ACC03043 Corporate Governance: Place Shareholders Interest
Case Study
‘As a separate legal person, a corporation has two basic objectives: To survive and to thrive. Shareholder value is not the objective of the corporation; it is an outcome of the corporation’s activities. While shareholders entrust their stakes in a corporation to the board of directors, shareholders are just one audience among others that the board may consider when making decisions on behalf of the corporation.
These audiences, typically called stakeholders, may also include other financial stakeholders, such as bondholders, and nonfinancial stakeholders, such as employees, customers, suppliers, and NGOs representing various concerns of civil society. In the face of limited resources, no matter how large the corporation, directors must make choices regarding the significance of the corporation’s many audiences.’
Required
Assume you have been employed as a corporate governance consultant by the Australian Institute of Company Directors (AICD). The AICD is concerned that many company directors hold the opinion that the company’s board of directors has a responsibility to place the interests of shareholders above all other stakeholder interests.
Your assignment is to prepare a report to be submitted to the AICD evaluating the evidence that the responsibility of a company director is to place shareholder interests above those of other stakeholders. Specifically, the AICD has requested that your report contain evidence, examples and recommendations for company directors that will guide them when making board decisions so they are responsive to diverse stakeholder audiences. The AICD has advised you that they intend to make your report a public document and it will be uploaded to the website so it can be read by both corporate governance specialists and non-specialists.
Answer:
Introduction
The shareholders and the other stakeholders both play roles for the benefit and the survival of the company. But it has been often experienced of which one is more important and whose interest should the director place above among the two most important pillars of the company, the shareholders and the stakeholders (Rönnegard & Smith, 2013). But it is really important to take this technically rather than generally. Starting from the fact that shareholders are the main source of capital for any business organization and they are the biggest creditors of a company, it is not only the responsibility of the directors to place their interest above stakeholders but it becomes their responsibility (Ali, 2015). Even while closing up an organization, the balances of the shareholders are cleared first, realizing the fact that shareholders are the biggest creditors of the company so the company should deal with them first (Harrison & Wicks, 2013).
Interest Of The Shareholders Should Be Put Above Other Stakeholders
From the very fact that the shareholders are the main source of capital which is the only thing that can give birth to a company, shareholders have always been a bigger responsibility for the directors and the company in general. It is a fact in today’s scenario, it isn’t so difficult to find stakeholders such as the employees, laborers, customers, etc as compared to the difficulties a company faces in getting a shareholders who can trust the company (Akpan & Amran, 2014).
Brief Evidence
Though quite old, but a very good example can be cited to support the subject. In the early 1990’s, there was a large oil company in Australia which was trying to change itself massively in terms of both structure and competition. Other competitors providing low cost services and goods had entered the market which made prices to remain very competitive. In less than a decade, the company had already restructured itself twice but only to continue losing its market share. The company was trying hard to reengineer their strategies of doing business to fight with the very competitive threat that they had underestimated. The company continued to shrink every year and finally after fifteen years, the company which was now about to be dissolved was sold to a competitor. Later on with lots of analysis, it was found out that the company greatly believed and had implemented the stakeholders first formula which they thought would work well for them. If said in a different way, then the needs of the stakeholders like consumers and employees within the organization came in the beginning and their shareholders in the later stage. But it did not work well; in fact, it resulted opposite to the company’s interests (Harrison & Wicks, 2013).
Apart from the above example, a deeper justification can be give to the fact that the company directors should place the interest of the shareholders above the interest of the other stakeholders looking at how these shareholders and stakeholders are composed and as per their work execution in the company.
Nature of the Shareholders and Nature of the Stakeholders
The shareholders connect with the company by either buying the equity shares or by initial public offerings. If the company makes profit and if the share price increases, then the shareholders earn profit in the form of dividend and when there is appreciation in the capital. So shareholders are more focused on the company’s work flow regarding how they can make profit and avoid losses. Whereas the stakeholders are those, who show interest in the company and they are not the true owners of the company like the shareholders. So they are not concerned more about the profit rather longevity of the work flow. So when looked at nature wise, the shareholders seem more important and more relevant for the organization.
Why Shareholders need to be Focused More
The monetary performance of the company like profits or loss directly affects the shareholders as it quickly reflects in the price of the stock. If there is a big loss on the company, then the share price decreases and certainly the shareholders are the one who get affected most. When it comes to stakeholders, then they can have an impact on what is going to happen to the performance of the company so they can work as per the indication they get regarding the work flow. They can be affected by company performance but not to the extent of shareholders. For example, the employees, they receive a fixed amount of salary no matter how bad the company may be running. So even looking at the impact, there is more affect on the shareholders than the stakeholders (Wu & Shen, 2013).
Importance of Shareholders
The shareholders are always looking for such activities in the organization which can help to raise the share price and value of the company which will certainly raise the value of the dividend which is benefit for the shareholders. The stakeholders are only focused on longitivity but they are less concerned about whether the company will be able to perform with good profit or not. There is this lack of realization on the stakeholders regarding the fact that a company cannot move forward or expand unless there is a good profit or extra surplus with the company. So, comparing their overall work and responsibility, it is quite clear that the directors should focus more on the shareholders interests (Khan, Muttakin, & Siddiqui, 2013).
Looking at the Interest of the Shareholders
The shareholders, who have made an investment into the business, want a very good return on their investment from the organization. But the activities of the stakeholders, that is the employees determine the profits or increase in the dividends of the shareholders. So the fact has to be understood that the shareholders do not work for other stakeholders but the stakeholders work for the shareholders (Fich, Harford & Tran, 2015). One cannot imagine the share price of a company decreasing and the shareholders leaving out of their shares by selling it because this can only harm the company in terms of its capital. So this itself makes the directors of the company to focus more on shareholders interest and work accordingly for the betterment of the company because it is really very important to have stability in company’s work for which can only happen if shareholders continue to hold shares. The shareholders have a number of different companies and other investment options to choose from and if the company in which they have invested doesn’t give good output for them then they may leave their shares and put it in some different place of investment. And this is something the directors should really be careful of because this act of the shareholders not only hampers their capital but also the company’s goodwill is hampered which doesn’t encourage anyone to invest on and can lead to have a serious damage in the long run (Wheelen & Hunger, 2017).
Example
The Cadbury Schweppes has more than 2 billion shares. In such a company, the directors have to gain the trust of the shareholders in terms of executing decisions and to able the organization to gain value on shareholders behalf because if the shareholders of about 2 billion shares start falling out, then one cannot imagine the company’s situation (Tricker & Tricker, 2015).
Conclusion
It’s not a new thing regarding the confusion like whose interest should be put first among the shareholders and the stakeholders. Over the years, there has been a lot of debate on these two main pillars of an organization. But looking at all the main reasons and elements given in the report, it certainly seems that the shareholders have the upper hand. In a company, there are founders and directors and the ideologists but who help a lot to establish or start a company but without the existence of the shareholders, it is impossible to run a company in context of the fact that a company needs quite a huge amount of capital which can be brought only with the help of shareholders. Even the stakeholders play important role in the company as without them a company won’t be able to run its day to day business. But one has to realize that they are their only because of the shareholders who are the main reasons for the company to have capital. So both the shareholders and the stakeholders won’t be successful without each other. But looking at the evidences and examples provided in the report it certainly seems the directors have to put the interest of the shareholders above the interests of the stakeholders.
References
Akpan, E. O., & Amran, N. A. (2014). Board characteristics and company performance: Evidence from Nigeria. Journal of Finance and Accounting, 2(3), 81-89.
Ali, T. (2015). Beyond shareholders versus stakeholders: Towards a Rawlsian concept of the firm. Research in International Business and Finance, 34, 126-141.
Fich, E. M., Harford, J., & Tran, A. L. (2015). Motivated monitors: The importance of institutional investors? portfolio weights. Journal of Financial Economics, 118(1), 21-48.
Harrison, J. S., & Wicks, A. C. (2013). Stakeholder theory, value, and firm performance. Business ethics quarterly, 23(1), 97-124.
Harrison, J. S., & Wicks, A. C. (2013). Stakeholder theory, value, and firm performance. Business ethics quarterly, 23(1), 97-124.
Khan, A., Muttakin, M. B., & Siddiqui, J. (2013). Corporate governance and corporate social responsibility disclosures: Evidence from an emerging economy. Journal of business ethics, 114(2), 207-223.
Rönnegard, D., & Smith, N. C. (2013). Shareholders vs. stakeholders: How liberal and libertarian political philosophy frames the basic debate in business ethics. Business and Professional Ethics Journal, 32(3/4), 183-220.
Tricker, R. B., & Tricker, R. I. (2015). Corporate governance: Principles, policies, and practices. Oxford University Press, USA.
Wheelen, T. L., & Hunger, J. D. (2017). Strategic management and business policy. pearson.
Wu, M. W., & Shen, C. H. (2013). Corporate social responsibility in the banking industry: Motives and financial performance. Journal of Banking & Finance, 37(9), 3529-3547.
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