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should be accountable to (Ali, 2015; Vilanova, 2007). Two principal standpoints on this issue are either accountable to only shareholders or accountable to a wider group of stakeholders. Smith (2003) identifies the fundamental difference between shareholder and stakeholder theory is that stakeholder theory requires the consideration of all stakeholder interests even at the expense of a reduction in corporate profitability. Despite the differences, both sides agree that the long-term interests of shareholders are best addressed through considering the needs of the wider stakeholder group (Ali, 2015; Smith, 2003; Vilanova, 2007). This section describes a gradual growth in the influence of stakeholder values on capital allocation. It introduces the doctrine of shareholder value, criticisms of the shareholder model leading to the demand to incorporate stakeholder values, and the gradual rise in socially responsible investments (SRI).

The doctrine of shareholder value is often associated with Friedman’s (1970) argument of having shareholder wealth maximisation as the only goal of corporate management. The shareholder model reinforces the idea that corporations should be solely operated in the interests of shareholders. The primary justifications for placing shareholders in first priority are the agent-principle relationship and that shareholders are the residual risk bearers. Spurgin (2001) suggests, in theory, shareholders have researched and invested in investment targets they conclude to have potential in generating financial returns. Shareholders then attend shareholder meetings and exercise voting rights to determine corporate direction. Managers in turn carry out shareholders’ decisions and are compensated according to their success or failures. According to this model, shareholders are the ‘principles’ who hire managers as ‘agents’ to carry out their interests, which generally relate to increasing financial returns. Shareholders are the residual risk

bearers as they do not negotiate compensation in advance and their remuneration depends largely on the performance of the invested corporation (Ali, 2015; Vilanova, 2007). As shareholders are the risk bearers, managers are seen to have the responsibility of increasing shareholder value and maximising the economic value of corporations.

Shareholder theory may reflect corporations’ traditional mindset of maximising shareholder value, but such a theory does not entirely reflect the modern corporate environment and has been criticised for a lack of behavioural considerations. Post, Preston and Sachs (2002) states that many modern corporations do not act solely on shareholder value and are already managed in ways that serve the interests of both internal and external stakeholders. Furthermore, individual shareholders often have diluted ownership of outstanding shares and cannot influence a corporation, nor do they have any desire to do so; hence, corporations do not need to manage themselves primarily for the benefit of passive individual investors. Management is not obliged to act primarily for shareholder interests as there are often no express contracts between shareholders and managers (Post, 2003). Shareholders are seen as beneficiaries of a corporation rather than those who are involved or impact corporate direction. Standard economic theory posits that people act to satisfy their own interests and market transactions generally follow narrow economic considerations. Ellis (2008) argues that standard economic theory “fails to accommodate the changing influence of unselfish values in different circumstances” (2008, p. 521). Even though non-economic motives play a relatively minor role in market transactions, people do not act solely for personal gains, due to the influence of ethical values and social norms on human behaviour. Hence, shareholders may not invest solely for

the purpose of maximising financial returns.

Although shareholder theory has been criticised to be unreflective of the modern corporate environment, it has been blamed for contributing to the financial crisis and failure of corporations to generate sustainable value. It became apparent from the Global Financial Crisis that corporate governance models emphasising shareholder value and shareholder accountability were unsuccessful at preventing poor director ethics and failures in risk management (Atkins, Solomon, et al., 2015). Furthermore, a focus on shareholder values does not create sustainable value for a corporation and its country of operation. Lazonick (2014) identified that from the late 1970s, US corporations favoured value extraction above value creation. Investment in human capital and manufacturing capital are important drivers to sustainable value creation; but the focus on shareholder values saw corporations reducing cost to distribute more profits, and investing in share repurchases instead of innovation and productive capabilities. Corporations’ short-term focus on shareholder values have contributed to employment instability and income inequality (Lazonick, 2014; Lazonick & O’Sullivan, 2000).

While shareholder values emphasise maximising investors’ financial returns, stakeholder values relate to meeting and balancing the expectations of key groups in society. Apart from public pressures for corporate sustainability (see Chapter One, Section 1.2), stakeholders have also been demanding corporate accountability. Corporate accountability generally relates to ‘transparency’ and ‘trustworthiness’, and in a broader sense, ‘involvement’, ‘participation’, and ‘responsibility’ to stakeholders (Bovens, 2007). Public pressures have made corporations increasingly accountable for their actions, resulting in demand for corporations to show accountability and disclose information that may impact

their stakeholders (Morf, Flesher, Hayek, Pane, & Hayek, 2013). Transparency is an essential element in conveying accountability, where information disclosures need to be complete, reliable and credible (Boiral, 2013). Members of society are now emphasising corporate sustainability and accountability, suggesting the role of corporations can no longer be focused solely on satisfying shareholders.

The doctrine of shareholder value indicates that investors are interested in financial returns, but there is no evidence stating investors are purely financially motivated and that all investments are purely economic events (Ellis, 2008; Murray, Sinclair, Power, & Gray, 2006). SRI started back in the US from as early as the 1970s, but it only gained momentum in recent years and has became a substantial part of the overall global investment market (Atkins, Solomon, et al., 2015; Bauer, Derwall, & Otten, 2007). SRI is also referred to as ethical, socially conscious, or sustainable investments. It involves investments that have social, ethical or environmental criteria combined with traditional financial investment decisions (Nilsson, 2008). Eurosif’s (2008, 2010) studies show the amount of assets under management by SRI funds have grown from a global total of €4,963 billion Euros in 2007 to €7,594 billion Euros in 2010. The increasing market presence of SRI suggests there are investors incorporating stakeholder values into their capital allocation choices and sustainability practices are seen to be associated with value creation. The next section expands on the relationship between shareholder values and stakeholder values with discussions on investors’ perceptions of the relevance of non-financial information.