Shareholder Theory and Stakeholder Theory: New Mindset and Practical Measures, Slides of Business Management and Analysis

Download Shareholder Theory and Stakeholder Theory: New Mindset and Practical Measures and more Slides Business Management and Analysis in PDF only on Docsity! 1 From Shareholder Theory to Stakeholder Theory: New Mindset and Practical Measures Simon S.M. Ho President, Hang Seng Management College simonho@hsmc.edu.hk 10 December 2016 2 Limitations of Concepts Promoting Social Values  Corporate Social Responsibility (CSR)  Creating Shared Values (CSV)  Social Enterprises (SE)  B Corporations 5 Assumptions of MSV • Since the mid-20th century, the belief in shareholder primacy & MSV has been deeply embedded throughout the business sector • Is widely taught in business schools • Blind faith in the MSV dogma is believed to be one of the main causes of the financial crises and various corporate scandals 6 Fixing the Misconceptions & Myths of MSV  Shareholders (except private proprietors) do NOT own the company or its assets  Directors and senior executives are NOT the agent of the shareholders only (the latter are appointed indirectly via the BoDs).  Directors are NOT legally obliged to maximize shareholder value.  MSV is NOT in the best long-term interests of the company. 7 Fixing the Misconception & Myths of MVS (2)  MSV assumptions are false or not supported by the current legal system and dominant economic theories (only a market norm & habit)  Most shareholders mainly have dividends rights and voting rights on limited issues including appointing directors.  “MSV is not a managerial obligation, it is a managerial choice” (Lynn Stout of Cornell Law School), 2012 10 Rationale of Stakeholder Theory  there is growing belief that corporate executives should not be concentrating solely on shareholder interests through profit maximisation,  but should also be balancing the interests of various stakeholders to earn reasonable (rather than maximised) profits and to promote sustainable values.  Stakeholder theory posits that non-shareholder stakeholders should be consulted on the major decisions that companies take. 11 Edward Freeman’s Stakeholder Theory  6 stakeholder groups have a right to demand certain actions from the management and not to be treated as a mere means:  Shareholders  Senior management  Employees  Suppliers  Customers  Local community  Those engaged in a reciprocal relationship with the company, and are vital to the survival & success of the corporation  The Management should carefully balance the competing interests of many stakeholder groups Stakeholder Model (Simon S.M. Ho, 2006) Controlling Shareholders Minority Shareholders Board of Directors The Executive Management Customers Suppliers Employees Government Creditors The Community 15 Critique of Stakeholder Theory (2)  How to identify relevant stakeholders and should they be individuals, groups or organizations? On what criteria?  How they can elect stakeholder group representatives?  Should all stakeholders’ votes receive equal weight or do some groups have priority interests?  Using Freeman’s model in solving stakeholders’ conflicting interests can still be problematic 16 Limitations of Concepts Promoting Social Values  Corporate Social Responsibility (CSR)  Creating Shared Values (CSV)  Social Enterprises (SE)  B Corporations 4 Levels of CSR J 2 tee / — The 6 Levels / Dimensions of CSR (Simon S. M. Ho, 2013) }—Primary/Mandatory —+<€——Discretionary/Strategic ——>l 17 20 Limitation of Social and Charitable CSR  The term ‘social’ is vague. It may mean all stakeholders including employees & customers, or the community or the whole society.  For charitable or community-based CSR outside core businesses, excessive commitments may be applauded by the public but not sustainable  Usually a BoD pre-approved 5% of annual profit is acceptable  The Management should not be too generous on such at the interests of the company, its shareholders and other stakeholders. Limitations of Creating Shared Values ((Porter & Kramer, 2011) • To enhance economic value or competitiveness while at the same time addressing social problems • Not a new concept, similar to strategic CSR • Still assumes MVS, though placing greater emphasis on social values • Like CSR, assumes corporations already follow the law and behaves ethically (which seems not true) - Do not really allow other stakeholders to take part in determining the directions of the firm Limitations of Creating Shared Values (Porter & Kramer, 2011) • Ignores conflicts between economic and social goals • Some social initiatives will benefit some firms, under some conditions, some of the time  no magic bullet • Most large companies focus on stimulating further demand among affluent customers 25 Limitation of Social Enterprises  Economic and social impact are relatively small  Still play an important complementary role as for- profit companies may not be interested in addressing some social issues for business  Social entrepreneurship is not the only, and not always the best way to achieve social changes/values (e.g. indivudals, Govt., NGOs, companies) 26 Purposes of B Corporations • New hybrid type of corporation: falls somewhere between SEs and mainstream enterprises, ‘Business as a force for good’ • The company charter of a B Corp specifies that it resolves some social problems in addition to earning profits. • Unlike SE shareholders, B Corps shareholders are not prevented from seeking high investment returns. • Protects B Corp. directors from liability when they consider the interests of non-shareholders, even if those decisions do no necessarily MSV. 27 Purposes of B Corporations • The B-Lab system ensures that all certified B Corps adopt charters that explicitly address social and environmental issues and that they are legally accountable for meeting defined performance standards. • The statutes were passed in most states in the USA • Through mutual agreements, certified B Corps can trade with one another with special discounts and beneficial terms. 30 Mainstream Corporations vs. Social-purpose Corporations  To have a clear division of labor:  Mainstream enterprises focus on creating private economic values,  SE/B Corp. focus on creating public social value from addressing a specific social issue  Without initiatives taken by social entrepreneurs, the status quo would stand mostly uncontested and pressing social problems would remain largely unresolved.  Not to make every business to become a social business 31 Towards Stakeholder-based CG Model: Reforming Board Governance 1. By amending existing law, expressly extending legal fiduciary duty of board directors & executives to non- shareholder stakeholders, allowing such stakeholders with a legal right to challenge board decisions in court 2. Allocating board seats to a broader groups of stakeholders including at least one employee 3. Forming a Stakeholder Advisory Council 32 Towards Stakeholder-based CG Model: Changing Executive and Employee Pay 1. Restructuring executive compensation to focus mainly on the real market not the stock market (abolishing stock options?) 2. Tie part of incentive compensation to the interests/performance of other stakeholders (including social & environmental) 3. Paying a minimum reasonable % (say as least ¼) of annual profits to non-executive employees 4. Narrowing the pay gap between lowest-paid and the highest-pad staff (say not more than 15 times) 35 Changes in the Values/Beliefs of Business Executives and Students  A management job is a noble calling, towards the ‘stakeholder-based liberal art approach’  Promote new mindsets of personal/corporate success vs value: wisdom, integrity, justice, equality, diversity, people caring, contribution to others, win- win, sustainability, harmony  If directors/CEOs engage in strengthening the civil foundation, they would lead more authentic and fulfilling lives  In doing so, we can restore the core of free capitalism and the bond of trust between business, government and society 36 Thanks 謝謝