Shareholderism versus Stakeholderism: Which Model Best Legitimates Corporate Power?

Corporate Power Is No Longer Self-Justifying

Big companies have a lot of power these days. They affect how people do their jobs and what they buy. They even influence how cities are built and how we use resources. The decisions they make can have an impact on people's lives, just like the government does. Now that companies have so much power, people expect them to use it in a good way and be honest about what they are doing. Corporate power is a deal, and companies need to be responsible with it.

For a time things were simple. If a company made money, followed the rules, and paid its taxes, people did not usually question its right to operate. However, this way of thinking is no longer good enough. Making money and following the law are still important. They do not necessarily make a company legitimate. These days people want to know more than if a company is creating value. They want to know how the company is creating value and who is affected by its actions.

This shift is being driven by heightened public scrutiny, more assertive regulators, and rising expectations from employees, customers, and investors alike. Corporate decisions are judged in real time, and trust can erode quickly when actions appear disconnected from broader social realities. Boards, in particular, are finding that legitimacy is no longer assumed; it must be continuously earned.

Corporate power finds legitimacy in balance between shareholder returns and stakeholder responsibility. ⚖️

Legitimacy Beyond Legal Permission

Corporate governance goes beyond following rules, and regulations. The law gives companies the right to operate, but it does not guarantee public acceptance. A company may comply fully with legal requirements, and still face resistance if its actions are viewed as unfair or irresponsible. Legitimacy depends on how people judge corporate behaviour, not just on legal approval.

Why Public Trust Matters

People closely observe how companies act. They assess decisions, outcomes,, and behaviour to decide whether a company deserves trust. Corporate governance plays a key role in shaping this perception. Companies must understand what society expects from them, and ensure their actions align with those expectations. When expectations are ignored, trust can erode, reputations can suffer,, and opposition can grow.

The Three Foundations of Corporate Legitimacy

Corporate legitimacy rests on three interconnected foundations. Each is necessary, but none is sufficient on its own.

Legal Authority

Laws, and regulations grant companies the formal right to exist, and conduct business. This provides a basic level of permission, but not full legitimacy.

Social Acceptance

Employees, customers, investors,, and communities must believe that a company’s activities are acceptable. Their collective judgment influences whether a company is supported or challenged.

Moral Authority

Legitimacy is strengthened when corporate power is used responsibly. Ethical conduct, and fairness determine whether authority is respected or questioned.

If any one of these foundations weakens, overall legitimacy can be compromised—even when the others appear strong.

Core Logic of Shareholderism

At the heart of shareholderism is a basic idea that is also very strong:

Shareholders as capital providers, and risk-bearers

The people who own shares in a company, the shareholders, give the company the money it needs to operate. When the company tries something, and it does not work out, the shareholders are the ones who have to deal with the problems that come with it. This means they have a say in what happens to the money the company makes because they are the main ones who get the money when everything goes well; the shareholders are the primary claimants on the money the company makes, the corporate returns that belong to the shareholders.

Directors’ fiduciary duties

The people in charge of a company, whom we call directors, have a job. They are supposed to make sure the company is run in a way that's good for the people who own the company, which we call shareholders. This means the directors have to be responsible, and make decisions that are fair. It is like a promise that the directors make to the owners of the company. This promise is called a responsibility. It helps to make sure that the people who own the company, and the people who are in charge of the company are working together, and doing what is best for the company. 

Profit maximisation as the organising principle

People thought of profit as something to aim for, not just something that happens. It gave them a way to see how well they were doing, and to make good decisions about what to do next. Profit was, like a target that they were trying to hit. It helped them figure out what they needed to do to get there.

3.1 Why Shareholderism Was Able To Work In The Past

Shareholderism was able to work for a time.

The idea of shareholderism is that companies should focus on making money for the shareholders.

This idea of shareholderism worked because people who owned the companies wanted to make money.

The people who owned the companies, the shareholders, were happy when the companies made money.

So shareholderism was a way for companies to make money for the shareholders.

Clear accountability

Company boards knew who they had to answer to, and the shareholders had clear ways to either reward or discipline the performance of the company boards. 

Capital efficiency

Markets put money into companies that used their resources in a way. This helped these companies come up with ideas, and get bigger.

Market discipline

Companies that are not managed well have to deal with the possibility of being taken over by companies or having their money taken away. 

Predictable governance structures

The roles were pretty steady. So were the responsibilities, and the things that measured success. This meant that the board could keep an eye on things. 

4. The Limits of Shareholderism in Today’s Economy

Short-Termism, and Incentive Distortion

The big problem with shareholderism is that it makes companies think about what they can get now. Shareholderism does this by making companies focus on short term goals. This is an issue, with shareholderism because it can hurt the company in the long run. Shareholderism is supposed to help companies. It often does the opposite.

The way we measure how well a company is doing is often connected to how money it makes each quarter, and what people think it should make. This can lead to executives getting rewards for making money now. It can also stop them from putting money into things that are important for the future like coming up with new ideas making sure employees have the skills they need, and dealing with big risks that could hurt the company later. 

A Growing Gap Between Impact and Accountability

Big companies, like these, have a lot of power that goes way beyond the people who own shares in them. These companies have ian nfluence that affects people, not just the shareholders of these companies.

These companies shape the markets, and the places where people work. They also affect what happens in our communities. When the only people who get a say are the shareholders that is a problem. 

Public Distrust, and Reputational Fragility

People do not trust companies as much as they used to. Now people think that big companies like Google or Microsoft or Apple have to do the thing or people will lose faith in these big companies. Public confidence, in companies has become more conditional.

The way a company does financially is not the thing that matters anymore. A companys good name, which it took a time to build can be damaged very quickly if people think the company is only doing what it has to do by law, and not doing what is right for society. 

5. Stakeholderism: A Broader Claim to Legitimacy

5.1 Core Principles of Stakeholderism

Corporations as Social Institutions

Stakeholderism starts with the idea that companies do not work alone. They are part of the economy. They are also part of the community, and the environment. So people think companies are legitimate not just because they make money but because of how they use their power in a responsible way. Stakeholderism is about how companies operate in the world, and that includes being responsible to the community, and the environment not, to their finances. 

Multiple Contributors to Value Creation

Value creation in companies these days is not about money. The people who work for the company the people who supply things to the company the customers, and the communities around them all bring in their ideas, trust, and help keep everything stable, and going. This idea of working with all these groups is important because it says that a company will do well in the long run if it treats everyone fairly, and has good relationships with all of them.

Directors as Stewards, Not Just Agents

When we think about the people in charge of a company, we should not see them as working for one group of people. Instead, the directors should be seen as the people who take care of the company as a whole. The directors have to do this, especially when there are different opinions, and big risks involved. The company is like a ship, and the directors are the people who have to steer it safely. The directors of the company have a responsibility to be the stewards of the company.

So why is stakeholderism becoming so popular these days? Stakeholderism is gaining traction because people are starting to realise that businesses have an impact on the community, and the environment. 

Systemic Risks and Interconnected Exposure

Climate risk, and inequality, and supply chain fragility have shown us that the decisions companies make can have effects on everything.

These problems are not simple to deal with by looking at money.

Reputational Visibility and Transparency

Companies are now more visible than because of digital communication, and the way they have to tell people about what they are doing. The reputation of a company is shaped all the time not sometimes.

Stakeholderism is a way of dealing with this situation. It makes sure that the values a company says it believes in are the same as the decisions it makes, and what people in society expect from the company. 

6. The Stakeholderism Dilemma: Power Without Clear Accountability?

The idea of stakeholderism gives companies a reason to be in charge but it also creates some problems with how companies are run that we cannot ignore. For the people in charge of companies the main issue is not what they want to do. Rather how they will be held responsible for their actions. 

The “Answerable to Everyone” Problem

People often say that one of the problems with stakeholderism is that it can be hard to figure out who is responsible for what. This is because stakeholderism involves a lot of groups, and individuals, and it can be tough to hold any one person or group accountable when things go wrong. The main issue here is the risk of diffuse accountability, which is a major concern for people who are sceptical of stakeholderism. Stakeholderism is a concept that gets criticised a lot, and the risk of diffuse accountability is one of the reasons why. 

Measurement, and Prioritisation Challenges

Measuring the outcomes that matter to stakeholders is a lot harder than measuring how well a company is doing financially. Stakeholder outcomes are really tough to figure out because they can be very different from one stakeholder to another. It is also hard to measure the outcomes of stakeholders because they are not always easy to see. The outcomes of stakeholders, like people who work for the company or people who buy things from the company, can be very important.

The Risk of Symbolic or Performative Governance

When people who have a stake, in something expect more companies feel like they need to show they are doing something. They do this by making a show rather than actually doing something that matters. The stakeholder expectations are getting bigger. The temptation to just make a show is getting bigger too instead of really doing something with substance like the stakeholders expect from the company, and its stakeholder expectations. Companies say they want to do the thing with their purpose statements sustainability reports, and public commitments.

Vagueness in Corporate Purpose

There is another problem, with companies having goals that are too general, and not clear. The problem is that these corporate purposes are often too broad, and ambiguous. This means that the corporate purposes are not specific enough, and can be understood in different ways.

When companies try to make everyone happy, their goals can be really unclear. If these goals do not clearly connect to the company strategy, the amount of risk the company is willing to take, and how the company spends its money, then they do not really help the people in charge make decisions. 

7. How Boards Actually Experience This Tension

The tension between shareholder expectations, and stakeholder expectations is something that people do not just talk about in terms when they are, in board meetings. People really feel the tension of shareholder expectations, and stakeholder expectations when they have to make decisions. These decisions require them to choose between shareholder expectations, and stakeholder expectations. 

7.1 Strategic Trade-Offs in Board Decision-Making

Cost Versus Capability

Boards often have to make decisions about what to do. They have to choose between saving money, and building things that will help the company in the future. The company needs to spend money on its people, and systems, and make sure everything runs smoothly. This can mean the company does not make much money right now. If the company does not do these things, it can become weaker, and face more problems over time. This is because the company needs people, systems, and smooth operations to stay competitive, and avoid risks. Boards have to think about this when they make decisions about the company, and its people, systems, and resilience.

Speed Versus Responsibility

Market dynamics often reward companies that do things fast.  When companies make decisions too quickly without thinking about how they will affect the way they operate, the people around them or the rules they have to follow, it can damage the trust people have in them, and cause problems later on. The people in charge, like the boards of these companies, have to find a balance between making decisions, and taking the time to do things properly. Market dynamics are important to consider when making these decisions because market dynamics can change quickly, and affect the companies in many ways.

Shareholder Returns Versus Social Impact

When we think about dividend policies we have to consider how they affect people. The same thing is true for restructuring decisions, and supply-chain strategies. These things can have effects on money but they also have social consequences.

The people in charge of the boards have to think carefully about all of these things. They know that if they make a choice that's good for one thing, it can hurt other things. This is because the choices they make about dividend policies, and other things can affect how legitimate they seem to people.

7.2 Crisis Situations as Legitimacy Stress Tests

When we are going through times, the problems that were already there become really clear. These tough times make us see the tensions that were already present in a strong way. Times of crisis make the tensions very obvious.

When things go wrong with the company, people who have an interest in the company do not just look at what happens in the end. They also look at how the company behaves during failures, regulatory breaches or external shocks. The company being open, the company being fair. The company responding to people often matters just as much as the company making money again. 

Stakeholder Trust as Strategic Capital

Trust is something that you can not see or touch. It is very important. Over time trust becomes a valuable thing that people need. Trust is something that people must have in order to work together, and rely on each other.

Companies that people trust, like their employees, and the community, can handle times better. When things get bad, the trust that these companies have built up can help them in a lot of ways.

9. What Will Legitimate Corporate Power in the Next Decade?

Clarity of Purpose: Making Trade-Offs Explicit

The purpose of something will always be important. Only when it gives us a clear direction to follow, not when it is just a vague idea. We need the purpose to tell us what to do not just be a concept that's hard to understand. The purpose is what guides us. It should be something that helps us make decisions, not something that confuses us.

Boards will have to explain what the organisation is about. They will have to say how they make decisions when there are competing priorities. Organisation leaders will have to think about how they balance things like growth, and risk returns, and resilience, efficiency, and responsibility.

Consistency of Conduct: Aligning Decisions with Stated Values

People will think something is legitimate if the people in charge do things over, and over again. Legitimacy is something that people will look at when they see how someone behaves for a time. The way someone acts will show if they are legitimate or not. Legitimacy will be judged on how someone does things over time.

People who have a stake in something will look at whether the big decisions, the way money is spent, and how problems are handled match what they say they will do. 

Governance Capability: Equipping Boards for Complexity

When people expect more, they also want boards to do more. Boards have to deal with a lot of demands. The demands on boards are really increasing as expectations get bigger.

The legitimacy of a company will depend on the director's ability to oversee risks that are all connected to each other. The directors need to understand what drives the value of the company beyond the money. They also need to be able to challenge the management

To do this the directors will need to keep learning all the time. They will need to have people with areas of expertise. 

Legitimacy as an Ongoing Obligation

In ten years people will probably not assume that companies have a lot of power. The power of companies will likely be questioned. Corporate power is something that people will think about carefully. Corporate power will not be taken for granted.

Being legitimate is something that you have to keep working for. You do this by making decisions that are clear to everyone, and by being responsible for what you do. People in charge have to show that they are in control all the time.

10. Shareholderism vs Stakeholderism: The Real Answer

Reframing the Debate

The divide between shareholders, and stakeholders is usually seen as a simple decision. In real life boards have to deal with a lot of complicated issues.

The real question is not about who corporations should care about – the shareholders or the people affected by their actions. 

Why Stakeholder-Aware Governance Matters

When we talk about governance, it is really important that it takes into account how the people involved are affected. This type of governance provides a basis for being seen as legitimate. Good governance is about considering the impact on stakeholders, which makes it more stable, and widely accepted. Governance that actually cares about stakeholder impact is the key to a foundation.

Profitability: Essential, But No Longer Sufficient

Money matters are really important. You cannot ignore them. Financial performance is something that you have to get right; it is not something that you can compromise on. Financial performance is a must. 

11. Conclusion: The Boardroom as the New Legitimacy Frontier

Corporate Power as a Privilege

Having the power to control markets, decide how money is spent, and affect people's lives is not something that people are automatically allowed to do. It is a privilege that is given to them under certain conditions. By the law, by the people who invest money, and by the community as a whole. 

Boards as Custodians of Trust

Boards are right in the middle of this task. They watch over things. Make sure people are doing what they are supposed to do. Boards also have to make decisions and be accountable for what they do. This way they take care of the trust that people have put in them and make sure that power is used in a way.

Legitimacy as a Renewable Mandate

Legitimacy is not something that you get. Then you are done with it. Legitimacy has to be earned over and over again. You have to do the thing all the time, make decisions that are clear and easy to understand, and make sure that the people in charge of governance are honest and trustworthy. This is how you keep legitimacy: by being consistent and fair in the way you do things and by making sure that legitimacy of governance is always maintained through conduct and transparent decision-making, which is what legitimacy is all about, and that is why legitimacy of governance is so important. Our Directors’ Institute - World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out efficiently, helping you make a significant contribution to the board and raise corporate governance standards within the organisation.

References: https://bclawreview.bc.edu/articles/3/files/63886129be6f6.pdf