Shareholders, Stakeholders, and Strategic Factor Markets

Despite calls to integrate a stakeholder perspective into managerial decision-making, the shareholder supremacy model continues to dominate practice. A key assumption of the shareholder supremacy model is that shareholders are the only firm stakeholder with a residual claim on a firm’s cash flows. This chapter shows—using strategic factor market theory from the field of strategic management—that if this assumption is correct, then a firm will not have any economic profits to distribute to its shareholders. If, on the other hand, a firm has economic profits to distribute to its residual claimants, then stakeholders besides a firm’s shareholders will have a claim on these residual cash flows. The implications of this argument for the role of stakeholder analysis in managerial decision-making are discussed.