Stockholder Value versus Stakeholder Value
One of the main arguments in favor of CSR and the stakeholder model is that it is consistent with stockholder value maximization. For instance, by anticipating and minimizing the potential conflicts between corporations and society, CSR plays a role in reducing the cost of conflicts. CSR may soften competition in product markets and lead to higher firm value, signal a firm’s product quality and improve reputation, and help to attract motivated employees.
Critics of stakeholder value maximization argue that CSR, and the stakeholder theory, have problems in terms of accountability and managerial incentivization. According to the stockholder value concept, managers are expected to invest in a project if its expected return exceeds the cost of capital. In the stakeholder value story, managers are asked to balance the interests of all stakeholders to the point that aggregate welfare is maximized. Still, the stakeholder theory does not define how to aggregate welfare and how to make the trade-off between stakeholders. If the social value of firms can be maximized, society will by definition benefit. However, the question is whether this goal is achievable and how economic efficiency and managerial incentives are affected by the maximization of stakeholder value (including social and environmental value).
Furthermore, CSR and the stakeholder model are also subject to Friedman’s (1962)2 arguments: Companies should only care about profits and, therefore, their stockholders, while governments deal with the provision of public goods and the existence of externalities. If CSR lowers firms’ profits due to compromises with stakeholders, firms should not implement CSR strategies as it is more efficient if they charge lower prices and allow consumers to make their own charitable contributions based on personal social and ethical values. This critique also has important implications for SRI: If SRI underperforms conventional portfolios, it would be more efficient for SRI investors to invest in better-performing conventional funds and use part of the returns to comply with their personal convictions by donating money to good causes.