“The stakeholder view is basically suggesting that the shareholder view is wrong about the set of legitimate owners of the firm. Other individuals besides shareholders, if they make firm-specific investments, should have legitimate claims on not only residual income but also on decision-making. On common sense as well as theoretical and normative grounds, these individuals and groups may be rightful owners.” (Nicolai and Klein, 2018)
Discuss
Introduction
In recent times, company is a popular form of business which is regarded as a trading device. This form of business corporation is very much more influential around the world and impact the field of macro and micro economics. In order to run business activities properly, it is necessary to consider corporate governance, which is defined as mechanisms to include internal and external governance structures, such as board of directors, shareholders, an executive management, stakeholders together with ethical, moral and political aspects. Corporate governance provides productive directions to operate corporative management and impose general acceptable standard of treatment between different constituencies and institutions who deal with business activities. Therefore, an effective and entrepreneurial board has crucial role to develop long term and sustainable success for companies, generating business value for shareholders and concerning wider society, that do not restrict only economic perspective. Considering important theories of corporate governance, many scholars initially pay attention how to maximize companies’ profit in response to shareholders’ demand and shareholders are regarded as owners of companies who are entitled to gain residual incomes, such as annual dividends and have power to control board in general meeting such as the appointment and removal of managers. However, shareholders cannot perform genuine decision-making power relate to administrate corporate affairs because this is categorized as duty of managers and shareholders can only have control power to separately check or examine business operations which are decided by managers under fiduciary duty . Nevertheless, in UK’s Company Act Section 172 imposes that directors’ duty act with good faith assist to promote company long-term success for benefits of all corporate constituencies. This legal instrument emphasizes the necessity of stakeholder theories influence actions are performed by directors and managers with the purpose long-term-success of company. For these reasons, board of directors have intensively concentrate on other factors and relevant groups or individuals apart from shareholders who involve in corporate affairs. It means that power and rights of stakeholders tend to be developed in domestic and international business much more than previous session. This essay will seek to demonstrate that although some scholar argues that considering stakeholders as owners are given decision-making participation remains complicated and unpractical for corporate activities, the stakeholder who make firm-specific investment should be regarded as legitimate owners of firms and have power of decision-making apart from the allocation of residual income, in other words they should be treated as equal as shareholders who are accepted as legitimate owners of company. In this paper, it is divided into 4 different sections, the general notion of shareholder primacy and stakeholder theory perspective to ownership and control will be explained in the first section. Then, it secondly discusses relationship between ownership, control and Corporate Social Responsibility (CSR). The argument contrast view point of stakeholders can be accepted as legitimate owners will be illustrated in the third section. In final part, the author’s perspective will be presented and end up with conclusion.
The boundaries of ownership and the evolution of ownership in relation to shareholder primacy theory and stakeholders’ theory.
An explanation of ownership in relation to corporate governance is complicated and controversial. Ownership can be examined as a bundle of rights and possession, involving alienable and non-alienable asset. The nature of ownership is not restricted only by legal provisions, but it also directly perceived in economics of property rights. In terms of business legal theory, it mainly relates to contractual terms, in particular, Jensen and Meckling establishes principal-agent theory and nexus contract theory that associate ownership with residual right of control in the incomplete-contracting tradition. Williamson and Hart point out that contractual parties who make specific investment in companies in incomplete contracts can gain the residual right of control, in particular the power of decision in activities that affect their interest explicitly because directors do not have equal vigilance to take care of other people asset comparing with their own property. In Hannsmann’s explanation, the key defining of ownership have to be examined simultaneously with the residual right of control and the right to have residual income. In the same way, Alchian agree that the residual control rights of ownership can develop value creating effort and investment. Since owners can fully determine how resources will be managed in the highest value that is not narrowly limited by existing agreement. Due to absolute control power, it can raise incentive for investors to promote financial support and capital, such as providing asset for firms which increase business value creation. In his position, he supports principal-agent and shareholder primacy theory.
Concerning ownership with shareholder perspective, Berle and Means support the shareholder primacy theory. Shareholders who invest money to purchase corporate shares own firm, but they suggest that even though firms belong to stockholders, they do not have real power of decision-making to run business activities. Since shareholders have to appoint board of directors and managers regarding fiduciary duty to determine corporate affairs, it can be considered the separation of ownership and control power of shareholders. In other words, shareholders as owners can control manager in another stage by the performance of voting rights in compliance with check and balance system and they cannot intervene directly determination of director and managers, there are very restrictive exceptional circumstances to allow shareholders influence decisions. In the same way, Jensen and Meckling establish agency theory to strengthen shareholder primacy theory, they confirm that managers are seen as agent who perform corporate operation in favor of principal or shareholders’ interest who are firm’s possession. Hansmann emphasizes it is necessary to focus owners, not shareholders per se, including the corporate resources, market, business target and characteristics of individual and group of owners. Although he did not explicitly state that only shareholders can be treated as owners of company, he pointed out concerning homogeneous group can reduce transaction cost in decision making procedure. Thus, this might imply if non-shareholders stockholders are regarded as owners, they can influence decisions and board of directors have to spend more time and pay higher transaction cost to develop perfect treatment for a large group of stakeholder and representations preferences to proceed business activities instead of serving shareholders interest in minor group.
In contrary, Stakeholder theory, it generally examines stakeholders can be divided into two types; internal and external stakeholders. The stakeholders’ protection is perceived by many specific law, such as labor law, environmental law and corporate law, contracts and other internal company’s policies. Donaldson and Preston clarified the business ethics, social services and moral prescription in the world of economics. They emphasize the obligation to primarily serve stakeholder’s interest because stakeholders can dominate long-term success of companies. Stakeholders theory reflect managerialism and Team Production theory, that is created by Margaret Blair and Lynn Stout. They explain creditors, managers, employees who devote human-skilled resources and promote financial supports, means that they have firm specific investments. Managers have to realize and maximize interests carried by groups and individuals that face with residual risks and gain residual claims. Hence, Blair and Stout, in Team Production theory agree to balance shareholders’ and other constituencies’ interests; they argue that shareholders are not corporate legitimate owners, but company own their asset itself and stockholders’ mere own shares.
Similarity, Hart illustrates that ownership create power in property rights economics because ownership bring about right to make firm decision over asset in circumstances that do not limit only in contractual term. Comparing with shareholder perspective, equity holders are corporate legitimate owners so that they have residual decision and control rights over firm’s assets. Stakeholders’ viewpoint, they also make specific investment for firms that can increase valuable asset; they should be seen as firm owners and have control power as equal as stockholders, in particular in Edward Freeman’s popular paper; Stakeholder Theory of Modern Corporation in 1984 illustrate that managers have to bear a fiduciary duty to stakeholders rather than stockholders and they can participate in making determination affecting the future direction of firm the way in which they have interests.
Another supportive methodology of stakeholders, instrumental and normative approaches of stakeholder management in respond to intrinsic value for stakeholder interests along with the goal of company. Donaldson and Preston develop instrumental approach, which is a model identifying the model of company and the relationship between managers’ duty and stakeholders’ role and management to achieve corporate performance goals based on cost-benefit analysis. However, the normative methodology focus on the right things and decision-making process that do not rely on cost and benefit assessment. The analysis of moral and ethical substances in corporate strategies provide guidance for case-by-case decisions in order to balance stakeholders’ interest. Therefore, in stakeholders’ perspective, it is recently considered managers have duty to maximize stakeholders interest with regarding they own company because they partially invest in company in the same way as shareholders’ privilege, stakeholders can dominance corporate affairs management. Nevertheless, in the eyes of economic and legal substantive, the role and right of stakeholders remain vague. It is important to demonstrate stakeholders’ protection in separation of ownership and decision-making power. It is difficult to accept that stakeholders are legitimate owners of firm and are authentically entitled to determine every corporate activity in form of voting rights and other contributions.
The relationship between ownership, control and Corporate Social Responsibility (CSR)
Some scholar agrees that Corporate Social Responsibility (CSR) can activate firms to reach an accomplishment in the long-run. Friedman highlights ownership can influence company to realize importance of CSR together with the residual claims of owners and CSR affect profit maximization. Berle and Means clarified separation of ownership or principal, in particular shareholders and the control power can cause agency problem, such as conflict of interest and mutual risk between owners and managers because owners cannot mandate business activities operated by agents closely. For these reasons, the relationship between agency theory and CSR can well conform together to motivate agents operate corporate policies that concern social services, moral and ethical aspects in order to maximize shareholders value and increase economic interest. Thus, agents concern about CSR because of an attempt to fulfill profit maximization of shareholders and corporate income as much as possible. On the other hand, Freeman argues that stakeholders’ theory is an essential foundation to develop CSR because managers must care the best interest of other constituencies, in particular local communities apart from shareholders interest. This method requires the coordination between stakeholders and managers to obtain residual claims, in ethical decision-making business affairs which cause more or less impact for stakeholders. They can provide some suggestions and gain the right to vote and access referendum openly in equal standard as shareholders with the aim of social benefit and good atmosphere of investment. For instances, Denmark’s family-owned Lego, proclaim that their ultimate purpose is to develop children have creative thinking, reason and support potential to plan their own future-human capability is endless. It means firm do not only maximize corporate wealth or fulfill owners interest, they aim to improve social purpose in view of main target of consumers; children that affect directly for firms’ incomes and decision-making process. Another outstanding case is BP’s deep-water horizon disaster, since company reduces costs for employees and contractors’ causing oil spill, 11 death and environmental hazards because they did not have sufficient essential human resources to take responsible for safety standard. This circumstance illustrates company created mistakes in the evaluation of possible dangers from business activity and ignore CSR, public health and environmental protection because they concern mere how to pay less and gain more in profit maximization for shareholders. Therefore, stakeholder theory has tendency to promote CSR regime more concrete in comparing with shareholder primacy which aim to operate CSR for one group interest.
The argumentative concept toward legitimate claims of stakeholders and author’s standpoint.
Although most companies recently implement stakeholder theory in running business, there are much more controversial to guarantee that this theory can work in companies productively and response all constituencies demands fairly and thoroughly. Stakeholders are categorized in different groups and some specific activities that they might have no effect. Although, some theorists demonstrate that they might not own corporate property, but they are important to make strategies for firms that impact long-term success. It is necessary to take into account for power of determination for stakeholders who are authentically affected by corporate affairs. However, the heterogeneous interest of various group of stakeholders causes unexpected problems arisen in reality. For the first problem, stakeholders expand beyond members of local community and broad range of citizens along with foreign investors who involve in business operational activities. In this case, anonymous consumers are regarded as stakeholders who influence corporate final decision, this circumstance might cause some group who unreasonably dissatisfy companies ban products and destroy corporate image. This can directly affect reduction of the quantity of product selling and brands. The second argument is the wider group stakes, the more divergent claims on the firm. For instances, companies normally require working skills and corporation to function operational business trade and stakeholders merely anticipate legitimate claim in final stage without any coordination for the development of firm wealth. Besides, due to a lack of awareness in company success because of caring only their own benefits, their determination might not create real advantages for company and could not actually fulfill their demands in practices. It creates variety of demands that are incompatible with corporate target and conflict other different groups because different group do not require similar means to fulfill their needs. Thus, this incident leads obstacles and further complicated difficulties for business management for company. The social responsibility of corporation is the third point to consider, companies actually have duty to society, but in recent time there are no certain guideline to restrict to what extent company have to take in to account social purpose together with running business operation. For example, Royal Dutch Shell has been harmed by shareholder group who have no genuine interest in corporate success; they seriously blame for every activity affect environmental damages even though they do not gain actual impact more or less causing by corporate operations, however company unnecessarily has to listen their comments and devote skills and time to find solutions. Hence, stakeholder management, such as decision power for a various group of stakeholders cause corporate endless and unnecessary responsibility, in other words this theory increase more burdens for directors, including reduction of incentive for shareholders to invest more funds for companies because rights and consideration might be partially divides to serve stakeholder interest instead of total income for owners.
In the author perspective, although there are some negative aspects for the residual claim in decision-making power for stakeholder, stakeholders’ management provide complementary matters for business operations. The first advantage is an awareness of moral and ethical standard, although stakeholders are normally protected by contractual agreement and other specific law, such as employment law, consumer law and environmental law, they have a primary safeguard to ascertain their rights, it does not seem to be sufficient to guarantee that their interest will be concerned as equal as shareholders. In particular, Company Act in Section 172 emphasizes managers have obligation to take into account for stakeholders’ interest that can help to maximize benefits for shareholders in larger amount rather than ignorance stakeholders’ rights. Another crucial factor, in Freeman’s paper, people who are volunteer to coordinate in business affairs are dominant to improve economic value. The firm is born to benefit all participants, not limit in one group. The effective board present the role serve other constituencies apart from increasing corporate wealth for shareholders, especially allow stakeholders make decision and have the right to vote for some affairs affecting their interest. Hence, my position agrees even though there are much more arguments to classify stakeholders as owners, at least in the minimum standard of treatment stakeholder make specific investment for firm so that they deserve to be granted residual claim, such as taking a participation for check and balance system and decision-making process apart from residual income in order to promote long term and sustainable success for company.
Conclusion
Although stakeholder cannot be regarded as owners of company same as shareholders, they should be protected by the existing law and contractual agreement, along with the right to control firm, in decision-making power for specific activities and circumstances that create possible impact for their interest. Even though stakeholders obtain general legitimate claim, such as residual income, it seems to be inadequate to preserve all interest because shareholders and managers are lacks of care in negative impact that possibly occurs with stakeholders and do not affect owner’s interest. In other words, there is no point to pay attention to increase other benefits and resolve problematic management whereas owners receive nothing. Therefore, this concept tends to harms profit of company itself and economic value in business society because certain standard of residual claim for stakeholders can create incentive for investors to support capital which influence corporate income and consideration in long term benefit.