Executive Summary:
The report evaluates the responsibility of a company director to place shareholders interest above other stakeholders’ interest. In order to acquire the objective, the report has extensively investigated the roles of shareholders and other stakeholders. It is important for every company director to place their shareholders interest as primary, and this is mainly because of the significant role they play, unlike other stakeholders, on the organization’s finance, operations, governance and control.
1. Introduction:
There has been long debated among the scholarly and the business community over the role and importance of stakeholders and shareholders. In the 2003 MIT Management Review, Smith has stated that the major distinction when it comes to business practice and business ethics is between the shareholders and the stakeholders. Although, both the elements have a sublime similarity, it is important to conceive both as different concepts itself says Smith (2003).
In the course of time, the importance of stakeholders or in other words the role of stakeholders is becoming important in the business sector. As Adams et al (2011) asserted the stakeholders are turning into a pivotal consideration point in the business, especially due to the increase in the social awareness and improved business models.
On the other side the role of Shareholders are widely debated among the business community as well as among the scholarly world. According Fox and Lorcsh (2012), the shareholders cannot be considered as owners of a particular company, at least in terms of legal aspects; even though the philosophy of corporations consider shareholders as the center of their entire business universe. However, Sandhbu (2011) argues that the shareholders are indeed the owners of the companies, or at least needs to be considered them as one. As an example he pitches the existence and the operations of public companies such as pensions funds, mutual fund and hedge fund corporations, where a pivotal role is played by the shareholders in the operation, finance and administration of these businesses.
Hence it is important to assess and understand in detail each of these concepts and their role as well as importance in the business world. The report aims to evaluate and determine the evidence that the responsibility of a company director is to place shareholders’ interest over the stakeholders’ interest.
Since 20th century, the outlook and the definition towards shareholders have persisted within a same set of thoughts and aspect among the business world. Omran et al (2002) defines shareholders as those who made their investment in a business or a firm through the purchase of shares of that particular business or the firm, and has special interest in the success and flourish of that business especially in the financial aspect. Omran et al (2002) also posits that a role played by the shareholders varies in terms of the type of investment they make for the company, for this reason he terms them as active investors and the passive investors. Active investors are those who have profound influence over the company and its operations, while passive investors are those who invest few percentage of their income into a company, pursuing an income on monthly or yearly basis.
Coco and Ferri (2010, p. 357) asserts that, “the interest of shareholders over the monetary valuation of the company they have invested is immense, since any fluctuation in this area would directly or indirectly affects the investment made on the company by the shareholder.” For this interest it is important to assume that there is a greater pressure from the shareholders over the company directors in the business operation, especially for the increase of the share-price so that their value of dividend would also increase with it. Through this their financial positions are improved and above all secured.
In another aspect, the investment made by the shareholders into a business is often liquid and mostly temporary as per Green (1993). The temporary period is mainly due to the form relationship that the shareholders have with the company. As Green (1993) asserted anytime an individual can become a shareholder of a company, and at the same time he or she can sell of the share at any moment for the purpose of a quick profit. Also the same investor would have multiple shares of multiple companies, which legally as well as in the business angle would never make them an owner. Hence, as Fox and Lorcsh (2012) argued that the shareholders would never become the “owners” of the company can be affirmed here.
Stakeholders on the other side, have a different kind of investment towards the company. Harrison et al (2010) says the stakeholder’s needs to be considered as an investor in the company, but the traditional notion of investment does not totally comply with the stakeholders’ investment within a company. In another perspective, stakeholders are individuals who has stake in the company’s success as well as failure, and this can be comprehended through numerous reasons. In one perspective there is a significance of stock holders and their involvement as a stakeholder and on the other customers of a company is also considered as a stakeholder, since they have a dire part to play on company’s success and failure. Harrison et al (2010) states that even communities that relies on the firm for employment, suppliers that relies on the firm for the contract of several services and even employees that is working within the firm, and who are dependent on to the firm; are all stakeholders in one way or the other.
Unlike shareholder, stakeholders, according to Adams et al (2011), are integrated by longevity. This means, for a stakeholder it is not easy to make a quick decision to take their stakes away from the firm they have invested upon, since many of the elements are legally bonded with the company. As Adams et al (2011, p. 1337) stated, “There are set of factors that is imposed upon them to make them rely on the company, and this includes cultural and geographical aspects that decide the success or failure of the company, in which the stakeholders have a major part to play.” For this reason, it is not only the performance of the firm that stakeholders are interested in, but also the external factors and the secondary impacts that would mould the performance of that firm.
According to Zhong et al (2017), “All shareholders are considered to be the stakeholders, but not all the stakeholders are considered as the shareholder of a company.” Since shareholders are investors and has already invested in a company that make them a stakeholder. As discussed earlier in the report, stakeholders interest always focuses on the success of the company, and here shareholders have the same interest that of the stakeholders, which makes them a stakeholder as well (even though the success aspect differs in both the cases). On the contrary, not all stakeholders are shareholders, and by assessing the stakeholder of a company, this would become clear as per Zhong et al (2017). The best examples of stakeholders are the customers, suppliers and even the employees a company possesses, and it is not necessary that these stakeholders necessary holds actual share or shares of the company.
Due to the reasons or the causes discussed above, there is a series of conflicts within the interest of the stakeholders and the shareholders of a company. When it comes to shareholders, especially the active or the mega shareholders, have the power or the authority to pressurize the company in certain level (Adams et al, 2011). For example, for their own optimization and increase of the profit they sometimes indulge in controlling the board of directors of a company to utilize a short-term business strategy, and this in some cases might kill the chances of the company’s success in the long run. Apart from it, they also have the freedom to sell of all their shares at their will and invest the same amount in another firm, which makes the position of shareholders all the more important among other stakeholders the company has (Adams et al, 2011).
When it comes to other stakeholders such as employees and the suppliers, there is a greater or deeper hook they have on the company for its long run and success, since their dependency to the company is greater than that of the shareholders. Due to this dependency of the stakeholders towards the company, it becomes clear that their part as a stakeholder is second to that of the shareholders of the company, since the shareholders holds a greater authority over the company’s success. For the board of directors, the main concern of them is to make their company survive the market and business challenges, and at the same time serve the interest of the shareholders as primary; because for them the stakeholders, especially the employees and suppliers are replaceable. As Smith (2003) asserted, the company view their internal stakeholders, especially the employees and suppliers as something that can be replaced if necessary for the company’s survival.
This degree of separation or the gap in the preference of the board of directors over its stakeholders is the main reason that pushes the internal stakeholders, especially employees towards the conflict of interest. For employees, their main focus is to move or sometimes fight against company layoffs, specially catapulted on the interest of the shareholders and in some cases for their long term sustainability/survival. Therefore there is a greater degree of rationality that both the shareholder and the stakeholder could invest to secure their self interest, mainly short term in nature, at stake of organization’s viability in the long run.
Although the ownership of the shareholders are debated among the business and scholarly communities, their significance in the business and the business operations are significant without a doubt. According to Harris and Raviv (2010) there are mainly four areas that the shareholders have the power over the company, and they are;
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| Source: Harris and Rajiv, 2010 |
- Finance: It is important for every company to raise funds for its ongoing operation as well as for the growth and enhancement. When shareholders invest their money in a company, in return, the company would give the shareholder a certain percentage of authority or control. Harris and Raviv (2010) exerts that the control that the company is giving to the shareholders are not necessarily ownership, since there are many aspects adhered to the term. For example, private firms and startups in some cases would adapt to this method and invite investment into their company for their growth and sustainability. External companies and venture capitalists pursue their investment in these companies in order to acquire certain percentage of share of that company.
- Operations: When it comes to firm’s operation, the shareholders plays direct as well as indirect role. It is the shareholders, especially the mega-shareholders, which play a major role in electing the directors, who then have the authority to appoint other senior officials; this includes CEO or chief executive officer. Through stock market, shareholders also play an indirect role. They invest in the companies which has the potential to back their investment, for this reason the management of the company would be under persistent pressure for the surplus cash-return towards the investors.
- Governance: For most of the public companies the board of directors is directly answerable to the shareholders, and it is important for the company to provide periodic financial disclosure of the company to all its shareholders. Some of the crucial decisions of the company are taken and implemented after discussing it with the shareholders.
- Control: As discussed in the operation section, the shareholders have a greater authority to determine who would control the company. Harris and Raviv (2010) assert that this is one of the advantages of a public company, since decision of the collective shareholders will always be for the success and prosperity of the company they invested upon.
As asserted in the report, the shareholder is always a stakeholder of a company, but a stakeholder is not necessarily a shareholder. The report affirms the significance and the authority of shareholders’ have over the company they invested upon, and at the same time the report also explains the dependency factor of both the shareholder and stakeholder over the company. From this it becomes clear that shareholders stand above the stakeholders of the company. Comprehending this factor, few recommendations are developed for the company directors for the successful future interaction with the shareholders as well as the stakeholders.
Recommendations:
- It is important for the company directors to understand the conflict interest between shareholders and other stakeholders, and strategize the operation as well as governance accordingly.
- Although the shareholders posit a greater interest for the company, it is important for the directors to bring about balance between shareholders’ interest and other stakeholders’ interest for the long-term sustainability and growth of the company.
- It is recommended to the directors to assess each strategy put forth by the shareholders, and implements only those that could assure long term success. For this it is important for the directors to conduct meeting with their respective shareholders and extensively discuss on each of the strategies.
References:
Adams, R. B., Licht, A. N., & Sagiv, L. (2011). Shareholders and stakeholders: How do directors decide?. Strategic Management Journal, 32(12), 1331-1355.
Coco, G., & Ferri, G. (2010). From shareholders to stakeholders finance: a more sustainable lending model. International Journal of Sustainable Economy, 2(3), 352-364.
Fox, J., & Lorsch, J. (2012). What Good Are Shareholders?. Harvard Business Review. Retrieved 1 August 2017, from https://hbr.org/2012/07/what-good-are-shareholders
Green, R. M. (1993). Shareholders as stakeholders: Changing metaphors of corporate governance. Wash. & Lee L. Rev., 50, 1409.
Harrison, J. S., Bosse, D. A., & Phillips, R. A. (2010). Managing for stakeholders, stakeholder utility functions, and competitive advantage. Strategic Management Journal, 31(1), 58-74.
Harris, M., & Raviv, A. (2010). Control of corporate decisions: shareholders vs. management. The Review of Financial Studies, 23(11), 4115-4147.
Omran, M., Atrill, P., & Pointon, J. (2002). Shareholders versus stakeholders: corporate mission statements and investor returns. Business Ethics: A European Review, 11(4), 318-326.
Sandbu, M. E. (2011). Just business: arguments in business ethics. Prentice Hall.
Smith, H. J. (2003). The shareholders vs. stakeholders debate. MIT Sloan Management Review, 44(4), 85-91.
Zhong, N., Wang, S., & Yang, R. (2017). Does Corporate Governance Enhance Common Interests of Shareholders and Primary Stakeholders?. Journal of Business Ethics, 141(2), 411-431.
Adams, R. B., Licht, A. N., & Sagiv, L. (2011). Shareholders and stakeholders: How do directors decide?. Strategic Management Journal, 32(12), 1331-1355.
Coco, G., & Ferri, G. (2010). From shareholders to stakeholders finance: a more sustainable lending model. International Journal of Sustainable Economy, 2(3), 352-364.
Fox, J., & Lorsch, J. (2012). What Good Are Shareholders?. Harvard Business Review. Retrieved 1 August 2017, from https://hbr.org/2012/07/what-good-are-shareholders
Green, R. M. (1993). Shareholders as stakeholders: Changing metaphors of corporate governance. Wash. & Lee L. Rev., 50, 1409.
Harrison, J. S., Bosse, D. A., & Phillips, R. A. (2010). Managing for stakeholders, stakeholder utility functions, and competitive advantage. Strategic Management Journal, 31(1), 58-74.
Harris, M., & Raviv, A. (2010). Control of corporate decisions: shareholders vs. management. The Review of Financial Studies, 23(11), 4115-4147.
Omran, M., Atrill, P., & Pointon, J. (2002). Shareholders versus stakeholders: corporate mission statements and investor returns. Business Ethics: A European Review, 11(4), 318-326.
Sandbu, M. E. (2011). Just business: arguments in business ethics. Prentice Hall.
Smith, H. J. (2003). The shareholders vs. stakeholders debate. MIT Sloan Management Review, 44(4), 85-91.
Zhong, N., Wang, S., & Yang, R. (2017). Does Corporate Governance Enhance Common Interests of Shareholders and Primary Stakeholders?. Journal of Business Ethics, 141(2), 411-431.
