ABSTRACT
https://s3-euw1-ap-pe-df-pch-content-public-p.s3.eu-west-1.amazonaws.com/9780203850626/2d411f73-7a33-4cbd-abe0-e61b9c5a5de6/content/inline_1_B.tif" xmlns:xlink="https://www.w3.org/1999/xlink"/> There are two competing theories about the purpose of the modern business firm. Each provides a framework for evaluating executive compensation policies, corporate governance procedures, and the economic and social performance of business. The first, shareholder theory, emanates from an economic perspective, focusing on the firm's purpose of creating wealth for its owners while minimizing both the importance of the firm's interaction with its other constituencies and its role in society. The second, stakeholder theory, broadens the first perspective, recognizing the importance of wealth creation as well as the firm's relationships with its multiple constituent groups—shareholders, creditors, employees, customers, suppliers, regulators, and local communities—and impact on society at large. Below, I discuss the foundations of these two theories, provide an overview of some recent developments within each theory, and conclude with some suggestions about how shareholder and stakeholder principles might be used to construct more effective frameworks for thinking about the role of the modern business firm.
