Do Stakeholders Belong in Corporate Finance?

Abstract

Economists and legal scholars have discussed the proper role of a public corporation since at least the early part of the 20th century. The two major schools of thought that have emerged from this discourse are frequently characterized as shareholder primacy and stakeholder primacy, noting that shareholders are one of many stakeholders. Until recently, however, this debate rarely made it into the MBA classroom. If the corporate objective function was discussed at all, it was typically treated in a cursory manner in the early stages of a corporate finance course, with shareholder primacy receiving the lion's share of attention. As a result, the shareholder primacy model has become the de-facto theory underlying MBA curricula. Recent events such as the failure of corporate governance systems, dramatic shifts in technology and production trends, and increased attention on the environment, however, have renewed interest in this debate among practitioners and academics alike. Efforts to redirect the focus of curricula have emerged, though almost exclusively from disciplines other than finance, and corporate finance faculty are frequently identified as the source of inertia against change.