their most important stakeholders are shareholders, and that their
primary purpose in management is to enhance shareholder value…
…but from a strategic and operational perspective, it is dead wrong
for any firm - publicly or privately held. A business does not exist
for the benefit of the investor, nor should it be run under that premise'
[McTaggart JM & Kontes PW, 1993]
The author of this quote went on to suggest that it would be in the best interest of a company to make the interests of the customer and not the shareholder their primary aim. In saying this he was implying that once a company starts doing what's right for the customer, their market share and return on assets will take care of themselves, and eventually this will translate into an increase in shareholder wealth. This type of attitude can also be seen in the opinions of many other well respected strategic thinkers, such as Vinten, who in 2001 argued that stake holding is a viable and sustainable way for companies to proceed, and that it will achieve an unassailable place in the corporate landscape of the 21st century.
Another important group of people who disagree with the notion that the maximisation of shareholder wealth should be the key aim are those of a socialist persuasion. They would suggest that the interests of society and employees should supersede the interest of customers and shareholders. Such thinking can be seen in the following quote;
'Jobs are means to fuel economies, enrich corporate profits, and help
meet needs of workers, customers, host communities, regulators, and
other stakeholders, including shareholders. Consequently, so long as
social welfare is attached to gainful employment, institutions will be
measured on how much they contribute to society.'
[www.jewishethicist.com/library/downsizingstakeholders.htm]
Such thinking is linked to the idea of 'corporate social responsibility', which argues that over recent decades their have been growing public concerns about the impact of business on the environment. It is argued that this concern culminated in the violent protests at the World Trade Centre meeting in Seattle and that it was this that forced many large companies to improve the image and responsibility of their operations, and make these factors, as opposed to shareholder wealth, their key priorities.
An example of how social responsibility and company image have been central to a companies strategy can be seen in the case of the supermarket group TESCO, who have spent an estimated £62.5m on their 'Computers in Schools' programme which benefits other stakeholders such as staff and customers. By carrying out such a scheme it would be argued by TESCO that they are not only interested in attracting and keeping customers but also in providing for poorer members of the community.
Although very idealistic, it would however, be argued by many that a world were such objectives were central to all organisations would be impractical and in the long run detrimental to all stakeholders. Such thinking in the 20th century has been largely promoted by Milton Friedman who argued that 'the business of business is about maximising stockholder wealth, not "promoting desirable 'social' ends" '. His argument rests on the following factors;
(i.) Agency Theory - The job of managers in a corporation is to
do the bidding of their principles - the stockholders.
(ii.) Market Mechanics - If abuses occur, the market will correct
them.
(iii.) Knowledge - Managers are not equipped to decide what is
good for the commonwealth. Their expertise is in maximising
profits, not in maximising social welfare.
[http://home.comcast.net/~nelson1397/stockstake.htm]
Before Friedman, similar views could be found during the 18th century in the works of Adam Smith, writer of 'Wealth of Nations', who believed in the power of pursuing self-interest, and stated that promoting one's own interest was the best way to benefit society.
Although such arguments could nowadays be viewed as slightly over-simplistic, they still have large support and can be used to counter the arguments put forward in the first half of this report. For example, in relation to the suggestion that customer satisfaction should be the number one priority and will have the eventual effect of increasing the benefit to all stakeholders, real life situations have proved that it is quite possible to achieve high levels of customer satisfaction and yet be unable to translate that advantage into adequate return for shareholders. An example of this can be found in the case of American Airlines (AMR), were although it was generally recognised that they were the industry leaders in terms of customer service, $100 dollars invested in AMR shares in 1983 would have only grown to $325 by 1993, far worse than the $450 that investors would have earned from the Standard & Poors 500 index. This could well have been the case as any strategy that requires an increase in the investment of the company's resources to increase customer satisfaction will increase shareholder value only if the economic return on the investment over time exceeds the company's cost of capital. The effects of what happens when a company pursues a course of action designed to increase customer satisfaction as well as shareholder wealth can be seen in the following diagram;
[McTaggart JM & Kontes PW, 1993]
Here, we can see that at point 1 there are clearly no conflicts between the two different stakeholders. On the other hand, strategies characterized by arrow 2 do present a conflict, as the cost of improving customer service has exceeded the returns on the investment, producing a negative value impact for the shareholder. We could therefore argue that strategies which aim to increase customer satisfaction are not worth it in the long run, and that whenever shareholders subsidize customers in a significant way, the financial health of the company is diminished, ultimately to the detriment of all stakeholders.
In relation to employees taking precedence over shareholders, a similar effect can be seen in real life situations, as companies that continuously transfers value from its shareholders to its employees to avoid redundancies and restructuring will become less and less competitive as their costs per unit climb above those of their competitors. Therefore, it would be the argument of many that the maximisation of shareholder wealth also leads to the maximisation of the economic interests of all employees over time, even when management is forced to downsize the company.
The argument of 'social responsibility' is one of the most important arguments used by those arguing against the importance of shareholders within a company, and can be countered in a similar fashion, as it is often the case that investments in the economy or local communities could offer the prospect of creating value for the shareholder, since they reflect well upon the company and enhance its image. This point of view is backed up in the following quote;
'…when one studies those companies that consistently create value
for shareholders at rates far greater than those of their peers, one also
finds companies that contribute generously to their local communities.'
[McTaggart JM & Kontes PW, 1993]
In conclusion it must therefore be said that maximising shareholder wealth is in general the most obvious and necessary objective that a company must have to succeed in the modern day business world . Although there are some who believe that the needs of shareholders can be balanced against the needs of other stakeholders in order to satisfy all parties and enable the organisation to move forward in the most constructive manner, the above points do suggest that it should be the primary objective of all publicly traded companies to act in the best interest of the shareholder. The reasons for this argument can be shown in the following quote;
'The governing objective for all publicly traded companies should be
to maximise the value of the company for shareholders. Achieving this
objective not only serves the interests of the company's owners but
also serves the economic interest of all stakeholders over time.'
[McTaggart JM & Kontes PW, 1993]
Although there are many understandable and convincing arguments that other stakeholders should take priority, it appears to be the case that by acting in the best interest of the shareholder, an organisation will improve the over all wealth of the company which will in time benefit all stakeholders. In addition to this, by having shareholder value as the chief priority, all large companies can have a clear objective that can be easily translated into a decision criterion, which will in turn benefit the profitability and overall wealth of any professional organisation.
WORDCOUNT: 1662
BIBLIOGRAPHY:
BOOKS/ARTICLES:
Aabo T Stakeholder Versus Shareholder Satisfaction in Corporate Risk Management (Aarhus School of Business) 2004
Finlay P Strategic Management: An Introduction to Business and Corporate Strategy (Paul Chapman Publishing) 2000
Haspeslagh P & Noda T Revisiting the Shareholder versus Stakeholder Debate: The Uses and Limits of Value-Based Management Practice in the Stakeholder Economy (INSEAD) 1999
Hobbs R Stakeholders And Corporate Governance: Theory And Evidence on Economic Performance (ESRC Centre for Business Research, University of Cambridge) 2001
Johnson G & Scholes K Exploring Corporate Strategy - 6th Edition (Prentice Hall) 2002
McTaggart JM & Kontes PW The Governing Corporate Objective: Shareholders Versus Stakeholders (Marakon Associates) 1993
WEB SITES:
http://home.comcast.net/~nelson1397/stcoktake.htm Stockholders versus Stakeholders 2004
www.emerald-library.com/ft A Mathematical Logic Approach to the Shareholder vs Stakeholder Debate (Emiliani ML, Rensselaer Polytechnic Institute) 2002
www.esrc.ac.uk/newsociety/whoinvests.html Who Invests, Wins?: The Shareholders v the Stakeholder 2004
www.jewishethicist.com/library/downsizingstakeholders.htm Jobs, Downsizing and Stakeholders (Nitkin d) 2004
www.jubilee2000uk.org/latest/mayo070203.htm Stakeholders vs Shareholders (Mayo E, Executive Director, New Economics Foundation) 2004
www.mises.org/freemarket_detail.asp The Free Market: Stakes Versus Stocks (Scott J, Ludwig Von Mises Institute) 1998
www.pirc.co.uk/embrace.htm Embracing The Shareholder: European and Asian Markets Respond (PIRC Intelligence) 1998
www.valuebasedmanagement.net/faq_shareholder_stakeholder_perspective.html Shareholder Value Perspective Versus the Stakeholder Value Perspective 2004