. & Collins, B. (2009). Resource Dependence Theory. Journal of Management. 35 (6): 1404- 1427

Allen, F. & Carletti, E. (2009). Stakeholder Capitalism, Corporate Governance and Firm Value. Retrieved from

Rappaport, A. (2006). Ways to Create Shareholder Value. Harvard Business Review. 66- 77

 Janet Peter is the Managing Director of MeldaResearch.Com a globally competitive custom writing service which is the premiere provider of Essay Writing Services, Research Paper Writing Services at Term Paper Writing Services at very affordable cost. For 9 years, she has helped a number of students in different academic subjects.

Read 77 times Last modified on Wednesday, 20 December 2017 08:39

Dr. Janet Richard is Author of this paper and is associated with ModernGator.Com which is a global Custom Essay Writing and Term Paper Writing Company. If you would like help in Research Papers and Term Paper Help you can visit our website. 

You can place an order similar to this with us. You are assured of an authentic custom paper delivered within the given deadline besides our 24/7 customer support all through. Visit
More in this category: « Leadership Human Service Models »
2014 Corporate Governance - ResearchWriting.Education .
Powered by Joomla 1.7 Templates