Shareholders and/or Stakeholders?

mei 6th, 2013 · by John · Weblog EN

The theory of the firm consists of a number of economic theories that describe, explain and predict the nature of a firm, company or corporation, including its existence, behavior, structure and relationship to the market. Discussions on these theories have highlighted a rivalry between two models:

  • Shareholder model: the purpose of the corporation is to promote shareholder value
  • Stakeholder model: the purpose of the corporation is to serve a wider range of interests

The shareholder model sees the business as an economic institution: the company interacts with various parties in society, but only through transactions in the marketplace. In this traditional view, the owner (shareholders) decides on the purpose of the organization, typically profit or shareholder value.

Nowadays managers and even shareholders themselves are more inclined to also look at other stakeholders. In the stakeholder concept the company is seen as a socio-political institution. It interacts with society in order to add value and increase prosperity for individual (groups of) stakeholders as well as for society at large. In this view, management of an organization assumes the role of, and acts as a trustee for all other stakeholders.

According to the traditional theory of the firm, a company should thus only strive to create value for its shareholder. But even in the modern theory of the firm with its emphasis on the stakeholder, creating shareholder value is often the most important goal of a company. There is however some confusion to what creating shareholder value is. Is it just about getting the highest stock price at the end of the quarter, or is there more to it?

The economic value of a company is calculated as the present value of the cash flows that the business is expected to bring in the future. From this amount, the debt the company has needs to be deducted, to arrive at the value for the shareholder. The quarterly stock price does not seem to enter this equation.

There is however a relation between stock price and shareholder value. But it is not that value is created when the share price increases. It is the other way round: if a company builds value, the stock price will eventually follow. The objective of shareholder value creation thus is to create value, and then let the share price reflect that value.

To maximize long-term cash flow, a company must manage its relationships with all stakeholders. A company that charges too much will lose customers to competition. If it charges too little, it may have happy customers, but will be unable to meet its financial obligations or finance the resources to offer new and improved products to customers. Paying employees too little ensures a substandard workforce; in a competitive world that could be killing. Paying too much however hampers the ability of the company to remain competitive. The same logic extends to suppliers and the government.

A successful shareholder value-oriented company must therefore formulate a strategy that adds value for shareholders as well as for its other stakeholders. A company cannot maximize shareholder value through systematic exploitation of its other stakeholders.

John Greijmans

 

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