Research Korner: Shareholder Value Creation Strategy

Stakeholders versus Shareholders

Introduction                 The face of the business community has been constantly changing since the early part of the nineteenth century. Corporate structures have been morphing in order to adapt to the changing environments and situations that ultimately affects their operations. It is important for companies to adapt since doing otherwise could result to becoming obsolete. As the demands of the market changes so does companies. The need for change is fueled by the passion to achieve company objectives, which can be used to determine the success of an organization.               Flexibility is needed in order to adapt. This was observed when the rights of corporate boards to preside over without undisputed approval of shareholders in exchange for statutory benefits were enhanced by state corporation law in the nineteenth century (Contributors, 𠁪). Most of the moves or changes, if not all, being done within the business community are aimed at enhancing the performance of business organizations. Through decades of business practices, serious issues have been uncovered and as such, they need to be faced.  One of the growing concerns of many corporations over the years was ensuring that all members of a specific business organization move and be motivated as one towards the achievement of their respective company mission and objectives. This implies that conflicting interests must be resolved in order to avoid division within the organizations membership. With this, the term and notion of corporate governance sprang to life.               According to Kay and Silberston (1995), the term corporate governance was coined in the 1980’s. Since then, a number of definitions for the term have mushroomed. This caused debates over the true nature of corporate governance to heat up. Until now, the debate rages on. However, through the constants exchange of explanation of varying points of view some clarification have been made, which helped in the establishing commonalities between the opposing views. These commonalities provide the leverage needed to understand corporate governance better.               These commonalities are present in the definition provided by Blair, Zingales, Meckling and Jensen.  According to Blair (1995), corporate governance pertains to the institutional, cultural and legal agreements that determine the parameters of publicly traded corporations. Zingales (1998) added that corporate governance is anything that affects the previous post bargaining power over the value generated by the firm.  However, Meckling and Jensen (1976) provided the most simple and easily understandable definition of corporate governance. They stated that corporate governance is the process of minimizing the costs of managers’ shareholder’s incentives.   Corporate governance is an important factor in ensuring the success of a company. It is important for people in the managerial levels to ensure that good corporate governance is being implemented in their business organizations. Otherwise, the business organization will suffer from internal damage caused by unresolved conflicts of interests. As such, company management must be able to recognize the presence of conflicting interests if they are to implement good corporate governance. This is the case since the failure to recognize the existence of conflicting interests can result to the assumption that everything is going smooth and that there is no need to implement programs that aim to resolve issues. This means that the road towards the implementation of an effective corporate governance program is to accept that not everybody within the organization is being motivated by the same factors.               This implies that corporate governance thrives in organizations that recognize the various differences of their members. Superficial recognition of differences is not enough to address the issues concerning the business organization. In-depth analysis must be taken. This is brought about by the need to know the root as well as the extent of the influence of the differences. Knowing every aspect of the differences of conflicts will allow corporate management to be implemented in the manner that it will most effectively counter conflicts of interest.               Before any analysis be done, it is important that the parties involved be identified. Doing so will ensure a holistic analysis of the situation. For the purpose of this paper, the significant governance issue of preference for stakeholders versus the preference for shareholders will be analyzed and evaluated. This is also in line with the statement made above that parties involved in conflicts must be first identified and studied if conflicts between them are to be resolved efficiently. The analysis and evaluation of the issue chosen will pave the way for the formulation of conclusion that could contribute to current views about corporate governance in relation to the interests of both stakeholders and shareholders.               Before the discussion of the issues chosen, it is important to know the two parties involved. As stated in the previous paragraphs, knowing the parties involved is important in order to determine their motivations as well as their interests. This means that knowing the nature of being a stakeholder or a shareholder will allow this report to determine the root of their difference and therefore, help in the formulation of a conclusion about the possible resolution of the issue.               The next two section of this paper will be presenting the characteristics of stakeholders and shareholders. The differences between the two groups will be presented. They will also be compared and contrasted in the hopes of uncovering the extent of the influence of their differences. From these characteristics, the possible root of the conflict of interest between the two can be determined.   Stakeholders               Stakeholders are composed of people who have an interest in a company, where the interest is not a consequent of them owning the company. Their interest in the company is present because it can be the case they have a certain level of dependency on the company. In addition, stakeholders are people or organizations who affect or are affected by the company (Freeman, 1984). However, this definition by Freeman is a bit problematic since the broadness of the definition can include the competitors of the company.   This problem was addressed by definition that is more recent. Post, Preston and Sachs (2002) stated that stakeholders are individuals or organizations that voluntarily or involuntarily contribute to the wealth creation of the company. Because of this, it can be stated that stakeholders are not passive members of a company. They have the power to voice out their concerns about the activities that companies engage in. This power became evident in the 1960’s and 1970’s when stakeholders challenged managers as well business practices (Weber & Wasieleski, 2003). Some of the business practices that they challenged were environmental responsibility, employment practices and product safety along with other business activities that directly affect the company’s profitability and operations (Weber & Wasieleski, 2003).   Because of the challenges being brought up by stakeholders, managers exerted efforts to overcome them. They attempted to formulate strategic responses; they turned to consultants as well as academics to help them with their responses. This indicates that the views of stakeholders are deemed as important views by the management of companies.   One of the strategic responses that companies came up with is known as corporate social performance (CSP). This response gain much attention in business literatures since it attempts to resolve the societal needs and issues being brought up by stakeholders, mostly of social activists and consumers (Altman & Vidaver-Cohen, 2000; Wartick & Cochran, 1985).  However, it is important to note that stakeholders are not composed of consumers and social activists alone. Also included in the roster of stakeholders are employees, contractors and shareholders. This is the case since all of the abovementioned groups or individuals depend on the company on a certain degree. Employees depend on companies for employment and thus income; contractors depend on companies for business transaction and thus profit; shareholders depend on companies for profit as well through the collection of their dividends.   Shareholders               Shareholders or stockholders are special kinds of stakeholders. This is the case since their interest in the company is motivated by the fact that they own it or because they own shares of stock. Companies give shareholders special privileges. These privileges depend on the class of stock that they own. Some of the privileges being given to shareholders is the right to vote (Wikipedia Contributors, 2006b). This means that they can affect the decisions being made and implemented by companies including the election of the board of directors.   It is often the case that the decisions being made by shareholders are lineate towards the ones that will ensure the profitability of the company. This is the case since they will be able to collect more dividends if the company is more profitable. Profitability of the company is very important to shareholders. To illustrate the point, if a company is liquidated after bankruptcy shareholders will receive nothing since the rights of shareholders to the company’s assets during liquidation is subordinate to the rights of the creditors.               Since shareholders contribute to companies by investing money, it is being considered by some that companies have responsibility to uphold the interests of shareholders alone.  This is outlined in the shareholder concept. The shareholder concept is associated with finance and accounting as well as with maximizing the wealth of the shareholders. This means that companies are expected to create at much wealth as possible for shareholders (Yacuzzi, 2005) As such, creating value for shareholders became an important part of corporate objective (McTaggart & Kontes, 1993).  Based on the shareholder concept, it is becoming clear that some decisions or actions as well as the interest of the shareholders themselves have great chances of clashing with the interests of other stakeholders. This is also one of the reasons why shareholders are being regarded as a unique part of a company’s roster of stakeholders.   Stakeholders versus Shareholders   Earlier, it was stated that shareholders are part of stakeholders. This means that shareholders, like other stakeholders, want companies to assure them that the company is doing everything they can for their interests. However, it is the case that shareholders and other stakeholders hold conflicting interests. This may sound contradictory at first since it has been stated that both parties want companies to be profitable in order to meet their interests. Nevertheless, upon closer inspection it can be revealed that the concept of acquiring profit by the two parties is different.   Shareholders are more interested in short term profits. On the other hand, stakeholders aspirations tend are likely to be costly and thus profit reducing. Because of this, conflicts between the interests of shareholders and stakeholders arise (Tutor2U, 2006). In turn, this conflict of interests results in the variation of corporations’ governing objectives.  There are companies who believe in the shareholder concept and those that believe otherwise. These variations in the governing objectives of companies will be the focus of this section of the paper. The two variations will be analyzed and evaluated in order to determine their effectiveness. In turn, this will pave the way for the formulation of the conclusion.   Companies who believe that the most important interest to protect are that o their shareholders prioritizes profitability over responsibility. They often see business organizations as mere instruments of the owners.  In addition, they tend to measure the success of the company through dividends, share price and economic profit (Value Based Management, 2005). They also believe that social responsibility is not for the companies to worry about; after all, society will benefit more from companies who are pursuing economic proficiency and thus self-interest. However, shareholder centric organizations recognize that it is instrumental to listen to the demands of other stakeholders. Nevertheless, this does not mean that it is their purpose to serve them. Thus, shareholder centric companies tend to create the best legally possible value for their shareholders. They also counter criticisms by stating that they are doing their social responsibility since they are providing job opportunities. Yet, they still believe that matter such as the environment, local communities and consumer welfare is best to be tackled by the government.   On the other hand, the second school of thought or those that give value to other stakeholders see responsibility over profitability. This may sound absurd since it is in any company’s best interest to be profitable. However, proponents of stakeholder centric theories proposes that giving importance to the issues being brought up by other stakeholders will allow a company to maximize its potentials and in the long run be able to achieve economic stability. For example, giving importance to the demands of the customers, which are part of the roster of stakeholders, will allow a company to gain a foothold of a market that will be able to ensure an influx of profit. This kind of thinking was applied by Xerox. According to Paul Allaire, Xerox CEO, their company changed substantially towards a more market driven one. They believe that if they do what is right for the customers, their market share and assets return can take care of themselves (as cited in McTaggart & Kontes, 1993).   In addition, giving importance to the resolution of the issues being brought up by employees can also be beneficial to the company and most of the parties depending on them. If employee issues such as health care, compensation and benefits are addressed there is greater chances of improving the over-all performance of the company. This is the case since most employees are directly involved in the process of production. They are involved in ensuring the quality as well as quantity of the products and services made available by the companies they work for. This means that they will be able to aid in the improvement of sales by delivering the kind of products or services expected by the market. People nowadays are after getting the best value for their money. Therefore, quality assurance is of utmost importance to them. Giving employees the kind of importance that they deserve can also motivate them and as such allow them to be more products in the help and help the company in achieving its mission and objectives.   Conclusion               In conclusion, companies must exert effort in ensuring the implementation of leveled preference for shareholders and stakeholders. They must recognize the fact that both are crucial in ensuring the success of the company. It is the case that the two groups are providing different kinds of aid to the company. Shareholders may be providing the capital needed to run the business but other stakeholders serve as instruments in making the capital go round and produce profit.               Even preference for the shareholders and stakeholders will allow companies to fulfill their economic objectives as well as their social obligations. Even though, companies are set up to acquire wealth, the welfare of all the people involved in making the dream a reality must never be sacrificed. It is in the joint contributions of shareholders and stakeholders that companies run and thrive. Neglecting the importance of one can damage the operations of any company. It is a matter of giving what is due to everyone who was able to contribute.     Reference   Altman, B.W. & Vidaver-Cohen, D. (2000). A Framework for Understanding Corporate Citizenship. Business and Society Review, Spring 2000, pp. 1-7.   Blair, M. (1995). Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, Washington DC: The Brookings Institution.   Freeman, R.E. (1984). Strategic Management: A Stakeholder Approach. Boston, MA: Pitman.   Jensen, M. & Meckling, W. (1976). 'Theory of the Firm: Managerial Behaviours, Agency Cost and Ownership Structure. Journal of Financial Economics 3, 305-60 Kay, J. & Silberston, A. (1995). Corporate Governance. National Institute Economic Review. 84, 84-97   McTaggart, J. & Kontes, P. (1993). Shareholders versus Stakeholders. Commentary. June.   Post, J., Preston, L. & Sachs, S. (2003). Redefining the Corporation: Stakeholder Management and Organizational Wealth. Tutor2U. (2006). Stakeholders and business ethics. Tutor2U. Retrieved March 30, 2006, from http://www.tutor2u.net/business/gcse/organisation_stakeholders_ethics.htm. Value Based Management. (2005). Shareholder Value Perspective versus the Stakeholder Value Perspective. Value Based Management.net. Retrieved March 30, 2006, from http://www.valuebasedmanagement.net/faq_shareholder_stakeholder_perspective.html. Wartick, S. & Cochran, P. (1985). The Evolution of the Corporate Social Performance Model. Academy of Management Review. 10(4), pp. 758-69. Weber, J. & Wasieleski, D. (2003, Spring). Managing the corporate social environment: Subjecting Miles' 1987 Model to tests of validation. The Journal of Corporate Citizenship, 9, 133-153 Wikipedia contributors (2006a). Shareholder. Wikipedia, The Free Encyclopedia. Retrieved  March 31, 2006, from http://en.wikipedia.org/w/index.php?title=Shareholder&oldid=44509212.   Wikipedia contributors. (2006b). Corporate governance. Wikipedia, The Free Encyclopedia. Retrieved 08:25, March 23, 2006 from http://en.wikipedia.org/w/index.php?title=Corporate_governance&oldid=44897824   Yacuzzi, E. (2005). A primer on governance and performance in small and meduim-sized enterprises. CEMA working Papers 293. Universidad del CEMA.   Zingales, L. (1998). Corporate Governance. In Peter Newman (ed.). The New Palgrave Dictionary of Economics and the Law. London: Stockton Press, 497-503.

Stakeholders versus Shareholders

Introduction The face of the business community has been constantly changing since the early part of the nineteenth ce...