Upload
marcos-m-tello
View
39
Download
1
Embed Size (px)
Citation preview
1
Stakeholder vs. Shareholder TheoryDiagnostic & Valuation of Firms Pierre-Olivier HIGI
Stijn Moens, Linda Pantera, John Regner, Wenlu Wang, Yiwei Ding, Benjamin Rudaz, Siwen Meng, Wenjie Zhang, Dimitri Bellas, Ivana Matuskova
2
Structure
1. Definitions
2. Measurements of stakeholder values
3. Stakeholder Theory: Pros and Cons
4. May stakeholder value replace shareholder value ?
1. Definitions1.1 Shareholders
1.2 Stakeholders
4
1.1 Definition – Shareholder theory
Milton Friedman, 1962
"There is one and only one social responsibility of business: to use its resources to engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud.”
The purpose of business is to make money for the owner or shareholders
1. Definitions
5
1.2 Definition – Stakeholder theory
Stakeholder theory:
Businesses exist not only to serve the interest of their owners, but to benefit all who have an effect on the company and who are affected
Objective of management is to balance stakeholders’ competing interests
1. Definitions
6
1.2 Definition – Stakeholder
2 different approaches: 1963 – Stanford Research Institute:
Stakeholders: « those groups without whose support the organization would cease to exist »
Shareowners, employees, customers, suppliers, lenders and society
2004 – R. Edward Freeman: Stakeholders: « any group or individual who can affect or is
affected by the achievement of the organization’s objectives » Everyone is a stakeholder UN Definition of Sustainable Development:
The ability of present generations to meet their needs while allowing future generations to meet their own needs
1. Definitions
7
1.2 Definition – Freeman’s approach
Customers
Investor groups
Employees
Suppliers
Unions
Communities
Media
NGOs
Government
Universities
Societal Stakeholder
s
Economic Stakeholder
s
1. Definitions
8
1.2 Definition – Freeman’s approach
Dramatically increases the number of stakeholders Not just those in whom the organization has a stake, but
those who have a stake in it Excludes all criteria of materiality, immediacy and
legitimacy
Stakeholders are all those who can affect or are affected by an organization
Competing interests How should the management prioritize? How should the benefits be measured?
1. Definitions
2. Measurements of stakeholder values2.1 Balanced Scorecard
2.2 How one could link the Balanced Scorecard to corporate strategies
2.3 The stakeholder strategy: a practical approach
10
2.1 The Balanced Scorecard
Vision and
Strategy
Financial: encourages the identification of a few relevant high-level financial measures. In particular, designers were encouraged to choose measures that helped inform the answer to the question "How do we look to shareholders?“
Customer: encourages the identification of measures that answer the question "How do customers see us?“
Internal Business Processes:encourages the identification of measures that answer the question "What must we excel at?“
Learning and Growth:encourages the identification of measures that answer the question "Can we continue to improve and create value?"
1. Definitions 2. Measurements
Financial
Internal Busines
s Process
es
Learning and Growt
h
Customer
11
2.2 How one could link the Balanced Scorecard to corporate strategies
Vision and Strategy
Shareholder
Financial Success FactorFinancial Measures
Customer
Customer Success FactorCustomer Measures
Process Success FactorProcess Measures
Learning and Growth
Learning and growth success FactorGrowth Measures
Strategy
Goals
Balanced Scorecard
1. Definitions 2. Measurements
12
2.3 The stakeholder strategy: a practical approach
1. Definitions 2. Measurements
3. Stakeholder Theory: Pros and Cons3.1 The impracticalities of stakeholder value
3.2 Should a firm’s objective be single-valued?
3.3 Shareholders’ property rights
3.4 Stakeholders and ethics
3.5 Creating shareholder value by focusing on stakeholder value
3.6 Examples
3.1 The Impracticalities of Stakeholder Value
1. Definitions 2. Measurements 3. Pros & Cons
15
How do you identify stakeholders and benefits?
It is difficult to define and prioritize all relevant groups of stakeholders
Even with a contained list of stakeholders, identifying benefits to all stakeholders groups is an onerous task for managers Within the same notional group, stakeholders may hold
significantly different views of what is beneficial How can a balance be struck between stakeholders within
the same notional group?
1. Definitions 2. Measurements 3. Pros & Cons
16
Quantifying effects is complex
Are all stakeholder groups equal? What outside criteria would be used to order them?
It is complicated to assign values to abstract effects on different stakeholder groups
How do you deal with conflicting stakeholder interests?
1. Definitions 2. Measurements 3. Pros & Cons
17
The stakeholder approach provides a new perspective and a source of innovation
It can be said that the stakeholder value approach at least helps managers understand better the company’s strategy and the drivers of value in their businesses
Ex. Shaw Industries
Shaw Industries Managers
Environmental Concerns
related to PVC
Cost Drivers of PVC
Health Concerns
related to PVC
EcoWorxinnovation
Half the weight = savings on shipping
Pick up of EcoWorx at end of product life = feedback loop on materials
Call for pick up from customer = a selling opportunity
By end of the year, EcoWorx = 50% of all carpet sale
1. Definitions 2. Measurements 3. Pros & Cons +
18
Value-maximization can short-change the long-term in favor of short-term gains
While proponents of value-maximization speak in terms of long-term value, in practice this is often not the case
Concrete metrics give managers a false sense of understanding
Shareholder view is more susceptible to moral myopia
Profit objective offers no guidance for managers of how to deal with the moral and legal challenges they face in the day-to-day activities of the firm
1. Definitions 2. Measurements 3. Pros & Cons +
.
1. Definitions 2. Measurements 3. Pros & Cons
3.2 Should a Firm’s Objective Be Single-Valued?
20
Multiple objectives is no objective
Scorecard is more like an ‘instrument panel’ than a single goal in itself, so cannot be used as objective
Even if stakeholder values could be identified, their prioritization is left up to the manager’s discretion
Allows for politicization, and leaves managers with power and room to act in their own interest
1. Definitions 2. Measurements 3. Pros & Cons
3 7 5 2
Employees
Environment Society
Shareholders
Scorecard
21
Multiple goals leave managers the opportunity to act in their own interests
For organization strategy to be implemented effectively each person must clearly understand how performance measures will be constructed
Stakeholder theory does not offer a framework against which managers can be concretely judged
Without a uniform objective function anything can be justified as in the interest of “stakeholders”
Managers will favor the stakeholder approach, as it leaves them with more freedom
1. Definitions 2. Measurements 3. Pros & Cons
22
Shareholder value is a focused stakeholder value
Inefficient for a company to define specific goals for each stakeholder value
More efficient to maximize shareholder value, a function of stakeholder values
Leaves the employees the freedom to most efficiently prioritize and manipulate the drivers involved to reach the goal
1. Definitions 2. Measurements 3. Pros & Cons
Objective = A × Possession + B × Shots on Target
+ C × Passing Percentage + …
23
Single-valued objectives oversimplify and distort
Having a single objective function has historically not necessarily led to good company governance
It oversimplifies complex reality
Takes moral responsibility away from managers (not my fault – my goal is solely to create profit…)
1. Definitions 2. Measurements 3. Pros & Cons +
24
Optimum solution is irrelevant
All objective functions are too complex to maximize
Objective functions serve to show how to improve
Stakeholder values theory should be viewed as an opportunity to get different stakeholders to cooperate and agree
1. Definitions 2. Measurements 3. Pros & Cons +
25
Value is derived from a number of dimensions
1. Definitions 2. Measurements 3. Pros & Cons +
3.3 Shareholder’s Property Rights
1. Definitions 2. Measurements 3. Pros & Cons
27
Shareholders’ property rights are sacred
It denies the duty agents owe to principals
It denies owners the right to determine how their property will be used
Any rights given to stakeholders take away from shareholders’ property rights
1. Definitions 2. Measurements 3. Pros & Cons
28
Key notions of accountability
An agent is accountable to a principal for an outcome
Requires the existence of a legitimate authority — stemming from certain types of relationships and agreements. (Fiduciary duty)
Accountable individuals and institutions are answerable for what they do — there exists a system that metes out reasonable incentives (positive & negative)
1. Definitions 2. Measurements 3. Pros & Cons
29
Stakeholders’ theory still takes into account shareholders’ rights
Shareholders are stakeholders
Stakeholders’ views should be taken into account, and conflicts among them minimized, so they: do not exit the deal use the political system to appropriate value for
themselves regulate the value created for others
Stakeholders have become increasingly vocal, organized and active due to advances in technology Heightened risk and impact of negative publicity
1. Definitions 2. Measurements 3. Pros & Cons +
3.4 Stakeholders and Ethics
1. Definitions 2. Measurements 3. Pros & Cons
31
Monopolies and externalities should be considered
Externalities: internalizing profits, externalizing costs
Avoidance of competitive behavior destroys potential value
Negative ExternalitiesPollutionTraffic
Positive ExternalitiesEducationHealthcare Infrastructure
’Deadweight loss’ of the marketBusinesses lack incentives to innovate and increase efficiency
1. Definitions 2. Measurements 3. Pros & Cons +
32
Just profits, no ethics?
Ethics
Profit Maximization
Government Laws &
Regulations
Do regulations give companies the freedom of separating business from ethics?
Freeman’s ’separation thesis’: ethical issues can be neatly separated from business issues
Is it the government’s role to define specifically what is and isn’t ethically allowed? And should companies engage purely in shareholder value maximization within these rules?
1. Definitions 2. Measurements 3. Pros & Cons
3.5 Creating Shareholder Value By Focusing on Stakeholder Value
1. Definitions 2. Measurements 3. Pros & Cons
34
All stakeholders should be considered for value-generating partnerships
Value-generating partnerships with economic stakeholders have been common throughout history but partnerships
with other stakeholders have often been overlooked
1. Definitions 2. Measurements 3. Pros & Cons +
35
Stakeholder values are sometimes value-destroying
Public perceptions are often more important in stakeholder values than scientific facts
For example, radical difference in public perception of tobacco and alcohol unrelated to relative health risks
Company reputation and branding is often more important than company actions
1. Definitions 2. Measurements 3. Pros & Cons
3.6 ExamplesGeneral Electric, Enron, Merck, FIGHTON
1. Definitions 2. Measurements 3. Pros & Cons
37
GE – Placing shareholders in the centre…
When Jack Welch assumed the position of CEO, he centered the company policy around shareholder value maximization
Streamlining the company
Reduced salaries and severe lay-offs
High performance targets for executives
1. Definitions 2. Measurements 3. Pros & Cons
38
GE – ...understanding the needs of all stakeholders
Market value increased from $14 billion in 1981 to $410 billion in 2004
”Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products” - Jack Welch, CEO
1. Definitions 2. Measurements 3. Pros & Cons
39
Enron – Shareholder focus led Enron to ”success” in the nineties
Enron's stock rose by over 300%
1991 1992 1993 1994 1995 1996 1997 1998 1999
The stock increased by 56%
The stock increased by a further 87%, Enron’s market capitalization
exceeded $60 billion, 70 times earnings and 6 times book value
2000
By the end of 2001, Enron had filed for bankruptcy
2001
1. Definitions 2. Measurements 3. Pros & Cons
40
Enron – …and to bankruptcy in 2001
Many reasons for its demise, which can arguably be traced back to an extreme misapplication of shareholder value maximization
Corporate policy based around immediate shareholder value maximization
This led the Enron management to become risk-prone, to engage in levered speculation, and to ‘cook the books’
Disregard for any other stakeholders, decisions focused around increasing the stock price in the short-term
1. Definitions 2. Measurements 3. Pros & Cons
41
Merck – Curing river blindness on the cost of shareholders
Merck discovered that an anti-parasite drug for animals was effective against a parasite similar to the one that causes river blindness in humans
Developing and testing a human version of the drug would cost a large amount of money
The target countries could not afford the drug if it was developed
1. Definitions 2. Measurements 3. Pros & Cons
42
Merck – What would you do?
Forget the drug and let poor people suffer from blindness
Develop the drug with a loss
Turn the preliminary
findings over to the WHO
1. Definitions 2. Measurements 3. Pros & Cons
43
Merck – Medical and Financial Success
Has saved 600 000 people from blindness
Big costs, but the predicted branding gains much bigger
Would this have been possible in a shareholder focused company
1. Definitions 2. Measurements 3. Pros & Cons
44
FIGHTON – Mixing business with politics…
Business venture manufacturing power supplies, metal stampings and vacuum cleaners to revive deprived black community of Rochester, NY
Cooperation between Xerox and FIGHT, a local community organization
Grass roots philosophy conflicted with business practices, nearly leading to company’s demise
1. Definitions 2. Measurements 3. Pros & Cons
45
FIGHTON – …led to unclear objectives and priorities
On the brink of bankruptcy
before change of policies
Politics interpreted
as firm policy, and
no clear guidelines
Lots of political
infighting and unprofitable operations
1. Definitions 2. Measurements 3. Pros & Cons
4. May stakeholder value replace shareholder value ?4.1 Summary
4.2 A middle route:
- Enlightened Value Maximization/Enlightened Stakeholder Theory
- Ethical Decision Model
47
4.1 Summary
Stakeholders theory is unpractical because it lacks a clear objective and makes managers unaccountable for their actions
However, a firm cannot maximize value if it ignores the interest of its stakeholders
The real issue is what corporate behavior will get the most out of society’s limited resources
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
48
Stakeholder Theory: Strategic Objective vs. Performance Metric
Pros
Expands the set of business unit objectives beyond summary financial measures
Captures the critical value-creation activities created by skilled, motivated organizational participants
Reveals the value drivers for superior long-term financial and competitive performance
Cons
Balanced Scorecard lacks one number that defines success
The number of stakeholders that need to be taken into account can spiral out of control very quickly (assumes limited common sense on the part of the manager)
All methods remain vague as to how managers should quantify trade offs
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
4.2 A Middle Route ?
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
50
Enlightened Value Maximization /Enlightened Stakeholder Theory
It utilizes much of the structure of stakeholder theory but accepts long-term value maximization as the firm’s objective
Value maximization provides the following answer to the tradeoff question: Spend an additional dollar on any constituency provided the long-term value added to the firm from such expenditure is a dollar or more
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
51
Pros of Enlightened Value Maximization /Enlightened Stakeholder Theory
Prevents short-term profit maximization at the expense of long-term value creation by taking into account all important constituencies of the firm not only shareholders but also employees, customers, suppliers and communities etc.
Allows for principled decision making independent of the personal preferences of managers and directors
Makes managers and directors accountable for the assets under their control because the value scorecard provides an objective yardstick against which their performance can be evaluated
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
52
Ethical Decision Model
Ordinary decency
Distributive justice
Maximize long-term
owner value
CompatibleSocial Responsibility
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
Can be a management tool
Business ethics:
Stakeholders can profoundly influence business’s direction: “The invisible hand” — The definitive business purpose
positively requires that the stakeholder preferences are taken into account
“Conscientious stakeholding” — Individual’s own choices of moral values to support social and economic institutions
53
Ethical Decision Model
1. Clarify the question- What is at issue?
2. Determine the question’s relevance for this business- Does the issue relate to maximizing the long-term owner value?
3. Identify the circumstantial constraints- Laws & regulations, Contractual, Cultural, Physical, Economic considerations
4. Assess the available options - Long-term owner value while respecting ordinary decency and distributive justice
5. Right course of action - Which action actually maximizes owner value?
Five steps:
1. Definitions 2. Measurements 3. Pros & Cons 4. Conclusion
Thank youQuestions?