• Social contract gives government too much power to make laws for the protection

of interest of society, but sometimes these laws create too much fear in the
business to do social contract.
• Sometimes contract can be unfair for someone. For example: - the poor do not get
the same benefits of contract.

(C) Shareholder’s theory: -

This theory emphasizes that there is the duty of the manager to serve the interest of
shareholders in best possible way by using the resources of corporate in optimum manner.
In other words, the main focus of this theory is to maximize the wealth of the shareholders

STAKEHOLDER’S PROTECTION
It is important on part of company that the interest of stakeholder must be protected and
then feels them satisfaction.

Types of stakeholders:
INTERNAL
STAKEHOLDERS

STAKEHOLDERS

EXTERNAL
STAKEHOLDERS
▪ Owners
▪ Board
▪ Managers
▪ Employees

1. Suppliers 3. Society 5. Creditors

 2. Customers 4. Government 6. Competitors

Internal Stakeholders:
✓ Internal stakeholders are the stakeholders that participate in the management of the
company and directly affected by their actions and decisions.
✓ They always try their best to participate in every important decision of the
organization.

• Owner: A person who owns something is called owner. Business is a separate legal
entity. Separate from its owner, the owner can be government or private
individuals. Shareholders are the owners of limited company
• Board: The board should ensure that the company always have adequate level of
finance to the operations of company. The structure, responsibilities, and powers
given to board of directors are determined by the bylaws of the company.
• Managers: The people that are responsible for developing and carrying out the
management process in the organization are called Managers
Employees: Employee is the person who get paid to work for the person or
company. They are affected by the terms and conditions of the job.

External Stakeholders:
✓ External stakeholders are the stakeholders that are not the part of organization and
not directly affected by the management decisions and results.
✓ These external stakeholders constitute the business environment.

• Suppliers: Suppliers are the persons or business entity that sells something
Supplier is called vendor. The company have following obligations towards the
suppliers:
▪ It should adopt the fair dealing with suppliers.
▪ It must encourage the small suppliers by placing orders with them.

• Customer: A customer is a person that consume the products and services. In

other words, he is an individual that buys the product for his personal use and
not manufacturing but for resale. He is called as King of the market
 • Society: A society is a group of individuals involved in persistent social
interaction. It is the responsibility of every business toward society as business
uses valuable resources of the society
• Government: It is an institution that govern the country. A business has duty
towards the government by paying the taxes to government in time.
• Creditors: A person to whom money is owing is a creditor. Creditors have
interest in business because as long as the company continue to be successful.
• Competitors: A competitor is a person, business, team, or organization that
competes against you or your company. In a business, we call a close
competitor a rival.

Why stakeholders need to be protected?

It is important for every business to protect their stakeholders for the purpose of following
reasons: -
1. Better Goodwill: - It is important for the business to protect the stakeholder for the
purpose of better goodwill. As it would be possible only by satisfying all the
stakeholders with their need. The different stakeholders have different needs and
hence business need to be understood their needs and hence satisfy them.

2. Long term interest: - For the purpose of making long term interest in the business, it is
also important for the business to protect its stakeholders. Shareholders are the
owners of the company. It is important for company to provide them favorable
returns in time and protect their interest also, so that they can invest in the company
for the long period and company survive for long.

3. Supply better quality goods and services: - Company always try to supply better
quality product their customers at reasonable rates. It is possible only if the supplier
provides better quality inputs to the company. Hence, company ensure that the
interest of supplier would be protected for that purpose.

4. Create economic and social development: - The companies should aim to create
economic and social development while minimizing negative impacts in society.
Companies can provide health facilities and can support the development of schools,
colleges and universities. Company always tries to provide better quality goods to the
society so that as a part of stakeholder, it would be protected and thereby company
benefited by the maximum returns.