Discuss About The Shareholder Value And Employee Interests?
A company is a distinct legal individual, separate from its owners, known as shareholders or members and have similar rights as a natural person. A company has the ability to sue and be sued, or incur debt. The company is an artificial person having perpetual succession, common seal, limited liability and ability to transfer its capital into small pieces known as shares. The person, who owns the share of a public or private company, is known as a shareholder. The individual holding shares of a corporation are its owners, but the corporation is managed by company officers known as directors. The directors are appointed by the shareholders or other board of directors, and they represent the company’s shareholders.
The corporate governance is a wide-ranging term, including various policies, directions, guidelines, and procedure followed by company’s directors in order to control and manage a company. Effective corporate governance increases the performance of the organisation and balances various interests of stakeholder in the company. The stakeholders of a company include consumers, stockholders, directors, managers, investors, and government.
The individual having an interest in a company or the person whose rights get affected by the activities of the company is called stakeholder. There two type of stakeholders: Internet and External. Internal stakeholders are entities who work as internal part of the organisation, including employees, managers, investors, and board of directors. External stakeholders are not part of internal management but still get affected by the performance of the company, including consumers, sellers, shareholders, government, community, and creditors (Golob 2007).
The employees are the individuals who hired by the corporation for a specific job. Many companies provide shares to their employees under Employees Stock Ownership Plan or ESOP, in order to increase their role in the organisation. The owners of a corporation appoint the directors as the officers of the company. The officers represent the interest of various stakeholders, supervise the activities of a corporation and make decisions for key matters of the corporation. The managers of a company control the daily operation of an organisation and supervise various aspects of a company, to achieve its goals (Damian 2002).
The consumers are the prime focus of a company. A company works to satisfy the needs or supply the products, to its consumers. The consumers are the most valuable asset of the organisation. The supplies provide the raw material for production and provide credit to the corporation. The government imply various taxes on the organisation and protect the public interest, in the corporation. The shareholder owns the shares of a company, they benefit from growth in the value of company’s stock (Fletcher 2003).
Shareholders invest their capital in the company by buying its share, as such; they are the part-owner of the corporation. Shareholders did not get involved in daily activities of business, instead, they have voting rights to appoint the board of directors. Shareholders have the voting power, which they used to make decisions for the major issues of the company (Farrar 2008).
The shareholders are important for the company because they help the company in raising funds for its operations. The shareholders help finance the company’s activities and in return, they become the owner of the organisation. The investment contributed by shareholder used in performing activities of the corporation and achieves its objectives (Sharma 2004).
The shareholder has both direct and indirect part in the activities of an organisation. The directors or the officers of a company are appointed by the votes of shareholders. The elected directors appoint other key managerial personnel of the company to manage the daily activities of the organisation. The indirect role of the shareholder is related to stock market. The companies require earning profits, in order to attract the investors. There is a constant pressure under company’s management to raise their profit.
Every public company generally has proper corporate governance guidelines, which require companies to disclose their financial statements in meeting to their owners. The officers and directors have a duty to respond to the shareholders and not to the managers. A public company’s board of director provide appropriate and whole disclosure to its owners in their meeting. The owners discuss and analyse the operation and growth of the company and take decision for major issues of the corporation.
The control of a company is determined by its shareholders. A higher number of shareholders increase the risk of a hostile takeover in a company, but if the shareholders are satisfied with the management and growth of the company, they can stop such attempts. The shareholders could accept the offer of merger or acquisition with another corporation if they are satisfied with the offer price (Christensen 2010).
The shareholders of a company face various risks while investing in a corporation. The value of share changes rapidly on the stock exchange. Various market factors or government policies could adversely affect the stock value of a company in the market. At the time of winding-up, the assets of a company get sold and proceed distributed among different stakeholders, shareholders get paid last (Nguyen 2002).
Many directors worldwide held the opinion that directors and officers have a legal responsibility towards company’s owners and it is their obligation to place their interest above all other stakeholders. But this is just an ideology, not the actual law. In shareholders primacy approach, the company’s sole motive is to increase the profits for shareholders. Under this approach, usually, the employees of corporation suffer due to job losses or work pressure (Grossman 2005).
According to various market experts, shareholder primacy affects the interest of other stakeholders of the company. The approach “Motive of a company is only to gain profit” has been changed with the introduction of Corporate Social responsibilities or CSR. Now the motive of the company is not limited to increase profits, but to also increase the quality of life for employees and society.
The study conducted upon 4000 company directors in June 2006, for finding the evidence of shareholders primacy. The survey was focused on finding evidence for whether directors prioritise the interest of shareholders in a corporation. The directors were asked to rank the stakeholders according to the priority of their interest. According to the survey, the shareholder’s interest was the number one priority by the majority of directors, followed by interest of the company and employees. While ranking their priorities, 74 percent of directors rank shareholders interest as their number one priority (Anderson 2007).
From the survey, it is clear that directors prioritise the interest of shareholders in the organisation, but the outcome of study does not conclude that pursue of shareholder interest adversely affect the interest of other stakeholders. Shareholders do have priority over other stakeholders, but some directors have ranked employee’s interest as the priority, making them appear equivalent when compared to other measures. For example, the company’s short term profits are not considered as a priority for the shareholders, by the directors.
The survey did not conclude that interest of other stakeholders is not being prioritized. Even if the shareholder’s interest is number one in the ranking, employee’s interest has ranked higher in these respects. For example, the interest of employees ranked higher in the list with some directors prioritising their interest as number one on the list. Therefore, the survey concluded that the shareholder’s primacy is a general viewpoint, rather than a specific policy made to maximise the profits for shareholders of a company.
The survey concluded that the shareholder primacy is not a legal policy nor it is result of the misguided views of company’s directors. The directors understand they are legally allowed to choose any approach, which is beneficial for all stakeholders of the company. The survey suggested that, corporate governance approach for overall achievement of goals has developed in the past decade, and it is the reason for failing of corporate governance, tormenting Australia along with many other countries (Mitchell 2005).
To protect the interest of various stakeholders and avoiding shareholders primacy, following steps could be taken by the company’s directors:
The objective of an organisation is growth and expansion, rather than collecting profits for shareholders. The company has various stakeholders including, but not limited to, shareholders, bondholders, employees, suppliers, managers, and directors. The board of directors should form policies for the benefits of all the stakeholders’ interest, instead of making policies just for a category of stakeholders. The shareholders are an essential part of the corporation, but shareholder primacy is not the approach for the growth of the organisation.
The company should take certain steps to increase the role of corporate governance in the organization. The overall growth of a company is beneficial for all the stakeholders’ interest. Timely and complete disclosure is a necessary part of a corporate social responsibility and the directors should perform their duties to maintaining transparency in company’s operations.
Golob, U. and Bartlett, J.L., 2007. Communicating about corporate social responsibility: A comparative study of CSR reporting in Australia and Slovenia. Public Relations Review, 33(1), pp.1-9.
Damian, D.E. and Zowghi, D., 2002, September. The impact of stakeholders' geographical distribution on managing requirements in a multi-site organization. In Requirements Engineering, 2002. Proceedings. IEEE Joint International Conference on (pp. 319-328). IEEE.
Fletcher, A., Guthrie, J., Steane, P., Roos, G. and Pike, S., 2003. Mapping stakeholder perceptions for a third sector organization. Journal of Intellectual Capital, 4(4), pp.505-527.
Farrar, J., 2008. Corporate governance: Theories, principles and practice. Oxford University Press.
Sharma, V.D., 2004. Board of director characteristics, institutional ownership, and fraud: Evidence from Australia. Auditing: A Journal of Practice & Theory, 23(2), pp.105-117.
Christensen, J., Kent, P. and Stewart, J., 2010. Corporate governance and company performance in Australia. Australian Accounting Review, 20(4), pp.372-386.
Nguyen, H. and Faff, R., 2002. On the determinants of derivative usage by Australian companies. Australian Journal of Management, 27(1), pp.1-24.
Grossman, H.A., 2005. Refining the role of the corporation: The impact of corporate social responsibility on shareholder primacy theory. Deakin L. Rev., 10, p.572.
Anderson, M.E., Jones, M.A., Marshall, S.D., Mitchell, R. and Ramsay, I., 2007. Evaluating the shareholder primacy theory: Evidence from a survey of Australian directors.
Mitchell, R., O'Donnell, A. and Ramsay, I., 2005. Shareholder value and employee interests: intersections between corporate governance, corporate law and labor law. Wis. Int'l LJ, 23, p.417.
Eccles, R.G., and Youmans, T., 2015. “Why Boards Must Look Beyond Shareholders.” MIT Sloan Management Review. Retrieved from < https://sloanreview.mit.edu/article/why-boards-must-look-beyond-shareholders/ >
Macey, J.R. and O'hara, M., 2003. The corporate governance of banks.
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