Exam 1: Introduction to Business Ethics

Correct Answer:

Answered by Examlex AI Copilot

The stockholder theory of business, also known as shareholder theory, is a perspective that holds that the primary goal of a business is to maximize shareholder wealth. This theory suggests that a company's main responsibility is to its shareholders, who have invested their money in the company and therefore have a financial stake in its success.

According to the stockholder theory, businesses should focus on generating profits and increasing the value of their stock, as this will ultimately benefit the shareholders. This perspective is often associated with the idea of "shareholder primacy," which asserts that the interests of shareholders should take precedence over those of other stakeholders, such as employees, customers, and the broader community.

Proponents of the stockholder theory argue that by prioritizing the interests of shareholders, businesses can create value for society as a whole by driving economic growth, creating jobs, and fostering innovation. They also contend that by aligning the interests of managers with those of shareholders through mechanisms such as stock-based compensation, businesses can ensure that decision-making is focused on maximizing shareholder value.

Critics of the stockholder theory, however, argue that it can lead to short-term thinking and a narrow focus on financial metrics at the expense of other important considerations, such as environmental sustainability, social responsibility, and the well-being of employees and communities. They advocate for a more balanced approach that takes into account the interests of all stakeholders, often referred to as the stakeholder theory of business.

In summary, the stockholder theory of business emphasizes the importance of maximizing shareholder wealth as the primary goal of a business. While this perspective has its proponents, it is also subject to criticism for its potential to overlook the broader impact of business decisions on other stakeholders and society as a whole.