Shareholderism versus Stakeholdership

By Atty. Gerasol H. Valencia

Stakeholdership, espoused by Tony Blair, the leader of Britain’s Labor Party, teaches that corporations are communities of diverse constituencies, each of which has a stake in the corporation and therefore a legitimate voice in its governance and destiny. The shareholders form just one constituency among several: hence, the preference for the term ‘stakeholder’. Other constituencies include the corporation’s employees, customers, suppliers, and even the localities in which the corporation operates. Advocates of stakeholderism claim that the corporation acquires such obligations from a implicit contract between the corporation and wider society.

In this connection, the understanding of corporate social responsibility in the late 20th and early 21st centuries would require a glimpse of the birth of corporations extending all the way to the Industrial Revolution. From its genesis in the early Industrial Revolution, the joint-stock corporation took root as heir to the private-partnership organization wherein close owner-capitalists maintained high levels of familiarity with the working s of the companies that they partially owned. As the scale of companies grew, so did the need for capital well beyond what the original entrepreneur and close partners could provide. Thus, the idea of passive investors purchasing equity shares emerged and by the end of the 19th century this would come to dominate the industrial landscape and become a central driving force of the economic expansion of Western nations.

United States court decisions in the late 19th century fueled the rise of shareholder supremacy, a notion built on the premise that shareholding entitles shareholders to the the dominant recipients of surplus generated by corporate wealth creation. This view, while upheld by the courts, met with opposition even among business leaders. Henry Ford and Owen D. Young, General Electric’s chairman in the 1920s, questioned the supremacy of shareholders relative to other parties that contribute to wealth creation. Two shareholders sued Ford for suspending dividends in favor of plant expansion. When asked what the purpose of his corporation was, Ford responded: “To do as much good as we can, everywhere, for everybody concerned… and incidentally to make money.” Ford lost his case in a Michigan court.

Shareholderism intensified during the ensuing decades more so after it had been reinforced by “stock market capitalism”, i.e., the unwavering focus on short-term share price at the expense of other performance indicators. Shareholder primacy reached its pinnacle after the 1980s. The wave of mergers and acquisitions that swept the business community in the name of maximizing short-term shareholder value dominated corporate decisions. Though the magnitude of long-term benefits, even to shareholders, of the 1980s, and the subsequent waves of mergers and acquisitions, remained contested, the period solidified the supremacy of shareholder rights vis-à-vis the rights of other stakeholders.

Today, the received wisdom of shareholder value as the central purpose of business poses a continuing challenge to corporate social responsibility. The conflict begins with management education deeply entrenched as to be the core driver of board and executive decision-making. This is happening despite the acute observation by Sumantra Ghoshal: “If the value creation is achieved by combining the resources of both employees and shareholders, why should the value distribution favor the latter? Why must the mainstream of our theory be premised on maximizing the returns to just one of these various contributors?”

In a fundamental sense, the emergence of corporate social responsibility may be viewed as a modest corrective mechanism to shareholderism. Its emphasis on stakeholder rights and participation opposes the unrelenting focus on shareholder interests, especially those that place short-term share price above all other goals.

Questions about the nature and purpose of the corporation are heard with some frequency. In Germany, for example, where labor is represented on corporate boards, equity ownership is traditionally far more concentrated that in the United States and the United Kingdom. Market dominance rather than share price is viewed as the core performance indicator. The distaste for shareholderism was expressed recently by the chairman of the German Social Democratic party, referring to the failed effort of the Deutche Borse to by the London Stock Exchange: “Financial investors… have no face; they descend upon companies like locusts, destroying everything [for short-term gain] and move on.” In India, South Africa and Brazil, skepticism of shareholderism has cast corporate social responsibility as an antidote or preemptive mechanism. In India, the Ghandian model of voluntary commitment to public welfare and social needs is at least as influential in shaping attitudes toward corporate purpose as are imported doctrines associated with Friedman and other Western thought leaders that equate corporate purpose with private gain.

With that as background, we can appreciate the evolution of corporate social responsibility. Juxtaposed with the ascendance of shareholder value as the core purpose of business were the early precursors of corporate social responsibility that took root some twenty-five years ago. Distilled to its basics, the corporate social responsibility story is a chronicle of gradual redefinition and expansion ranging from “must do” legal compliance blended with traditional paternalistic philanthropy usually manifested through dole-outs, to “should do” based on traditional cost-benefit analysis, to “ought to do” based on emerging global norms of integrity, ethics and justice. These phases form a continuum, implying a process of building toward a more complex and nuanced framework for defining corporate social responsibility in concept and practice.

To state the matter in another way, we can identify a thread in the corporate social responsibility history as a three-fold shift in focus from (1) what is legally required and charitable to (2) what is financially justified and, most recently, to (3) what is morally expected. Each step along this continuum mirrors an evolving definition of the parties to whom corporations are responsible and accountable.

Since 2000, corporate social responsibility has entered yet another phase often called “integration”. This stage reflects a maturation of the corporate social responsibility idea and is recognition of the inherent limits of distancing corporate social responsibility from core business strategy and operations. The leading edge is now characterized by the idea of seamlessness, i.e., identifying and implementing actions that make corporate social responsibility everyone’s business and ending its isolation as a useful by dispensable add-on to “real” business activities. Paradoxically, companies pursuing integration see corporate social responsibility as becoming less visible as it penetrates not only strategy and operations but also corporate governance. What is emerging from the integration phase is actually multifaceted comprising:

· Alignment with business objectives within overall company strategy

· Integration across business entities and functional areas

· Institutionalization by embedding strategies, policies, processes and systems into the organization’s fabric

The beacon of this movement is a new set of “design principles” that strive to foster the innovation and competitive instincts of companies which elevating social purpose as the preeminent goal of the corporation. Its six principles are:

1. The purpose of the corporation is to harness private interest in the service of public interest.

2. Corporations shall accrue fair returns for shareholders but not at the expense of the legitimate interests of other stakeholders.

3. Corporations shall operate sustainably to meet the needs of the present generation without compromising the ability of future generations to meet their needs.

4. Corporations shall distribute their wealth equitably among those who contribute to their creation.

5. Corporations shall be governed in a manner that is participatory, transparent, ethical and accountable.

6. Corporate rights shall not infringe on the rights of natural persons to govern themselves and on other universal human rights.

Today, few would doubt that the future is inextricably linked to the corporate future. As such, corporate social responsibility is not an option; it is a reality. The sheer weight of the corporate role in wealth creation and the footprint associated with this creative process makes responsibility inevitable.

Two centuries ago, social purpose was the central charter of corporations in the United States. One hundred years ago, well into the era of large, investor-owned companies, industrialists like Ford and Young understood the concept of harnessing private interest to serve a broader public purpose. With the right mix of wisdom and will, the next decades may well witness a turning away from the deleterious effects of single-minded shareholderism toward next generation corporate social responsibility that meets the dual goals of prosperous corporations and prosperous societies.