One of the most important aspects of any good corporate governance and responsibility includes the faith and the trust which has been entrusted on the board of directors of any company, by its stakeholders. It is this fiduciary relationship between the board of directors and the different stakeholders, which sets out the tone of a good corporate governance. It has been the ideology from the very beginning that any company and its board of directors must focus their importance and attention to the shareholders of the company. This ideology has lost its sheen in the past couple of years. Due to the rising number of corporate problems, financial scams, corruption cases, fraudulent and money laundering activities, the faith of the different non-financial stakeholders such as the society in general, the government, the local communities, the employees as well as the suppliers has taken a sever hit. The primitive ideology of looking solely into the interests of the shareholder’s interests has led to the problems of overlooking the different needs and requirements of the other stakeholders. Through this report, a comprehensive analysis of the need of the companies to look into the interests of the other stakeholders has been made.
One of the most important assets for any business organisation the amount of funds it has at its disposal. The amount of funds helps it to perform in an effective and efficient manner. Adequate funds also help the company in bailing it out at times of financial emergency. Thus, the importance of funds cannot be downplayed (MIT Sloan Management Review 2018). There are various ways for arrangement of funds, issuing shares is one of them. It is regarded as one of the most effective ways of raising long term funds. The amount of funds is collected by issuing shares in the name of the company in the stock market. The total amount of capital is divided into smaller denominations, which are purchased by individuals in the market. These individuals buy all these shares of the company and led their money to the company in return for some dividend and returns, voting rights and other benefits. They are regarded as the owners of the company. The amount of shares held by each of the members represent their ownership, their decision making powers, liability and their decision making powers. These shareholders can either be an individual, group of people, or a partnership a company, or any other kind of a corporate body. Being the beneficial owners of a limited company, they are not only involved in daily affairs and the management or financial dealings. These duties are the responsibilities of the directors. Their importance in the organisation, is of paramount’s importance. They are one of the most important aspects of any organisation. They play a major role in the organisation in the following ways:
Financing: One of the most important roles which the shareholders play in an organisation is the role they play in the financial aspect of the organisation. They help in financing the short term and the long term operations of the company. In return for ownership of the company. They help in raising the financial assets of the company in the form of equity shares, preference shares. In return the company is expected to provide certain kind of benefits and returns in the form of dividends at periodic manner.
Company Operations: Shareholders who are also the part owners of the company, play a major role in the day to day affairs of the business. They elect the directors of the company, appoint supervisors and senior officers, including the Chief Executive Officer, Chief Financial Officer and always expect the company to grow at a healthy pace, which would eventually lead to better returns in the form of dividends.
Governance of the company: Shareholders play a vital role in ensuring smooth governance in the company. Companies have a set of corporate policies and norms to follow, like selection of the board of directors, and their composition, the role of the Chairmen, codes of conduct, business ethics and many other policies (Chassagnon and Hollandts, 2014). The shareholders expect the company to honour their obligations and responsibilities. They want the company to provide them timely feedback about the ways their company is working and moving, they also expect complete transparency from the side of the board and the management of the company at all times. The CEO and the CFO sign the documents and the reports of the company, ensuring their accountability towards the operations and the results of the company, as a result of which they become liable to the shareholders for providing any kind of feedback. This helps in ensuring a proper governance of the company, under the watchful eyes of the shareholders.
A shareholder is always one of the stakeholders of a business organisation, but it is not the case with the stakeholders of the company, not all stakeholders are the shareholders of the company. A company cannot grow alone, it needs of the support of all the other groups of individuals apart from the shareholders, for ensuring their all-round development and support. They broaden the pool of people who care about the well-being of the company, apart from the shareholders and the management of the company. They do so because, they too have vested interests in the company’s growth and development (Walker and Dyck, 2014). It is for this vested interests or the stake, which helps them in clinging to the business organisation. It includes a wide range of people ranging from loyal customers, employees, suppliers, creditors, local community, society at large, the government and many others as well. They share a symbiotic and a healthy relationship with the shareholders and the management of the company. The company cannot work alone with its management and owners, it must look as well as cater to the needs and requirements of the employees, their welfare and benefits, the supplier’s problems, the expectations of the local communities, ensuring proper adherence to the needs, expectations, compliance with all the legal and financial requirements. The importance of the stakeholders towards the organisation are as follows:
Any successful business relationship stems from the idea of working towards a common objective, which helps in catering to all of the objectives of the stakeholders and the company as well. Motivated employees, give their best to the organisation as they know the importance of the job, which they have at their disposal, vendors and suppliers who are paid their dues in a timely and efficient manner, always tend to go the extra mile in case of providing any kind of help to the company (Times.com 2018). In the same way, when the organisation plays a vital role in providing any kind of help to local community, the local authorities also help them by awarding them contracts for conducting businesses or community development. They are also provided tax subsidies and other benefits. When any company provides quality product and services, which genuinely helps in eradicating the problems of the society and helps them to increase and improve their standard of living, the society and the community also serves the company back in their own little way. They help in spreading a positive word of mouth about the company and its products and services. The word of mouth is one of the most effective promotional tools, which provides a massive advantage to the businesses. Thus, it can be clearly implied that the stakeholders play a very active role in ensuring the overall success of any business organisation. Without any of these groups of stakeholders, the company cannot survive in the long run. If any one of the blocks fall of the cliff, the company would collapse, thus each of the stakeholders play a major role in ensuring the success and the longevity of the organisation.
Looking solely into the interests of the shareholders has its own share of disadvantages and long term implications, which might compromise the integrity of the enterprise in the long run. Shareholders occupy a significant place in the organisational hierarchy of any business organisation and they put their money and resources on the line, which is a considerably risky venture, which entitles them to receive many kinds of financial benefits to them, but not at the expense of the other stakeholders of the organisation (Garcia et al. 2016). The dangers of focusing exclusively upon the interests of the shareholders are as follows:
One of the most important ill-effect of serving to the interests of the shareholders is the risk of ubiquitous short termism (Forbes.com 2018). There remains a large number of chances, where the company executives might conspire with the shareholders with the purpose of making short term gains at the expense of the employees, customers and the society on the whole.
There also exists the risk of rise in the manipulation activities of stock prices, in the cases, where the shareholders of the company are given too much importance and their vested interests are solely looked into (Felipe et al. 2015). In these cases, the manipulation activities of the company executives of the stock prices with the use of speculation activities and the buybacks of the shares.
Serving towards the interests of the shareholders of the company, would in a way provide the organisation a group of disgruntled and dispirited employees. When any employee of the company would be compelled to work for creating money solely from the shareholders and the owners, the employee in question would become dispirited, let alone be passionate about their job (Walker and Dyck, 2014). This would severely affect their morale and performance, which would eventually lead to an increase in the attrition rate and the performance of the company as well.
The need for striking the right balance between the two sides has become a compulsion, as leaning too much on the shareholders’ side have some serious implications on the overall health of the organisation. Indeed there exists a fiduciary relationship between the executives of a company towards all of its stakeholders, especially those apart from the shareholders. It has been rightly said that the value maximisation of shareholders is an outcome of the activities undertaken by the company and it is not an end in itself, rather a means to the end. While shareholders do invest their money into a company, but they are just one of the many spectators, who are a part of this large group of vested interests holders. Some of them like the employees have their entire livelihood depended on the company. According to Mishra and Mishra (2013), the primary stakeholders like the customers, employees are vital to the persistent growth and development of any organisation, or else it would lead to the cessation of the organisation. From the point of view of the business, scientists have said that a company groups and classifies the stakeholders into different groups, on the basis of their financial value to the organisation. It is because of this the interests of the other group of stakeholders are exploited and taken care of adequately (Tullberg, 2013). As per reputed Author and Professor of Harvard, Mr Bruce Scott, in his recent editorial ‘When Capitalism only rewards shareholders, it’s time to reform’, has said that that today’s version of capitalism, completely ignores and disregards the fact that corporations owe their powers to the society and other aspects of it (Scott and Scott, 2018). At times like these, it becomes very essential to concentrate on the larger picture and take into account the needs and requirements of the other group of stakeholders apart from the shareholders. Thus, the importance of the other stakeholders cannot be ignored. Thus in this regard, it would be a viable solution to present a Statement which would cater solely to the requirements and expectations of the stakeholders apart from the shareholders of the company (TheEconomist.com 2018). It would provide them a sense of importance within their organisation.
Conclusion:
The importance of the looking into the interests of the various other stakeholders apart from that of the shareholders of the company is very important. It provides the other stakeholders like the employees, customers, suppliers, local community, government and the society an importance in terms of the company’s functioning and growth. This would go a long way in ensuring an effective, efficient and spirited work force and strong network of well-connected stakeholders, who would not think twice before bailing out the company in case of any kind of problem or emergency. Of course the shareholders being the owners, would always demand better financial returns for their investments, but it also must be kept in mind that in the process of accomplishing their objectives, the other parties must not be ignored or exploited in any form.
References:
Brandt, F. and Georgiou, K., 2016. Shareholders vs stakeholders capitalism.
Chassagnon, V. and Hollandts, X., 2014. Who are the owners of the firm: shareholders, employees or no one?. Journal of Institutional Economics, 10(1), pp.47-69.
Felipe-Lucia, M.R., Martín-López, B., Lavorel, S., Berraquero-Díaz, L., Escalera-Reyes, J. and Comín, F.A., 2015. Ecosystem services flows: why stakeholders’ power relationships matter. PloS one, 10(7), p.e0132232
Florea, R. and Florea, R., 2013. Stakeholders interests analyse and harmonization-starting point of strategic approach. Economy Transdisciplinarity Cognition, 16(1), p.130.
Forbes.com. 2018. [online] Available at: https://www.forbes.com/sites/stevedenning/2014/10/14/the-unanticipated-risks-of-maximizing-shareholder-value/#36d6c5e97094 [Accessed 3 Aug. 2018].
Garcia-Torea, N., Fernandez-Feijoo, B. and de la Cuesta, M., 2016. Board of director’s effectiveness and the stakeholder perspective of corporate governance: Do effective boards promote the interests of shareholders and stakeholders?. BRQ Business Research Quarterly, 19(4), pp.246-260.
InBrief.co.uk. 2018. The Roles and Duties of Shareholders – InBrief.co.uk. [online] Available at: https://www.inbrief.co.uk/company-law/shareholder-roles-duties/ [Accessed 3 Aug. 2018].
Mishra, A. and Mishra, D., 2013. Applications of stakeholder theory in information systems and technology. Engineering Economics, 24(3), pp.254-266.
MIT Sloan Management Review. 2018. Why Boards Must Look Beyond Shareholders. [online] Available at: https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/ [Accessed 3 Aug. 2018].
Scott, B. and Scott, B. 2018. Column: When capitalism only rewards shareholders, it’s time for reform. [online] PBS NewsHour. Available at: https://www.pbs.org/newshour/economy/column-capitalism-shareholders-time-for-reform [Accessed 3 Aug. 2018]
The Economist. (2018). A new idolatry. [online] Available at: https://www.economist.com/business/2010/04/22/a-new-idolatry [Accessed 3 Aug. 2018].
Time. 2018. https://time.com. [online] Available at: https://time.com/4121/why-shareholder-value-should-not-be-the-only-goal-of-public-companies/ [Accessed 3 Aug. 2018].
Tullberg, J., 2013. Stakeholder theory: Some revisionist suggestions. The Journal of Socio-Economics, 42, pp.127-135.
Walker, K. and Dyck, B., 2014. The primary importance of corporate social responsibility and ethicality in corporate reputation: an empirical study. Business and Society Review, 119(1), pp.147-174.
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