Stakeholder model versus shareholder model

A stakeholder is any individual or group affected by, or with an interest in, a business (1) — such as employees, customers, suppliers, the local community and shareholders (1).

Cutting costs often benefits one group at another's expense (Knowledge 1). For example, cutting costs by lowering wages or reducing staff raises profits for shareholders but harms employees (Application 2). This creates a conflict: shareholders gain higher dividends while workers face lower pay or job losses, which can cause disputes, low morale and reputational damage for the firm (Analysis 1).

Switching to cheaper overseas suppliers lowers GreenGrocer's cost of goods, benefiting shareholders through higher margins, but it harms its existing local suppliers who lose the contracts (Knowledge + Application). This pits owners' returns against suppliers' livelihoods: dropped local farmers face lost income, and GreenGrocer's supplier relationships and local reputation suffer (Analysis).

The switch also creates a conflict with customers and the community who value locally-sourced produce (Knowledge + Application). Shoppers who chose GreenGrocer for its local, fresh sourcing may feel misled if shelves fill with overseas produce, and the community loses the support of a local buyer → falling footfall and goodwill as the firm's cost-driven decision clashes with customers' and the community's values (Analysis).

Closing the factory would benefit some stakeholders. Shareholders would gain from lower costs and higher profits, as DriveCo removes an inefficient plant with poor capacity utilisation and high unit production costs — supporting dividends and the share price. Remaining, more efficient plants could absorb production more cheaply.

However, the decision seriously harms other stakeholders. The factory's assembly-line workers lose their jobs, and the local community loses a major employer, damaging the local economy and DriveCo's reputation as a responsible employer. Suppliers to that plant lose orders, and customers could face disruption if output falls during the transition. There is a clear conflict between shareholders' returns and workers'/community's interests.

The overall impact therefore depends on how DriveCo manages the closure and the weight it gives each group. Judged purely on the shareholder model, closing an inefficient plant is rational and protects long-term competitiveness in a low-margin car market. But the human and reputational costs to workers and the community are severe, and mishandling them (no redundancy support, no consultation) could trigger disputes and lasting brand damage that ultimately hurt shareholders too. So while the closure likely benefits DriveCo financially and may be necessary for competitiveness, its net impact depends on whether DriveCo cushions the blow to affected stakeholders — meaning the decision is defensible on efficiency grounds but should be handled to limit the damage to workers, community and reputation.

As a growing restaurant chain, FreshFare depends heavily on staff and customers, so the choice between a shareholder and stakeholder approach shapes its whole model.

The case for a shareholder approach. Focusing on maximising owner returns would give FreshFare cost discipline and a clear profit focus as it expands — tightly controlling food costs, labour rotas and site overheads to fund rapid rollout and reward investors. For a chain needing capital to open new outlets, keeping investors happy eases access to finance.

The case for a stakeholder approach. However, a restaurant chain is labour-intensive and service-driven: its success rests on motivated staff delivering good service at every customer touchpoint, and on a reputation customers trust. A stakeholder approach — treating waiting and kitchen staff well, sourcing responsibly, caring about the community — would lift staff morale and retention (cutting costly turnover and training) and build customer loyalty and repeat custom. In hospitality, unhappy staff quickly mean poor service and lost diners.

Judgement. On balance, FreshFare should lean towards a stakeholder approach, because in a service-based, labour-intensive business its performance depends directly on motivated staff and loyal customers — treating them well is not just ethical but commercially essential, and pure short-term cost-cutting would risk poor service, high turnover and reputational damage that harm profits anyway. However, this depends on FreshFare still maintaining enough financial discipline to fund its growth and satisfy the investors it needs. The best route is a stakeholder-oriented approach that also delivers the returns to fund expansion — recognising that, for FreshFare, looking after staff and customers is the very thing that generates long-term shareholder value. So the two approaches largely converge, but the emphasis for a service chain should be on stakeholders.

As a listed manufacturer, Meridian faces genuine pressure to reward shareholders, but prioritising them over wider stakeholders carries long-term risks — so whether it should depends on its time horizon, its market, and whether the two interests really conflict.

The case for prioritising shareholders. Shareholders own Meridian and bear the risk, and as a listed company it is accountable to investors who expect returns. Prioritising them — through profit, dividends and a strong share price — gives Meridian cost discipline (tight control of raw-material costs, factory capacity utilisation and unit production costs), supports its share price (easing access to equity finance and deterring takeovers), and provides a clear, measurable objective. In the short term, satisfying investors is essential to Meridian's independence and its ability to raise capital, and the shareholder model (Friedman) argues that generating profit within the law is precisely a company's job.

The case against / for wider stakeholders. However, prioritising shareholders at the expense of wider stakeholders is risky for a manufacturer. Squeezing employees (pay, conditions, redundancies) harms morale and productivity on the assembly line and raises turnover; squeezing suppliers threatens the reliability and quality of Meridian's components inventory and supply chain; ignoring customers, the community and the environment risks reputational damage, lost sales and even a scandal (pollution, exploitation) whose cost could dwarf any short-term saving. A pure short-term shareholder focus can therefore destroy long-term value — the very thing shareholders ultimately want.

What it depends on. Whether Meridian should prioritise shareholders depends on several factors. It depends on the time horizon — short-term investor pressure favours a shareholder focus, but long-term value favours looking after stakeholders. It depends on the market — where customers and staff value ethics and quality, stakeholder neglect is costly; in a pure price war it matters less. It depends on the type of stakeholder pressure and whether Meridian's investors are short- or long-term. And crucially, it depends on recognising that the two are not truly opposed in the long run: motivated staff, reliable suppliers, loyal customers and a strong reputation are exactly what generate sustainable profits and shareholder value.

Conclusion. On balance, Meridian should not prioritise shareholders at the expense of its wider stakeholders, even under short-term pressure — though it cannot ignore its owners either. The most defensible approach is to recognise that, for a large manufacturer, serving stakeholders well is the route to long-term shareholder value: looking after employees, suppliers, customers and its reputation protects the productivity, supply chain, sales and brand on which sustainable profits depend. Meridian should therefore balance the two, resisting purely short-term, value-destroying cost-cutting while still maintaining the financial discipline and returns its listed status demands. How far it leans towards shareholders depends on the urgency of its investors' demands and its financial position — but treating shareholder and stakeholder interests as a long-term partnership, rather than a zero-sum choice, is the wisest course. Prioritising shareholders over stakeholders may satisfy investors this year but risks weaker performance in the years that follow.