Shareholder vs. Stakeholder Values in Corporate Strategy

Introduction

This paper presents insights into the ideas of corporate shareholder and stakeholder values. Over the course of more than two hundred years, business entities and corporations have had a major effect on global economic society. The business community should represent a combination of financial, social, and environmental performance. Corporations have become such a major part of modern society that they are discussed and studied by academics, business ethicists, social engineers, theorists in economics, law, political science and sociology, political parties, labor unions, communities, environmentalists, the media, and the general public.

All of these groups are trying to better understand the various aspects of shareholder and stakeholder value streams. In first-world nations that utilize market economies, most experts agree that companies best serve their markets by pursuing strong economic profitability. But equally prevalent is the notion that organizations should also strive to meet their social obligations and responsibilities to the environment and community — even when profitability and social responsibility may be at least partially contradictory objectives.

On one hand, a business's profitability represents an objective of earning a strong return for shareholders. Profitability builds a foundation of trust with investors, which in turn supports rising stock prices and continued investor confidence. Profits can therefore be seen as an indicator of competitive health. But from another perspective, companies are groupings of human resources — people working together to meet a common goal. There should be more to a business than economic endeavors. Employees, customers, suppliers, governments, and other external interest groups must all hold a sense of trust in a corporation's social and environmental accomplishments in the same way that investors hold trust in its financial achievements. With that in mind, the combination of shareholder and stakeholder value together represent the true worth of a business.

It makes sense for the modern world to have a foundation in a market-based economy because the competitive market system efficiently helps meet the needs of consumers. These are not modern inventions or recent revelations. Adam Smith's concept of the invisible hand, articulated as early as 1776 in An Enquiry into the Nature and Causes of the Wealth of Nations, held that businesses pursuing their own self-interest would inadvertently serve the public good. These insights still hold relevance today.

There is no apparent inherent conflict between a business community attempting to maximize shareholder value and maximizing stakeholder or social values. In a sense, maximizing one inadvertently helps attain the other. Corporations can do well financially precisely when they do well in a socially acceptable manner. As Adam Smith suggested, a business may "do good as a by-product of seeking to do well." In theory, the concept seems to hold without restriction. As Pierucci, Naughton, and Clark (2005) note: "If the interdependence of persons in the modern corporation is understood as a moral category, then the analysis of the corporation must move beyond a calculation of its material productivity and market capitalization. The transitive and objective nature of human action within the corporate structure must be subordinate to the immanent and subjective significance of the human act."

In actual practice, however, it is clear that corporate social standing and profitability do not always work well together. There are many instances where conflicts have arisen from a corporation's moral, financial, or fiscal policies, because maximizing profits and doing what is good for stakeholders and society are not entirely in sync. This paper addresses these first- and second-order effects of shareholder versus stakeholder values, examines when and why conflicts arise, and explores ways to resolve these serious tensions. The concepts addressed focus on timely and classical ideas facing corporate America and, to some extent, the new international conglomerates operating in today's highly global and competitive world economy.

The business environment today must address concerns such as corporate migration and relocation, global expansion, data overload, pollution, employee job security, and a host of other formerly straightforward business situations. The world has shrunk with the advent of the internet and other technological advances, all of which have created new potential conflict points between shareholder and stakeholder values. Yet there may also be ways to mesh these two value systems. At the June 1999 International Association for Business and Society (IABS) annual conference in Paris, Duane Windsor of the Jones Graduate School of Management suggested that combining shareholder and stakeholder values might produce a more sound business environment: "Accommodation, alignment, or satisfaction of multiple stakeholder interests in a focal firm — when, how, and by whom — is an underdeveloped dimension of the governance, value creation, and stakeholder literatures" (Windsor, 1999).

The Dilemma of Shareholder and Stakeholder Values

Before delving into definitions and other details associated with shareholder and stakeholder values, it may be more beneficial to first demonstrate some of the typical dilemmas twenty-first-century business organizations must face. Consider Wal-Mart and its ambitious expansion to become the world's largest international retailer.

To meet its profitability-motivated objectives, Wal-Mart has consistently satisfied the shareholder values required for growth. The company's expansion into markets such as Canada was designed to satisfy financial objectives and meet shareholder expectations. But the Canadian market was very different for the retail giant and created strong, antagonistic opposition from various sources. As Shorter (1987) observed, "The study of industrial relations systems permits, at the same time, an examination of the role of the state in reproducing antagonistic production relations."

The expansion into Canada covered a spectrum of financial and legal concerns, including the acquisition and termination of collective employee representation, unfair labor practices and associated regulations, collective bargaining arrangements, and individual rights to collective bargaining. Stakeholder expectations were largely overshadowed by the need for profitability. Wal-Mart had historically maintained a union-free labor force and attempted to migrate that philosophy into its new Canadian markets.

Because of its labor policies, Wal-Mart was already facing labor disputes throughout the United States. This was driven home in June 2004, when American labor parties organized multi-million dollar campaigns to unionize Wal-Mart's employees nationwide. As Ramstack (2004) reported: "Union leaders say their chances for organizing Wal-Mart workers shot up this week when a federal judge in San Francisco said 1.6 million current and former employees could sue the retailer for sex discrimination in a class-action lawsuit."

These union efforts only intensified as Wal-Mart moved into the Canadian provinces, where unions were stronger than in the United States. Bertola, Boeri, and Cazes (2000) note that in the United States and Canada, labor turnover is roughly twice as high as in most European countries, and that while job tenure tends to be longer in countries with more stringent employment protection legislation — such as Italy and France — the evidence does not always conform neatly to theoretical predictions: "Most remarkably, not only are the estimates for Italy and France, at 21 and 24 per cent respectively, very high in absolute terms (one in every five jobs is either created or destroyed each year), but they are also extremely close to the estimates for the United States and Canada despite the much heavier regulation of dismissals in the European labor markets."

Once Wal-Mart settled into the Canadian market, it faced new challenges as unions heavily recruited its employees. Canadian statutes and social conditions created friction. Wal-Mart and the opposing labor factions demonstrated that financial and social expectations were not one and the same. The problems that emerged carried legal intrigue, acts of data destruction, and the suppression of vital evidence. Both sides spent millions on representation and lobbying efforts, ultimately affecting Canadian jurisprudence.

An evaluation of Wal-Mart's move north reveals a series of problems and external turbulence as the company attempted to balance shareholder and stakeholder needs. Since the early 1970s, Wal-Mart has consistently attempted to balance social standing with profitability.

To demonstrate Wal-Mart's philosophy of giving back to meet environmental and social obligations, the organization was credited with contributing approximately ten billion Canadian dollars directly or indirectly into the Canadian economy in 2003 alone. But even those hefty sums were not considered socially acceptable during this era of globalization and technological advancement. Wal-Mart continued to expand and realize consistent profits while being criticized for not offering sufficient wages or working conditions during these profitable periods. The company was also heavily condemned for its treatment of female employees, its turnover policies, and other human resource issues including limited healthcare options (Bertola, Boeri, & Cazes, 2000).

Wal-Mart, of course, presented itself in a shareholder-focused fashion, maintaining that it had sufficiently met the balance between shareholder and stakeholder value: "Wal-Mart Canada employs more than 65,000 Canadians and has been ranked Canada's best retail employer twice during the past three years by international human-resources firm Hewitt Associates and Report on Business Magazine. The company is committed to community involvement and has contributed more than $35 million to Canadian charities. Wal-Mart Canada was established in 1994, is headquartered in Mississauga, Ontario, and operates 234 Wal-Mart discount stores and six SAM'S CLUBS in Canada" (Wal-Mart Canada, 2004).

Despite this optimistic self-presentation, the labor force at Wal-Mart Canada was consistently moving toward unionization. The company's Jonquiere store, for instance, had been automatically certified with the United Food and Commercial Workers union (UFCW), and Wal-Mart expressed concern that the unresolved labor situation was proving detrimental to the store's business performance (Wal-Mart Canada, 2004).