A welfare economics approach to stakeholders’ theory

Governing the corporation for the benefit of all stakeholders lacks the operational clarity for practical implementation that is well established in pro-shareholders’ governance. This paper addresses the implementation problems faced by stakeholders’ governance. It claims that many of these problems stem from the fact that dominant approaches to stakeholders’ governance rely on changing the decision-making criterion of capitalist firms from profit- maximization to welfare maximization. A new governance approach is then presented that retains the profit maximization criterion for corporate decision-making but adds a constraint to the maximization problem. The constrained profit maximization (CPM) approach to stakeholders’ governance has similar operational clarity to conventional profit maximization, but its adoption requires genuinely responsible behavior by firms: a willingness to sacrifice private profits in favor of broader social benefits.