Corporate Finance Puzzle 1: Stockholder versus Stakeholder Wealth Maximization

A public company serves a variety of stakeholders, from suppliers of capital (stockholders and lenders/bondholders) to employees (managers, labor) to customers to society.

In modern corporate finance, both on the financial and legal realms, the traditional focus has been on maximizing stockholder wealth. That focus both puzzles and troubles observers, ranging from academia to politicians, who argue that this focus on creating stockholder wealth has left the other stakeholders unprotected. While there are some academics, primarily in law schools, who have been pushing for an alternative objective of maximizing stakeholder wealth, that movement seemed to get a shot in the arm from an unexpected source, the Business Roundtable, comprised of some of America's highest profile CEOs. On August 19, 2019, the Roundtable put out a press release signed by 180 CEOs that seemed to concede that companies should be focused on stakeholder wealth maximization, not just stockholders.


While the notion of stakeholder wealth seems broader and more designed to create companies that will do good for society, labor and their customers, while delivering shareholder wealth, I argued that while it sounds good, it is likely to do good in this post. My argument is a simple one. A company cannot have multiple objectives. It can focus on one group, and view the the other groups as constraints. I present alternative views of corporatism, from the cut throat corporatism that corporate critics often use as their strawman to constrained corporatism, where companies still focus on maximizing shareholder wealth, with constraints on fair wages for employees, competitive prices for their products and services and limits on social costs. It is true that these constraints have to imposed either by markets (the best case option) or by governments (where you risk bludgeon policies) or be internally imposed.

  1. Why are shareholders given primacy among the stakeholders, in conventional corporate finance and corporate law?
  2. What are the worst case outcomes for other stakeholders, from shareholder wealth maximization?
  3. What are the factors that can temper and prevent these worst case outcomes?
  4. Why or why isn't stakeholder wealth maximization the answer?
  5. If you were devising the perfect corporate model, in terms of delivering both economic vitality and social well being, what model would you use?