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ACCA Applied Knowledge · Business and Technology · Stakeholders in business organisations

Zeta Ltd's board argues that spending on local community projects is justified even where it reduces short-term profit, because good community relations protect the company's licence to operate and long-term value. Which view does this argument most closely reflect?

The argument reflects stakeholder theory, with an instrumental justification. The board treats the community as a group whose goodwill matters and defends the spending because it protects long-term value, rather than claiming only owners' immediate returns count.

  1. APure shareholder theory with no regard to other groups
  2. BStakeholder theory, including an instrumental justificationCorrect
  3. CAgency theory showing managers acting against owners
  4. DTransaction cost theory

Explanation

The board recognises a non-owner group (the community) as relevant and justifies it by long-term value, an instrumental stakeholder argument. Pure shareholder theory would reject spending that has no profit purpose, and nothing here describes managers acting for themselves.

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