Multiple Stakeholders and Conflicts of Interest

In the modern corporation, stockholders hire managers to run the firm for them; these managers then borrow from banks and bondholders to finance the firm's operations.

Investors in financial markets respond to information about the firm revealed to them by the managers and firms have to operate in the context of a larger society. By focusing on maximizing stock price, corporate finance exposes itself to several risks. First, the managers who are hired to operate the firm for stockholders may have their own interests that deviate from those of stockholders. Second, stockholders can sometimes be made wealthier by decisions that transfer wealth from those who have lent money to the firm. Third, the information that investors respond to in financial markets may be misleading, incorrect or even fraudulent, and the market response may be out of proportion to the information. Finally, firms that focus on maximizing wealth may create significant costs for society that do not get reflected in the firm's bottom line.

These conflicts of interests are exacerbated further when we bring in two additional stakeholders in the firm. First, the employees of the firm may have little or no interest in stockholder wealth maximization and may have a much larger stake in improving wages, benefits and job security. In some cases, these interests may be in direct conflict with stockholder wealth maximization. Second, the customers of the business will probably prefer that products and services be priced lower to maximize their utility, but this again may conflict with what stockholders would prefer.

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