My paper for this course will discuss stakeholder theory and its impact on corpo
My paper for this course will discuss stakeholder theory and its impact on corporate valuation. I want to show that a business firm cannot have a full picture of its profitability if it only looks at ROI for shareholders. In contrast, stakeholder theory argues that a firm should create value for all its stakeholders, not just its shareholders (“About,” 2018). I would like to demonstrate ways in which a firm can quantify this value by expanding on what are traditionally considered chief measures of profitability, such as Return on Investment. A stakeholder is commonly defined as any party that has an interest in a company and can affect or be affected by its business (Fernando, 2023). I would like to suggest that a stakeholder should be specifically defined as a party that has an explicit financial interest in the continued profitability of the firm. By defining stakeholders in this way, their impact upon a firm’s valuation can be quantified and therefore analyzed.
I mentioned this in our Zoom meeting and assignment for last week, but I feel its worth reiterating here. If I have learned one concept in my studies in financial management, it is that a business’s purpose is to generate value. However, I feel that limiting this concept to “in the form of profit for shareholders,” while adequate in most cases, failed to capture the true essence of owning a business and its impact on society. For example, if a business has one shareholder (the owner), any value measured is only an indication of his personal income and investments. Hypothetically, if the owner ceases operations for his business–maybe he decides running a business is more headache than its worth–Then he is the only one financially impacted by that decision. Yet if his business plays an important role his community, or if his clients depend on his firm as a reliable source of materials or services, or if he had two or three employees working for him, suddenly his decision has farther-reaching consequences. This is just one example, but it highlights the issues at hand at even a local level. If the impact of this scenario could have been quantified and analyzed in terms of stakeholder valuation, it might have changed the business owner’s decision.
References
Fernando, J. (2023, March 7). What are stakeholders: Definition, types, and examples. Investopedia. https://www.investopedia.com/terms/s/stakeholder.asp
University of Virginia. (2018). About. Stakeholder Theory. http://stakeholdertheory.org/about/
