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Shareholder
Shareholder and stakeholder and stakeholder
theory: after the financial crisis theory
Terence Tse
ESCP Europe, London, UK 51
Abstract
Purpose The recent financial crisis has restarted the debate of the value of both shareholder and
stakeholder theories. This paper aims to continue this discussion.
Design/methodology/approach The paper reviews existing literature and examines the benefits
and problems associated with these frameworks through the lens of the recent events which have taken
place during the financial crisis.
Findings The main assertion of this paper is that shareholder theory is in itself a sound theory. Yet,
some executives following this theory could have brought disrepute to it. In contrast, the stakeholder
theoretical framework has yet to assert its influence because the concept is not yet unambiguously
defined, which makes it difficult for the framework to become operational in practical business settings.
Research limitations/implications Future research should seek consensus on the scope and
definition of the stakeholder model, as well as who the stakeholders should include. It should also
focus on developing the tools and techniques necessary for the incorporation of stakeholder theory into
business operations.
Social implications Policy makers could work with industry bodies and business leaders to
encourage them to place greater emphasis on the interests of non-shareholders and encourage
collaboration between various groups of stakeholders to achieve corporate goals.
Originality/value The paper continues the shareholder and stakeholder theory debate in light of the
recent economic crisis.
Keywords Shareholder value analysis, Stakeholder analysis, Financial services, Economic theory
Paper type Research paper
1. Introduction
In June 2009, more than 1,000 MBA students from several top business schools signed
an oath that declared the rejection of the shareholder-oriented business approach and
vowed to give equal importance to shareholders, co-workers, customers and the society
in which we operate (Skapinker, 2009). Whether this is a knee-jerk reaction of MBA
students to mitigate the blame of the latest economic crisis on senior executives or the
pursuit of a new ideal is beyond the scope of this paper. However, it is clear that these
students, among many corporate executives, are opting for the main contending
alternative to shareholder- stakeholder theory. The debate between these two theories is
not unprecedented. The scandals at Enron, Global Crossing, Tyco International and
WorldCom sparked fierce debate as to which of these two theories is superior to the other
(Smith, 2003). The decline of many seemingly successful UK banks before the latest
financial crisis such as Northern Rock, Royal Bank of Scotland (RBS) and Halifax Bank
of Scotland (HBOS) reminded us that this debate is far from over. Indeed, in view of the Qualitative Research in Financial
various characteristics of the crisis, there is an urgency to continue this discussion. Markets
Vol. 3 No. 1, 2011
This paper aims to serve this purpose by reviewing some of the existing literature of pp. 51-63
both shareholder and stakeholder theories and discussing the benefits and problems q Emerald Group Publishing Limited
1755-4179
associated with these frameworks through the lens of the recent financial crisis. DOI 10.1108/17554171111124612
QRFM It concerns particularly the UK banking and financial services sector because this
3,1 industry is considered to be one of the primary catalysts of this crisis. Perhaps, more
importantly, the problems that plague this sector seemingly epitomise the misguided
use of shareholder theory. The main assertion of this paper is that shareholder theory is
in itself a sound theory and it is likely that some executives following this theory, rightly
or wrongly, have brought disrepute to it. The stakeholder theoretical framework, on the
52 other hand, has yet to asset its influence. It has not managed to supplant shareholder
theory because the concept is not yet unambiguously defined, which makes it difficult
for the framework to become operational in practical business settings.
This paper is organised as follows: Section 2 first highlights the advantages of
shareholder theory. It then discusses the disadvantages of the theory, primarily from the
perspective of how this framework has been misused. Since executive remuneration and
earnings benchmarks are connected to the creation of shareholder value, this section
also examines how they could have further exacerbated such misuse. In Section 3, the
advantages and disadvantages of stakeholder theory are subsequently discussed. The
final section provides some concluding remarks, implications to policy makers and
practitioners as well as recommendations for future research.
Shareholder theory
Benefits
Clearly defined recipients shareholders as the All constituents of an organisation not simply
residual claimants its shareholders can benefit from the value
created by the corporations
Clearly defined goal for the managers maximise
shareholders value
Problems
Temptation for empire building (especially with Multiple recipients require multiple
the use of debt) organisational objectives, which can create
confusion for managers
Reckless use of financial leverage Scope of the theory remains ill defined
Excessive risk taking by executives induced by It is unclear who the recipients are
managerial compensations, compounded by
managerial hubris and over-confidence in ones
own abilities
Current management tools and techniques are Table I.
developed for the shareholder value framework Benefits and problems
new ones for stakeholder theory need to be of shareholder and
developed stakeholder theories
QRFM theoretical concept to an actual business setting, not least because the scope of the theory
3,1 is yet to be properly clarified and the stakeholders themselves identified. Consequently,
the tools and mechanisms needed to put the stakeholder theoretical framework into
practice are yet to be developed.
It must be stressed that the need to combine shareholder and stakeholder theories is
not merely an academic issue. As Beinhocker (2006, p. 409) said:
60 Questions over whose interests corporations should serve lie at the heart of heated debates over
corporate governance reforms, corporate social responsibility initiatives, antiglobalization
protests, and the future of the European Unions economic model.
This suggests that the debate is not only relevant to business executives, but also policy
makers. Without properly taking both shareholders and stakeholders into account in the
pursuit of company goals, it is possible that improvement in corporate governance and
social responsibility, in particular the financial services sector, would be impeded. If this
is the case, another financial crisis may occur in the future.
To prevent the disaster from repeating itself, policy makers could work with industry
bodies and business leaders to encourage them to place greater emphasis on the interests
of non-shareholders. They would also do well to develop more collaboration between
various groups of stakeholders to achieve corporate goals. Given its broader social
implications, especially in the wake of the financial crisis, the effort to try and advance
the field would be well spent.
Indeed, even though this paper has drawn examples from financial services, the
debate should not be confined to this sector; others may also benefit from the inclusion of
the stakeholder perspective. For example, of late there appear to be signs that companies
can improve corporate performance by taking the stakeholders interests into accounts.
Paul Polman, the CEO of Unilever, recently commented that, I do not work for the
shareholder, to be honest; I work for the consumers, the customers [. . .] I dont drive this
business model by shareholder value (Stern, 2010). Despite this claim, Unilevers share
price went from 13 to todays approximate price of 20 during his last year in power.
Taking this at face value, it seems possible for company executives to blend both the
shareholder and stakeholder values, thereby creating benefits for all involved.
The academic community can also play a vital role in bridging the
shareholder-stakeholder gap. Future academic research should seek to develop a
specific research agenda that calls for a consensus on the scope and definition of the
stakeholder model, as well as an agreement on whom the stakeholders should include.
Only then will it be possible to answer other prominent questions such as how to balance
and prioritise the interests of different stakeholders. Moreover, as one of the major
appeals of the shareholder framework is that it is easily quantifiable and measured
through share price, researchers should explore new ways to better quantify stakeholder
performance. These figures are likely to be important prerequisites for the development
of the tools and techniques necessary for the incorporation of stakeholder theory into
business operations.
These are undoubtedly enormous undertakings for policy makers, practitioners
and academics. However, this may very well be the price of the progress needed to
integrate the two theories. It is hoped that the financial crisis and the attempts of MBA
programmes to focus their attentions on serving the greater good will take us a step
closer to completing this goal.
Notes Shareholder
1. Technically, it should be the value of the firm. However, investors tend to use share prices as and stakeholder
proxy as the information related to the latter are much more convenient to obtain.
2. The opposite can also be true: the manager may refrain from undertaking investment
theory
A because investment B provides more certainty that she would be obtaining the bonus.
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Corresponding author
Terence Tse can be contacted at: ttse@escpeurope.eu
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