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).

There are strict guidelines that outline the shareholder value approach. Corporations are required to conduct business with an understanding that the organization is subject to stock market pressures, competition, and profitability needs. A corporation should serve the overall common good while meeting these market and profitability objectives. Management should be capable of meeting day-to-day, short-term, and long-term requirements in a highly competitive global marketplace.

In a true shareholder value system, corporations have abandoned the requirement to satisfy every stakeholder demand. When a decision must be made between the common good and legal, safe profitability, the corporation should act in its best financial interest — because corporations should not be confused with charitable or social entities. As Pierucci, Naughton, and Clark (2005) argue: "Ownership of corporate shares does not constitute the right to extract the maximum financial gain from the interdependent web of human action which constitutes the modern public corporation."

Profit is critical in the shareholder value system because it represents the lifeblood of the company. "If the corporation was truly dedicated to the fullest possible growth and development of its employees, productivity and profitability might just reach levels undreamed of heretofore" (Pierucci, Naughton, & Clark, 2005). The idea of sustainable development recognizes the need to balance economic, social, and environmental goals — the "triple bottom line" — for short- and long-term value creation (Windsor, 1999). Companies have been forced to integrate principles associated with stakeholder needs into their corporate strategies in order to balance value and profit. But as Warren Buffett, CEO of the Berkshire Hathaway Group, has observed, it can take an organization twenty years to build a reputation but only five minutes to ruin it. Trust is derived from reputation.

If investor trust is the foundation of the shareholder value approach, then the twenty-first century has been its antithesis. "Legislative reform undertaken to arrest corporate malfeasance reflects the need to stem the loss of investor confidence and revitalize the reputation of American business. Fiduciary breaches between company directors and executives and their employees and shareholders, as well as the conflict of interest for investment analysts and auditors, are only aspects of the problem" (Kinetix, 2004).

The American legal system has been steadily introducing new legislation, statutes, and regulatory measures to address the inherent problems associated with a lack of investor trust in corporate America. As the CEOs of companies like Tyco and Sprint were indicted and tried, and as the nation reeled from the Enron and Arthur Andersen debacle, the enormous pressure that the shareholder value approach creates became abundantly clear. There was a widespread need for all businesses to maintain very high levels of profitability, often at any cost.

The Shareholder Value Approach

The steep declines in stock prices of organizations found guilty of questionable ethical and accounting practices created a legislative need for protecting shareholder value. Windsor (1999) notes: "Public companies are now among the most accountable organizations in society... But the emphasis on accountability has tended to obscure a board's first responsibility — to enhance the prosperity of the business over time... Good governance ensures that constituencies [stakeholders] with a relevant interest in the company's business are fully taken into account."

Investors now seemingly look beyond financial measures to social and environmental accomplishments to determine a company's true market value. "The findings of several independent studies have confirmed that superior environmental and social performance correlate closely with superior strategic corporate management, and therefore with superior financial performance and shareholder value creation" (Kinetix, 2004).

It is in a business's best interest to consider more than the basics of shareholder value added approaches in the twenty-first century, because there will be no need for businesses if whole societies fail or if global ecosystems deteriorate. Today's global marketplace is characterized by new levels of diversity, liberalization, and capital mobility. "To maintain profitability and growth, companies need to be attentive to issues of governance, social responsibility, and the prudent and efficient use of resources" (Kinetix, 2004).

A shareholder value added viewpoint is one in which the emphasis on new opportunities and risks is driven primarily by organizational profitability over social and environmental responsibilities. In this view, a company's primary obligation is to serve as an instrument of its shareholder owners. A shareholder value supporter measures organizational success through market value, share price, dividends, and steady economic profit. The shareholder value added advocate would likely see stakeholder management as a means to an end rather than an end in itself. In the extreme, this philosophy would promote corporate self-sufficiency and manufacturing efficiency above environmental controls or human resource advocacy.

Nonetheless, a shareholder value added philosophy does not completely ignore stakeholder demands. "Quantitative environmental and social performance continue to influence the market's assessment of value. The perception of qualitative performance, especially in governance — the arena of values, ethics, transparency and accountability — has also become a determining factor in market valuation" (Kinetix, 2004). Shareholder value, however, always takes precedence. The underlying assumption is that maximized shareholder value, achieved through legal and permissible means, will ultimately satisfy the needs of society as well.

"This shareholder value model has been increasing in importance in the last 10 years and was entering Western Europe via Great Britain rapidly. The American enthusiasm and entrepreneurial spirit was attractive as a remedy to the sometimes bureaucratic company cultures in Europe. Shareholder value can be achieved and measured in a number of ways. Cutting costs and postponing expenditures are popular ways to make short-term profits grow... Also the buying and selling of (parts of) companies is very popular, although it is widely known that most if not all mergers and takeovers in the longer run decrease corporate value" (De Jonge, 2003).

An advocate of shareholder value thinking would also support goals associated with short-term maximization by corporate management. Management could even dismiss efforts to forecast long-term value creation. Unfortunately for the shareholder value approach, it has begun to lose momentum as high-profile mismanagement has overshadowed the value received through short-term gains. Traditionally, corporations were seen as vehicles to maximize the wealth of shareholders — and nothing more. As a result, the interests of stakeholders were either not considered or reduced to secondary objectives less critical than profitability. Communities and legal systems were greatly influenced accordingly. "Faced with parochial wealth maximization as the animating spirit of the corporation, the larger community will, of course, respond with equally parochial laws and regulations designed to protect its interests" (Pierucci, Naughton, & Clark, 2005).

Consider how Ford Motor Company influenced the city of Detroit, the state of Michigan, and the entire world at the beginning of the industrial revolution. In 1903, Henry Ford founded his corporation, building it on a foundation of his personal invention — a motorized four-wheel buggy called the Quadricycle. By 1908, Ford introduced the Model T, eventually selling over 10 million of them. The famous dictum of the era was that you could have a Model T in any color you desired, as long as that color was black. Ford's innovation of the assembly line set him apart from other inventors and businessmen of his time.

Today, Ford has systematically reduced its reliance on the high-cost labor markets of Detroit and surrounding communities. Profitability and shareholder value drive decisions that have moved the company away from higher-priced domestic labor. Ford began moving manufacturing facilities to the new and emerging markets of Asia and mainland China: "Ford Motor Company expects sourcing for parts and components from China to reach $1 billion by the middle of next year and it can rise to more than $10 billion by mid-decade, as part of its overall drive to cut costs" (Ford to Spend $1bn a Year in China).

Reducing the domestic manufacturing labor force is no longer merely a short-term tactic. Layoffs, downsizing, and corporate restructuring have all given way to full corporate relocation abroad. Ford and other corporations must continuously search for alternative ways to cut costs while still fulfilling customer quality demands. Shareholder value is the primary driving force behind these new corporate imperatives.

The goals and requirements of shareholders in a shareholder value model also dictate the purpose of a company and have had far-reaching consequences for an organization's pursuit of consistent profits. One accurate measure of shareholder value is Total Shareholder Return, which represents changes in the overall capital value of a company. Total Shareholder Return is typically measured over a finite period — such as one year — adding dividends and expressing the result as a gain or loss percentage from the original beginning value. This process was developed by the Boston Consulting Group as a measure to calculate an otherwise unavailable stock price for private companies, using a firm's CFROI and invested cash growth.

There may be a movement toward reduced focus on shareholder interests given the significant erosion of investor faith in global markets. "Investors feel that companies have misused their trust to ensure the capital markets that the profits were still in line with expectations. And 'trust is fragile and resembles a piece of china and, once cracked it is never quite the same'" (De Jonge, 2003).

This is not to say that shareholder value thinking has become obsolete. As the baby-boom generation ages, investments by shareholders will continue to increase. "Companies that integrate sustainability into their strategic planning can increase market share, competitive edge and profitability, while minimizing exposure to litigation, regulation and damage to reputation. In addition to strong financial growth, stakeholders are demanding ethical leadership, transparent reporting and a commitment to triple bottom line results" (Kinetix, 2004). Corporations will continue to appease shareholders through comprehensive reporting, assurances, and other value-added initiatives that help them outperform competition and regain investor confidence.

Recent scandals — including mutual fund fraud, accounting irregularities, corporate theft, and favoritism — continue to influence shareholder value added philosophies and investment decisions. Nonetheless, the market continues to receive large amounts of investment capital, driven in part by the baby-boom generation nearing retirement. The key for investors today is to remain in the market for the long haul in order to reduce volatility. As Glassman, Hassett, and Lindsey (1999) noted, "When you look at data going all the way back to the nineteenth century, you find that stocks are really not any riskier than bonds in the long run. While the returns of stocks fluctuate from year to year, this volatility is canceled out over longer periods."

Banks, insurance companies, and pension funds have provided stabilizing forces for corporations focused on short-term prospects. "In Europe the potential for this stabilization or dampening effect on short-term corporate and investor thinking is bigger than in the United States, but smaller than in Japan" (De Jonge, 2003). If trust is to be reestablished in the shareholder philosophy, these institutions will help institute the necessary regulations clarifying auditing and consulting policies under appropriate corporate governance. "It would be attractive if we could keep the strong aspects of shareholder thinking (entrepreneurial spirit and market dynamics) and combine that with something new to compensate for its shortcomings or less strong characteristics" (De Jonge, 2003).

In corporate America, human knowledge, experience, innovation, customer relations, and efficiency are valuable tools for meeting shareholder and customer expectations. The sudden collapse of Enron — described by The Economist as "a Texan energy-to-finance-to-fraud conglomerate" — shook faith in the integrity of corporate America and in the Wall Street-centered model of capitalism. "The dotcom bubble was one thing; the realization that apparently profitable companies are not making any money quite another" (Unknown, "Capitalism and Its Troubles," 2002).

Employees form the basis of economically viable organizations. Recruitment and hiring policies must focus on bringing in motivated, well-educated people, because shareholder value is strongly driven by human capital — a dynamic that is even more pronounced in service-oriented organizations. The better the employees, the better the results demonstrated by the company, and the more equity investors can build.

Employment and ethics concerns will escalate as corporations move to new geographically advantageous locations. Consider how Wal-Mart had to abandon its union-free environment, which had been corporate policy for many years. Similar issues will arise as existing management and union relationships require new negotiations when organizations such as Ford evacuate the United States to open new plants abroad. Employees who remain will have to accept that such moves may be in the best interest of the shareholder, even when they conflict with domestic stakeholder needs.

Consider Enron and its accounting firm Arthur Andersen. A memorable television commercial of the era depicted a Christmas-like evening with snow falling — when the camera panned into an ominous building, the snow turned out to be frantic accountants shredding documents. "The next time an attorney hints that staffers shred documents as investigators close in, only a fool will follow the suggestion" (Chicago Bureau Chief Weber, 2002).

The general meaning of shareholder value counsels investors never to avoid purchasing a stock simply because it seems expensive — even if they can only afford a few shares. Consider that one of the most successful organizations in history, Berkshire Hathaway, has consistently traded in the thousands of dollars per share. An investor who declined to purchase at $1,000 would have missed extraordinary gains. The company strongly believes that shareholder expectations should be met before stakeholder value is considered. Even during downturns, the stock has tended to move forward. "No, there's no way of telling how quickly stocks will snap back. But if you're regularly adding to your stock portfolio, you'll pray for a slow recovery" (Clements, "Wipe Those Bear Market Worries Away").

The shareholder value model in its modern form has overlooked vital environmental and social issues. An alternative framework — the Stakeholder Value Approach — has emerged in response. "Criticisms that one must choose between social wealth maximization and stakeholder management raise the question of whether non-feasibility of interest balancing undermines the stakeholder approach. Capital then receives priority as the firm's organizing element" (Windsor, 1999).

The stakeholder approach incorporates a broader set of external concerns beyond profitability. Stakeholder responsibility forces a company to consider ethics, values, and principles, corporate social responsibility, corporate citizenship, and sustainability. These issues have been recognized by global industry as vital to true business success and as a foundation for social acceptability. "In recent years a 'business case' for sustainable development — the concept that adopting business policies aligned with the objectives of sustainable development can increase business value — has emerged" (Perceval, 2003). Corporations have begun to move beyond a profitability-or-else philosophy and have redefined how to increase and measure a business's value.

To define stakeholder values, one must begin from a perspective that places emphasis on a business's responsibility to the environment and to social causes — potentially above those of profitability. In this view, the corporation is seen as a grouping of people and social groups who have an obligation not only to meet their commercial objectives but also to fulfill environmental and social responsibilities. Stakeholder value advocates measure a company's success through a consensus agreement among the various parties involved. As Pierucci, Naughton, and Clark (2005) argue, 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.

Conclusion

Wal-Mart Canada (2004, November 15). News release. Retrieved January 19, 2005, from http://www.walmartcanada.ca/

Windsor, Duane (1999). Can stakeholder interests be balanced? International Association for Business and Society.

Yahoo Finance (2005, January 21). Wal-Mart. Retrieved January 21, 2005, from

Yahoo Finance (2005, January 21). Ford. Retrieved January 21, 2005, from