Focused on shareholder wealth, committed to the economic interest of all other stakeholders: How companies can be both | Inquirer Business
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Focused on shareholder wealth, committed to the economic interest of all other stakeholders: How companies can be both

In a recent article that appeared in the MIT Sloan Management Review (issue of Dec. 17, 2020), authors Tom Hunsaker and Jonathan Knowles wrote:

“Companies [should] show that they are actively contributing to the broader society rather than simply serving as financial entities seeking to maximize their return on capital.”

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The notion that companies should contribute to the wellbeing of others instead of just pursuing the financial interest of corporate investors is in keeping with emerging thinking that “… the fiduciary duties of executives to non-shareholder stakeholders [should cover] a plurality … of the purpose of the corporation” (N. Craig Smith & David Rönnegard, Journal of Business Ethics, Nov. 16, 2014; emphasis supplied).

Both statements convey the message that businesses should attempt to achieve multiple goals. They echo the currently evolving viewpoint that call to question the long-established tradition that the corporation has only one purpose, and that is to maximize shareholder wealth.

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On Aug. 19, 2019, the influential Business Roundtable (BRT), an association of close to 200 CEOs of major US corporations, formally abandoned its long-standing advocacy of shareholder wealth maximization as the main purpose of business corporations in favor of a new Statement of Purpose of the Corporation (SPC).

With this formal proclamation, BRT committed corporate America to creating value for all stakeholders by adopting a five-fold mission: to deliver value to customers, to invest in employees, to deal fairly and ethically with suppliers, to support communities, and to generate long-term value for shareholders.

Among the over 150 signatories to the SPC are Amazon’s Jeff Bezos, Apple’s Tim Cook, Bank of America’s Brian Moynihan, BGC’s Joe Davis and IBM’s Ginni Rometty, to mention but a few.

Over a year later, 26 of the largest business and professional organizations in the Philippines, collectively known as the Philippine Business Groups (which includes the Management Association of the Philippines or MAP, sponsor of this column) signed a Covenant for Shared Prosperity by which they upheld the universal issues of economic and social inequality and noninclusivity by ensuring “ethical wealth creation and the sharing of prosperity with all stakeholders.”

Many prominent individual corporate CEOs and business leaders the world over have similarly expressed their faith in stakeholder capitalism. Among them are outgoing Mastercard CEO Ajay Banga, who declared that capitalism should be “repositioned for stakeholder capitalism,” and recently installed Accenture CEO Julie Sweet who observed that “serving stakeholders is not separate from the business. It’s responsible business by design.”

By all indications, stakeholder capitalism appears to be the new mantra in the corporate world.

However, simultaneously aiming for several goals could be problematic. Creating value for all stakeholders in a company deprives its managers of an unequivocal criterion for making rational choices. Any strategic decision made is acceptable for as long as it creates value for everybody, and decision makers are unable to determine what is the best, or optimal solution. For this purpose, firms must pursue only one goal.

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By long standing managerial practice, businesses create value for themselves by extracting value from all the other entities with which they interact in the process of value creation—their customers, their workers, their suppliers and service providers, and the larger communities of which they are an integral part. To our minds, this is a self-seeking and short-sighted business solution by which businesses try to grab a bigger slice of a given economic pie at the expense of everybody else, and by degrading the ecosystem that sustains the entire community.

A better strategy for corporate managers to follow is to create a bigger pie, and to share out bigger slices to everybody—including the owners of the firm.

If business is to implement socially beneficial initiatives and at the same time achieve its long-run strategic goal of maximizing shareholder wealth, it has to radically change the manner in which it does business. In particular, it needs to rethink the way it pursues its profit objective.

As an alternative to profit or shareholder wealth maximization as the raison d’être, or sole purpose of the business enterprise, we propose to state the function of the firm in modern society as one of maximizing economic value, and allocating the economic wealth created among all the groups that contribute to the process of value creation.

By implementing appropriate strategies and putting in place governance mechanisms for creating value for its other stakeholders, we contend that the residual value that accrues to the owners of the firm (aka profits) over the long stretch will consequently be maximized.

Following this line of reasoning, we propose the following business strategies for efficiently appropriating economic value to the non-owner stakeholders of the firm:

ʎ Create value for customers through product and service development to better serve their needs, offering generous prices and providing adequate customer care.

ʎ Create value for workers by offering comfortable wages and other performance-based financial benefits, creating an organizational culture that is conducive to information sharing and collaboration, and devoting ample resources to maintain a high level of productivity primarily through skills development.

ʎ Create value for business partners by engaging suppliers and distributors in a mutually beneficial and trusting collaborative relationship.

ʎ Create economic value for the rest of society, primarily by developing the limitless productive resources that remain untapped at the bottom of the social pyramid, the poorest and least productive members of society. This objective is pursued mainly by partnering with government agencies, multilateral organizations, nongovernmental organizations and other institutions in the community in implementing what are known as inclusive business models, solutions that provide access to economic opportunities to low-income communities in a manner that will make businesses more viable and sustainable.

The resources employed by firms in pursuing these stakeholder strategies are in the nature of investments intended to enhance long-term productivity and to insure sustained shareholder wealth creation over the life of the enterprise, and not short-run operational costs to be minimized in order to achieve immediate gains for the owners. One creates value for all, and the other creates value for business owners at the expense of all others. INQ

The article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is a retired professor of economics and management, and currently professorial lecturer at the University of the Philippines-Diliman.

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TAGS: Business, MIT Sloan Management Review
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