Which statement best describes stakeholder theory in contrast to shareholder primacy?

• A. Stakeholder theory holds that firms have obligations to all stakeholders and should balance interests; shareholder primacy prioritizes maximizing shareholder wealth above other claims.
• B. Stakeholder theory focuses only on employee interests and ignores customers.
• C. Stakeholder theory requires sacrificing profits to society regardless of impact.
• D. Shareholder primacy means firms must maximize social welfare even if it reduces profits.

Answer: (A)

Stakeholder theory expands the purpose of the firm by treating obligations to a broad set of stakeholders—employees, customers, suppliers, communities, and the environment—as important and requiring managers to balance these interests, not simply favor one group. This contrasts with shareholder primacy, which treats maximizing shareholder wealth as the primary objective, often tied to stock price and dividends.

In practice, stakeholder theory seeks sustainable value by weighing trade-offs among different claims rather than pursuing profits for shareholders alone. It does not ignore profits, but profits are pursued within a framework that respects multiple interests.

Choosing the broad, balancing approach is why this description fits best. The idea that stakeholder theory focuses only on employees or that it requires sacrificing profits regardless of impact misstates its balanced emphasis, and the notion that shareholder primacy aims to maximize social welfare even if profits fall reverses the typical priority.