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CS Professional · Environmental, Social and Governance (ESG) - Principles and Practice · Conceptual Framework of Corporate Governance

Himalaya Foods Ltd's board adopts a policy saying that, in decisions, it will consider only the maximisation of shareholder wealth and ignore effects on employees, customers and the community. A director argues this contradicts the modern stakeholder approach to governance. Which statement best supports the director?

Stakeholder theory says long-term value depends on balancing the legitimate interests of all affected groups, including employees, customers and the community, rather than shareholders alone. A policy ignoring these groups therefore conflicts with the stakeholder approach, though profit remains a legitimate objective.

  1. AStakeholder theory holds that the board must always prefer creditors over shareholders
  2. BStakeholder theory holds that long-term value depends on balancing the legitimate interests of all affected groups, not shareholders aloneCorrect
  3. CStakeholder theory prohibits the company from earning profit
  4. DStakeholder theory applies only to unlisted companies

Explanation

Stakeholder theory broadens accountability to employees, customers, community and others while still permitting profit. It does not rank creditors above shareholders, forbid profit or limit itself to unlisted firms.

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