Where Does the Value of A Corporation Lie? A Literature Review

Abstract

This paper discusses the historical and theoretical perspectives of value in a corporation and the varying positions or views of prominent proponents and opponents of the shareholder and stakeholder theories to draw conclusions about where the value of a corporation lies.  The literature has revealed that the corporate world has evolved over the years.  The purpose and existence of corporations, coupled with the industrial revolution, have influenced the transformation of the corporate world.  At the center of the debate around corporate purpose and the existence of corporations are two theories: the shareholder and stakeholder theories.  Although literature recognises Edith Tilton Penrose's theory of the growth of the firm as one of early attempts to contribute towards stakeholder theory, the term "stakeholder" was first used in 1963 and the stakeholder theory was only coined in the early 1980s. However, it is interesting to learn from the literature that the initial corporations founded in the eighteenth century were anchored on serving the public interest, which aligns with the ideology advanced by the stakeholder theory. This suggests that, while the stakeholder theory entered the corporate world discourse much later, the philosophy embodied in it served as the foundation for the first corporation.  This implies that the value of the corporation then lied in the public interest.  However, the push for the requisite capital investment to finance innovative manufacturing initiatives that characterized the industrial revolution triggered a paradigm shift from the corporate business model centered on serving the public interest to the shareholder business model with the sole purpose of maximizing profits and shareholder value for its owners.  It is against this background that in 1970 Milton Friedman coined the "shareholder theory," advancing the argument that the purpose of a corporation is to maximize profit and shareholder value, provided this is done without committing fraud or deception.  The ongoing call for corporations to embrace the stakeholder theory – advocating for a business model that goes beyond corporations meeting their financial obligations – to taking into account the interests of all other stakeholders, seems to be the renaissance of the original corporate purpose.  The ongoing debate between the two theories is intense, with proponents and opponents of each theory defending their business model and dismissing the other.  Literature suggests some positive gains in the paradigm shift from the shareholder theory-driven business model to the stakeholder theory-driven business model. In the recent past, the debate got even more interesting when renowned corporate executives renounced the shareholder theory, followed by the most recent collective statement by CEOs of about 200 major US corporations embracing the stakeholder theory. However, the CEOs of top US corporations' collective embrace of the stakeholder theory does not imply a rejection of the shareholder-based business model. Notwithstanding all the intense debate and the seemingly shifting paradigm among some of the top corporate executives, the shareholder theory still reigns in the corporate world, and value still lies with the shareholders.