Who Decides what a Company should Do?

september 6th, 2012 · by John · Weblog EN

Wikipedia defines management as “the act of getting people together to accomplish desired goals and objectives using available resources efficiently and effectively”. This definition begs the question: who is it, that sets the goals and objectives management is expected to accomplish? There are two competing theories. The traditional view states that the shareholder decides on these goals. A more modern view takes into account that an organization is affected by and can affect various groups and individuals, each having their own objectives they want the company to achieve.

Shareholder model: the purpose of the company is to create shareholder value

The traditional shareholder value theory is voiced by Milton Friedman: “In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. [His] responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society”.

In the shareholder model, the owner decides on the goals and objectives for management, these typically are making a profit or creating economic value. But this view already contains or implicates elements of a wider responsibility:

  • - In Friedman’s view, people still have to comply with the basic rules of the society, “both those embodied in law and those embodied in ethical custom”.
  • - Shareholders are residual claimants; they can only get their part of the revenues of a company after other parties like suppliers and employees have been duly rewarded.
  • - Transactions might be done between organizations, but these are always represented by people. Next to maximizing shareholder value, these people will have their own goals and objectives in life.

Stakeholder model: the purpose of the organization is to serve a wider range of interests

Nowadays managers and even shareholders are more inclined to also look at the interests of stakeholders. These are individuals or groups, that have an interest in, or who are significantly influenced by decisions and actions of, an organization.  In this model, the company is understood to be a socio-political institution, which interacts with society in order to increase wealth and prosperity for stakeholders. The management of an organization assumes the role of, and acts as, a trustee for all other stakeholders, including the shareholder.

The Stakeholder concept, includes the shareholder value approach

Any organizations exists to create benefits or “value”, not only for the shareholder, but also for:

  • The customer, if it wants to keep selling its products and services.
  • The employees, if it wants to ensure that products and services sold are produced and delivered.
  • The suppliers, if it wants the resources enabling the production and delivery of products and services.

Of course management of a company can still say that creating shareholder value is most important, but if they do not take the interests of other stakeholders into account, they will end up with unsatisfied customers, with unmotivated staff and, with no resources. Creating value for the shareholder will then be a tough job!

 

 

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