Post on 12-Jul-2020
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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
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Limitations of Concepts Promoting
Social Values
Corporate Social Responsibility (CSR)
Creating Shared Values (CSV)
Social Enterprises (SE)
B Corporations
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Shareholders Vs. Stakeholders
Milton Friedman (1970s) -- Shareholder Theory The sole responsibility of a business is to increase its
profit legally and ethically via fair market competition, return it to the shareholders and let hem spend their money as they wish
Edward Freeman (1990s) -- Stakeholder Theory Corporations cannot be thought of as being
responsible to only one group, but must be seen to bear responsibilities to all of the individuals their activities affect, and upon whom their existence depends
Both do not emphasize on creating social or public value
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Shareholders Right & Director/CEO
Duties
1. Company directors & CEO are the agent of the
shareholders only?
2. Company directors & CEO are legally obliged to
maximize shareholder value (MSV)?
3. Existing law prevent the Board of Directors from
considering the interests of non-shareholder
stakeholders?
4. MSV is in the best interests of the company?
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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
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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.
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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
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The Intended and Unintended
Consequences of MVS (1)
Management focus on expectation (stock) market than real (product) market
High debt financing and high dividend payment
Encouraging short-termism, reducing investing in R & D and innovations
A doubling of stock buybacks was correlated with an 8% fall in R & D spending (The Economists)
Growing macroeconomic instability
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The Intended and Unintended
Consequences of MVS (2)
Excessive and abusing executive stock option pays excessive risk-taking
Other social & environmental externalities
Average stockholding period: 8 years in 1960s 4 months today
Average life expectancy of corporations:
55 years in 1960s 15 years
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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.
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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
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Stakeholder Theory: R. Edward Freeman’s Doctrine of Fair Contract
The Principle of Entry and Exit Clearly defined entry, exit and renegotiations rules/conditions
The Principle of Governance Rules of the game set by unanimous consent
The Principle of Externalities If effected person want can be renegotiated
The Principle of Contracting Costs Shared cost of contracting
The Agency Principle Must act in the interest of all stakeholders
The Principle of Limited Immortality Continued existence of corporation is an all stakeholder interests
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Critique of Stakeholder Theory (1)
Allowing other stakeholders to participate to determine the future directions of the firm change the normal dynamics of the business world and violate some rights of the shareholders
Respect to other layman stakeholders is shown by treating them as contractors. It does not require “having a say”
Student’s grade
‘You cannot please everyone and that the inability to appease all stakeholders’.
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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
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Limitations of Concepts Promoting
Social Values
Corporate Social Responsibility (CSR)
Creating Shared Values (CSV)
Social Enterprises (SE)
B Corporations
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Levels of CSR
(1) Advantageous to both(2)Advantageous to
corporation but not advantageous to the society
(3) Advantageous to society but not advantageous to corporation
(4) Not advantageous to both
Social Value
Eco
no
mic
Valu
e +
-
+ -
The Value Matrix (VM)
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Limitation of Social and Charitable
CSR
Most ‘CSR’ activities today are social, charitable or environmental which are outside their core businesses
While some CSR steam from compensating the social costs incurred (i.e. compensational CSR) or altruism (i.e. caring CSR), and many expect more CSR activities can lead to better reputation and thus more businesses (i.e. instrumental CSR)
Most firms engaging such CSR still adopt a MVS view, not a stakeholder approach
Corporations engaging in CSR do not imply they already comply with legal and ethical obligations, may undermine the interests of employees & customers.
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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
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Purposes of Social Enterprises
The Skoll Foundation: “social entrepreneurs” as “society’s change agents: creators of innovations that disrupt the status quo and transform our world for the better”.
Roger Martin & Sally Osberg: “ a social entrepreneur identifies an unjust social equilibrium, identifies a means of changing it, and implements the change, forming a new social equilibrium”.
Social entrepreneur vs social enterprises
SEs have clear social missions and to be self-financed using market forces
Focus on and create more social values than mainstream businesses, but not the only institutions to create social changes
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Limitation of Social Enterprises
Definition & certification
Emphasising more ‘entrepreneurship’ than ‘social’
Lack of innovations (novelty, impact, size, adoption rate)
Focus on ‘enterprises’ or ‘entrepreneurship’?
Narrow financing sources (donors do not receive tax deductions)
Restricted profit redistribution to shareholders
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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)
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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.
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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.
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Limitation of B Corporations
Similar to SEs in some ways
Its primary rationale rests on the mistaken, though widely-held, assumption that existing law prevents BoD from considering the interests of non-shareholder stakeholders
Still hold the unfortunate misconception that existing law forces corporations to single-mindedly MSV
Most states adopted “constituency statutes” explicitly empowering directors to consider the interests of other stakeholders.
B Corp. advocates provide mainstream corporations with excuses not to consider other stakeholders’ interests by overstating the limitations of existing law placed on director’s’ decisions.
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Merits of B Corporations
The more mainstream corporations convert to B Corp., the better? Or in fact there should not be any B Corp. some day?
B Corp still a good idea and play a complementary role in the movement period to focus on social value
The law’s mandatory company charter, accountability, transparency and legal protection provisions will help attract more responsible investors’ capital
The B Corp banner/logo gives marketing, recruitment and other management advantages
However, the ultimate mission of its advocates should urge all companies to adopt a stakeholder approach (instead of excusing them not to do so)
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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
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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
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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)
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Towards Stakeholder-based CG Model:
Cross-sector Social Innovations
1. Taking the lead in social/business innovations in order to making a better world (and more profits).
2. Companies at all times should have at least one bold, pioneering & strategic initiative under way
3. Some innovations can be more feasible and beneficial by joint actions with other companies, NGOs, and/or social enterprises
4. Cross-sector collaborations on social innovations: enhancing free exchanges of ideas, values & resources
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Unique Roles of Family Businesses
Leaders as Pioneers
Reduced agency costs
Family values tie with business value
Have a more long-term vision in creating
values
Would be easier to embrace other
stakeholders
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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
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Thanks
謝謝