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Shareholder model of the corporation
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See also: Stakeholder model of the corporation (stakeholder capitalism)
The shareholder model of the corporation is a term referring to a theory of corporate governance that argues the people who own shares of a corporation's stocks, shareholders, should own and manage the corporation with a view to maximizing the financial returns on their investments.[1]
The shareholder model of the corporation "regards the corporation as a legal instrument for shareholders to maximise [sic] their own interests—investment returns."[1] Scholars often contrast the shareholder model with the stakeholder model of the corporation developed by scholar R. Edward Freeman, according to which the firm should serve the wider interests of stakeholders rather than those of shareholders only.[1] Freeman's definition of stakeholders included shareholders, employees, creditors, suppliers, customers, and the local community.[1]
According to a 2004 Corporate Governance article, the shareholder model of the corporation developed along the following timeline:[1]
- 15th and 16th centuries: "Underlying the notion of private ownership is the ideology of individualism which emerged in England in the 15th and 16th centuries as a result of the emerging mercantilism and the Reformation and Renaissance which gradually broke from the old feudal society and required a new definition of social order and regulation. Individualism initially emphasised [sic] such conceptions as individual separation (with self-confidence, self-awareness and self-help), freedom (free mobility, free exchange and free competition) and autonomy (private contract, self-determination and self-regulation)”[1]
- 17th, 18th, and 19th centuries: "With the development of the capitalist economy during the 17th, 18th and 19th centuries, when incorporation began to emerge in England at first as a chartered form for overseas trading (such as the East India Company in 1600) and subsequently as a legislated form as a mechanism for raising capital and business expansion, the individualist ideology was inherited by corporate law theory in interpreting the nature of incorporation. It was assumed that the right to incorporate is inherent in the right to own property and write contracts, and that the corporation is a legal extension of its owners – shareholders. The inherent property rights theory also insisted that although a company is regarded as a legal person separate from its owners, the nature of shareholders as the company’s owners never changes and the company is legally obliged to serve the interest of its shareholders (as the corporate members). Corporate property should be treated as a private association which demands the minimum of government regulation and interference."[1]
- 19th century: During debates over corporate personhood in the 19th century, one side of the debate held that “the corporation as a legal group is simply created by the state and is no more than a private association of shareholders. The new form of corporate property is the aggregation of individual property rights under a collective name, united by contract and protected by company law. Since shareholders are the owners of the corporation, the corporation has legitimate obligations and the managers have a fiduciary duty to act in the interest of shareholders.”[1]
- 20th century: Scholars like Milton Friedman argued that "the function of business in a society is to make profits in a free market for shareholders, which should not be confused with other social functions performed by governments, institutions and charities. The request for social responsibility of business is harmful to the foundations of a free society with a free-enterprise and private-property system. Thus, for Friedman, the only social responsibility of business is to increase its profits."[1]
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