Within many for-profit organizations, there are two common models that drive the decisions of all the leaders within the organization. The two models are the shareholder-wealth maximization model and the stakeholder model. With each model, there are challenges and benefits. As a leader, it is important to understand both models so you can know how to best serve those you lead and your organization.
Shareholder-Wealth Maximization Model
In today’s business environment there is a strong culture of leaders that follow the shareholder-wealth maximization model. As stated on wiki answers, “The Shareholder-Wealth Maximization model (SWM) goal states that the objective of a firm’s management should be to maximize the present value of the expected future cash flows to equity owners (shareholders). Consider cash flows to be the same as profits. Hence, the value of a firm’s stock is equal to the present value of all expected future profits, discounted at the the shareholders required rate of return.”
With the shareholder-wealth maximization model, whether it is the CEO, mid-level manager, or the supervisor, all leaders are taught to focus on maximizing the shareholder wealth. With shareholder wealth as the driving force, leaders have foregone ethics, moral values, and any other set of standards they held for the purpose of increasing the profit within their company. Leaders within this framework have taken greater risks or made other decisions that either led to their personal downfall or the downfall of the company.
The shareholder-wealth maximization model has been, in many cases, the one and only model used for leadership for within for-profit organizations. It has been around for many years to where it has become very prominent.
Stakeholder Model
With the recent downfall of companies and leaders all over the world as a result of their drive to follow the shareholder-wealth maximization model, another model has been brought to light. It is the Stakeholder Model. In this model, leaders focus on all parties or stakeholders involved. The stakeholders are individuals and groups with a multitude of interests, expectations, and demands as to what organizations or businesses should provide to society. Within the stakeholder model, “The responsibilities of executives and managers include satisfying multiple stakeholder needs while responding to the interests of shareholders.” (Clarkson, 1991; Goodpaster, 1991)
Leaders within the stakeholder model have many more factors to consider when making their decisions, in addition to just maximizing shareholder wealth. They can’t just look at the needs of the shareholders and try to get the most profit, they must look for the overall good of everyone involved. The graphic below shows an example of a stakeholder map that could be used.
Conclusion
I first encountered these two models when I was in the MBA program. They have helped me to look at many more stakeholders that will be impacted from my decisions. I learned that even though it is very important to make decisions with the bottomline in mind; the bottomline can’t be the only consideration when making big decisions. In the current environment of constant scrutiny, leaders must consider many of the stakeholders that will be affected as a result of their choices. Even in an environment/system that follows a shareholder-wealth model, other stakeholders can’t be simply overlooked to make the most profit. When that happens, it is the start of the downfall of great companies.
What are your thoughts on the stakeholder and shareholder models? Have you worked within one framework and been impacted as a result? Please share your thoughts and comments in the comments section below!
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