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Shareholders versus Stakeholder priorities37

Shareholders versus Stakeholder priorities: Anglo Corporations should have only one focus that is shareholders

Table of Contents

3Executive summary


5Corporate governance

9Shareholders versus Stakeholder priorities

9A historic viewpoint

11Shareholders versus Stakeholder priorities

14The rationale for shareholder primacy over stakeholder primacy

14Maximization of shareholder value

16Agency theory

18Financialization and the critique of shareholder value

19Shareholder value maximization as an objective for Anglo companies

22Shareholder value and corporate behaviour

25Allegory of shareholder ownership

26Shareholders as the risk bearer

27Director duties

28Economic and Social Welfare Assumptions Underpinning shareholder value maximization

28Legal issues and shareholder primacy



Executive summary

Effective corporate governance is a major contributor to economic growth because it has the ability of enhancing company performance. Organizations have the obligation adopting effective and efficient corporate governance structures as a way of facilitating growth. In an organization, shareholders engage in the election of directors, who recruit the management who, in turn, are charged with the responsbility of running the organizations. The need to ensure the existence of an administration whose behaviour will likely be apprehensive with its well-being, and with the board of directors, which may be obliged to specific groups, including the executive form the essence of shareholder supremacy in Anglo-American countries. The question of whether shareholder primacy should be the focus of corporate boards in Anglo companies is based on the understanding that other stakeholders such as workforce, supplying agents, the government and the surrounding community play an equally essential role in corporate governance.


The conflict between individual freedom and organizational authority power has been continuing overtime. Initially, the focus was on the relationship between an individual and the church; more recently, it was on the constitution and individual in relation to the civil state. In the contemporary society, the dispute concerns making corporate authority attuned to the desires of a dynamic society. The contemporary organization has not only been involved in the creation of untold wealth and provided the society with the chance to expressing and developing their capacities but also has enforced expenditures on personalities and the society. The process of encouraging the freedom of individual energy at limited costs on different stakeholders, therefore, emerges as a major impediment.

Corporate governance is central to this challenge. This is because handles systems, procedures, and methodologies by which organizational activities are controlled. There are explanations that emphasize on the connections between the management, the board, and its shareholders. From an elaborate perspective, corporate governance encompasses the relationship between an organization with to all of its stakeholders and society. This is inclusive of the sets of rules, guidelines, listed guidelines, and deliberate private-sector activities that facilitate organizations to attract capital, ensure effective, generating revenue, and act in accordance with both legal responsibilities and general societal prospects. Varieties of meanings and descriptions that have been developed over the years are a reflection of their origin. The law focuses on the prescribed and trustee characteristics of the governance responsibilities. Researchers in finance and economics focus on making decisions, the probability of conflicting interests, and the configuration of motivations. Specialists in management often embrace a behavioural viewpoint towards understanding the relevance of corporate governance in organizational growth and development.

These definitions are also a reflection two essentially diverse views about the purposes and responsibilities of a corporation. The shareholder and stakeholder viewpoints, present an argument concerning the extent to which the management should manage a company mainly for the benefits of its lawful owners or whether they should be enthusiastically concerned with the wants of other stakeholders such as employees, the government and the society. In an attempt to provide a response to this debate, the main objective of the study will be to assess the relevance shareholder value maximization in with reference to Anglo companies.

Corporate governance

This is inclusive of the processes and structures in an organizational context, which define the direction and management while defining the roles and responsibilities of the board of directors and different levels of participants (Sarbah & Xiao, 2015). Effective corporate governance is a major contributor to economic growth because it has the ability of enhancing company performance. Organizations have the obligation adopting effective and efficient corporate governance structures as a way of facilitating growth. The objective of corporate governance is therefore to build an environment that enhances confidence and trust among competing and conflicting interests (Sarbah & Xiao, 2015). Furthermore, by addressing these interests, effective corporate governance improves on the shareholder value and ensures the protection of their interests through accountability. Organizations that demonstrate effective corporate governance operate on zero tolerance to vices such as corruption. This is only achievable through the introduction of value management as a defining element in organizational governance (Sarbah & Xiao, 2015).

Being a structure by which companies are regulated and measured. Corporate governance guarantees the existence of boards of directors who are obligated to ensure the governance of their organizations. The role of the shareholders in governance is to engage in the election of the directors and the auditors. In addition, by assessing organizational performance, shareholders are satisfied that a suitable and effective governance structure is in place to address organizational and individual needs (Urlacher 2008).

According to the Organization for Economic Cooperation and Development (OECD) corporate governance is the methodology through which companies are regulated and measured. The governance edifice of an organization stipulates the allocation of privileges and duties among varieties of players in a corporation (Zimmerli et al 2014). These include the board of directors, management, and other stakeholders. The corporate governance structure also and defines the guidelines and processes for making pronouncements on organizational activities. This ensures that, it also gives an arrangement that a company can use in setting objectives, and develop a technique of accomplishing those aims and assessing organizational performance (Wright et al 2013).

In organizations where there is lack of shared consensus about organizational mandate, to whom the board is answerable, and the standards they should use in decision making, there is a substantial hindrance to improve the efficiency of the governance responsibility (Wright et al 2013). In situations where boards function with tacit assumptions concerning their aims and loyalties, it is possible to hide potential discrepancies among their members at the expense of organizational effectiveness (Zimmerli et al 2014). These create a challenge in getting consent on intricate matters, such as the credentials of the CEO, the degree by which an organization can outsource parts of the value chain, or the process of evaluating and compensating top management (Wright et al 2013).

According to Lorsch (1989), the confusion among directors with regard to effective corporate governance and their accountabilities is based on their beliefs, as traditionalists, rationalizers, or broad constructionists. Each group views corporate governance in a different way. The traditionalists perspective argues that the directors are accountable to shareholders only. From this viewpoint, the fundamental purpose of the contemporary organizations is the maximization of shareholder value (Lorsch 1989). Proponents of this perspective do not believe in the existence of any a conflict between prioritizing on the interests of the shareholder and reacting to the desires of stakeholders, hence experiencing diminutive role uncertainty or disagreement (Brancato & Plath 2004). Proponents of this perspective find support for this position through the explanation of the present US law. This perspective also tends to base its arguments on the highly exposed exploitations at Enron, WorldCom and Vivendi corporations as irregularities made imaginable by inadequacies in the existing system instead of as pointers of more universal complications (Brancato & Plath 2004).

The rationalizers experience more apprehension concerning their responsibility as directors. They identify that, in the contemporary multifaceted, international economy, actual strains can arise between the divergent interests of stakeholders (Lorsch 1989). The rationalists argue that in such situations it is not possible for decisions to be condensed to the modest argument that what is worthy for the owner is decent for all the other players. For instance the decision on whether to close a domestic plant to enhance low cost manufacturing; whether to subcontract manufacturing to lower cost suppliers; or the best approach in responding to pressures for corporate social responsbility operations, depend on the view and interest offal the constituencies and not only the shareholders (Carter & Lorsch 2004).

The final group are constructionists who identify precise duties to stakeholders instead of shareholders and have the willingness of acting on its beliefs. Directors belonging to this school of thought continuously tussle to ensure a balance between their opinions with the more traditional perspective of the board’s responsibilities and to exist within the existing legal requirements. In addition, they structure their pronouncements based on the best long-term requirements of the company (Carter & Lorsch 2004).

This is an indication that majority of directors often feel entombed in a predicament concerning their traditional lawful duty to stockholders, whom are considered too concerned in short-term disbursement, and their opinions about the plans that have long-term benefits for the health of the company (Carter & Lorsch 2004). Furthermore, in many boards, there is an evolving culture, which prohibits open discussion on the true purpose of the board. Most of the boards were ignorant of current verdicts in the progressing legitimate context that provides them the freedom of considering other stakeholders (Zimmerli et al 2014).

Recently the issue of the primary role and accountability of the board has generated more confusion. This is despite strong bombast from numerous quarters encouraging the intensification of shareholder value, as the main goal of an organization (Coffee 2002). There is an increasing acknowledgment that an organization and the board have bigger duties. This trends are a reflection that issues of corporate governance can be perceived from an monetary and emotional rather than legitimate ownership of the company (Davis 2006). The need to shift from shareholders to other stakeholders who comprise the human resource of the company generated actual complications for the board. According to Lorsch (1989), boards face challenges in making decisions to the entities they have real responsibility and where their obligations. It is the obligation of the boards to think about and engage in discussions among themselves, the stakeholders, and the time horizons in the process of allocating their board responsibilities (Davis 2006). Most boards have avoided dialogue of these complex issues. They seem too nonfigurative, and reaching an agreement among directors about them can take more time than directors want to devote (Davis 2006). 

Shareholders versus Stakeholder priorities

A historic viewpoint

In the 19th century, the firm was perceived as a societal apparatus for the government to could use in realizing its public policies. Every occasion of incorporation required the development of an act of the public law in the United States. The role of the legislations was to safeguard stakeholders by ensuring that firms would not follow undertakings outside their initial contract (Joo 2004). In late 19th century, states started allowing general amalgamation. This resulted in exponential evolution in the formation of firms for private corporate determinations. In its outcome, concern for stakeholder well-being was replaced by the concept of running the firm for shareholders benefits (Joo 2004).

century, the State Supreme Court in Michigan while addressing Dodge vs. Ford Motor Company acknowledged the preeminence of shareholder value maximization in a ruling. Ford Company wanted to invest its considerable retained earnings in the firm instead of distributing it to shareholders (Rivero & Nadler 2003). The complainants, being minority stockholders in the organization, brought a lawsuit challenging Ford, claiming that the aim of profiting workers and customers was to ignore the shareholders. In the verdict, the court was in agreement with the complainants (Rivero & Nadler 2003).thIn early 20

.(Rivero & Nadler 2003)The lawsuit resulted in the development of the notion that a firm is structured and managed mainly for the benefit of the stockholders. The authority and responsibilities of the board are to be directed towards the realization of shareholder interest. The decision of directors is to be implemented in the selection of the techniques of attaining that objective, and cannot be extended to an alteration in the objective itself, to profit reductions, or to the non-distribution of returns among shareholders as a way of devoting them to other purposes

of executive deliberations considering that shareholders were the owners of the owners of the organization (Niskanen 2007).  foundation century, a new sensation influencing firms in the United States was capital ownership. Ownership of capital became widely disseminated among most of minority shareholders, but control was left as a function of a few managers (Rivero & Nadler 2003). Separating ownership and control was perceived as a threat to the foundation of the existing economic order. This was based on the argument that running organizations on behalf of the shareholders was the thIn late 19

To ensure the protection of the desires of other investors and participants in an organization, about 30 states in the United States ratified stakeholder acts that permitted the board to consider the wellbeing of non-shareholder population in business decisions (Niskanen 2007). This law provided boards with a leeway in the determination of that which is in the greatest lasting good for the firm and how to consider the desires of other stakeholders as part of the decision making process. However, despite these legislations, the conventional of United States corporate law is dedicated to the principle of shareholder wealth maximization (Niskanen 2007).

Shareholders versus Stakeholder priorities

Inasmuch as shareholders own organizations, they usually delegate the role of running to qualified personnel. Shareholders engage in the election of directors, who recruit the management who, in turn, are charged with the responsbility of running the organizations (Vinten 2001). Since the management and board have a trustee responsibility of acting in the greatest benefits for shareholders, this arrangement presents the implication that shareholders face two distinct principal-agent complications. This is because of the need to ensure the existence of an administration whose behaviour will likely be apprehensive with its well-being, and with the board of directors, which may be obliged to specific groups, including the executive (Solomon 2007). Most of the activities that define contemporary corporate governance structure are premeditated to alleviate these possible problems and support the behaviour of all parties with the paramount benefits of shareholders generally interpreted (Vinten 2001).

The conception that the prosperity of shareholders is the main goal of the organization originates from the lawful status as residual petitioners of shareholders defines the need to maximize shareholder interest. Other participants in an organization, such as suppliers and personnel, have detailed claims on the financial operations of the organization (McSweeney 2008). Unlike other stakeholders, shareholders acquire return on investment from the outstanding following the payment of other stakeholders Hypothetically, this makes shareholders the remaining claimants and ensures the creation of the strongest incentive as a way of maximizing the an organization’s value and generating the greatest benefits for larger society (McSweeney 2008).

It is noteworthy that not all shareholders share common goals and interests. The interests of minority of investors and majority shareholders, including with a majority portion of stocks and formal investors are often dissimilar. Minority shareholders, with a small percentage of the organization’s residual shares, have limited power of influencing the board of the organization (Niskanen 2007). Furthermore, with only an insignificant percentage of their individual groups invested in the corporation, these shareholders have diminutive incentive of exercising power on the operations of the organization over the corporation (Vinten 2001). Consequently, minority shareholders are often reflexive and concerned only in promising returns. They have limited concern on essential organizational activities such as voting. In situations of discomfort, minority shareholders often sell (Vinten 2001).

Majority shareholders possess an adequately big portion of the corporation and this justifies the time and expenses necessary in monitoring the activities of the management. These shareholders hold a majority of shares whose portion in the organization may not be considered as majority possession but is large enough to encourage active involvement in administration (McSweeney 2008).

In Anglo companies, institutional investors encompass a variety of managed investment resources. These include banking institutions, trust funds, annuity funds, and joint funds. All of these investors have diverse investment aims, selection management castigations, and speculation horizons (Lazonick and O’Sullivan 2000). Institutional investors both embody an additional layer of organizational complications and a chance for oversight. To recognize the probability for an extra level of agency complications, there is need to question whether it is possible to expect that a bank will address minority shareholder interests any better than organizational management. Institutional stakeholders may have genuine motivations than the executive as a principal element of favourable investment return (Lazonick and O’Sullivan 2000). However, they seek passive, unresponsive monitors, partially out of predilection and relatively because participatory assessment may be forbidden by rules or by prevailing internal investment guidelines (Aglietta and Reberioux 2005). Indeed, an essential attribute of the recent corporate governance discussion focuses on the question of whether there exists use and desire of creating techniques for institutional investors to become more active in observing and chastising organizational behaviour. Theoretically, being majority owners, institutional investors have a better inducement of monitoring corporations. However, the reality is that organizations failed to safeguard their own investors from executive delinquency in companies such Enron, Global Crossing, and WorldCom, despite the fact that they held major decision-making positions in these firms (Aglietta and Reberioux 2005).

The growth of private equity defines the current expansion of the capital markets. Financial resources designated as private equity are different from other types of venture finances because of the large size of their prosperities in distinct recipient corporations (Jackson 2009). They are characterized by longer venture prospects, with relatively less percentage of organizations in individual fund groups. The management in private equity has a superior level of participation in their recipient corporations when equated to other investment experts (Petra 2006). They also play a significant part in manipulating the activities of the board of governance of their investee organizations. Through their extended venture prospects, active participation in governance and uninterrupted commitment to monitoring the executive, private equity executive play an essential part in determining the activities of the board (Petra 2006). The significance of their role emerges in takeovers or majority stake procurement, where a private equity executive exercises considerable power not just with the aim of influencing marginal stake reserves in the place of a corporation’s governance practice (Jackson 2009).

The rationale for shareholder primacy over stakeholder primacy

Maximization of shareholder value

The question of whether shareholder primacy should be the focus of corporate boards is can generate different responses in different parts of the world. In European and Asian regions for instance, the management and the directors are expected to concentrate with the satisfaction of the interest of other stakeholders such as the workers, the government, supplying agencies and the surrounding communities (Hinsey 2006). According to Centre of European Policy Studies (CEPS), the desire to introduce a system that focuses on the incorporation of systemic rights, control measures and processes at an internal and external level within an organization encompasses corporate governance. Through these systems, the board ensures that the management is focused in the promotion and protection of stakeholder interests (Simpson &Taylor 2013).

Corporate governance from the Anglo-American approach underlines the supremacy of proprietorship and property rights with the main concern being concentrating in the creation of shareholder value. From the Anglo American approach, workers, supplying agencies, and other stakeholders have rights defined by contractual agreements they signed with the company. The shareholders, being the owners of an organization are of high priority (Simpson &Taylor 2013).This modern approach in understanding the relationship between the role of executive and shareholders rights presents the notion that the management in an organizational context is only answerable to shareholders. Although some scholars have argued that organizations were answerable to both the surrounding community in which they operated in many respects, the solutions proposed by advocates of shareholder value maximization assert the extent to which an organization should implement shareholder interest at the expense of other stakeholders is dependent on the existing obligations to both parties (Simpson &Taylor 2013).

The suppositions sustaining the analysis in the shareholder-stakeholder supremacy debate recognizes that the concept of corporate governance results in the separation of ownership and control. This separation of powers and responsibilities necessitates that organizations are legally accountable and the activities of the management are defined and regulated with those interests in the developing the organization. Upon incorporation, corporations become a separate legal unit, which cannot be perceived as an amalgamation of shareholders. According to Macintosh (1999, p.144) this leads to the argument that the board is an entity that plays a trustee role in an organization rather than acting as an agents for its membership. The implication this argument is that organizations can be perceived as economic entities with comprehensive social duties and can only be held responsible to the surrounding community (Macintosh, 1999). While correspondingly apprehensive with the inability of the management to be considered accountable to shareholders, Berle (1963) contended that the answer was in the consolidation of the trustee obligations of executives to shareholders. Conversely, according to Ireland (2001, p.149) the arguments presented by Berle (1963) point was not inspired by principles but by failure to perceive any way of stopping the management from advancing individual interests. The most essential element for organizations in the corporate system is to survive. This is by ensuring that virtuously neutral technocracy approaches are used as a control measure for established organizations. This would enable the development of some level of balance between varieties of entitlements by different groups in the community and transmitting to every group a percentage of the revenue torrent based on community policies instead of private desires.

Agency theory

The work of Jensen and Meckling (1976) provides an understanding of the predominance given to shareholders in modern-day conventional finance. Proponent of the agency theory emphasized the punitive role of the marketplace asserting that unrestricted executive objectives were not serving shareholders interests. According to Ireland (2001, p.153) organizations should ensure that in the process of satisfying the need and desires of other stakeholders, shareholders receive only a fair return of the percentage they investment in an organization. Failure by the organization to ensure fair distribution of revenue could lead disgruntled shareholders into selling their shares, leading to a reduction in an organizations share price, and possibility of leading to the elimination of the executive. It is the threat of dismissal that leads conclusion that the interests of the management are therefore dependable with the shareholder (Milne and Gray, 2007).

Drawing from the proclamation Aglietta and Reberioux (2005, p.28) argue that market discipline would enhance fiscal productivity. This makes it possible to develop an assumption for the rationalization for the maximization of shareholder value by linking all behaviour to the property rights structure (Aglietta and Reberioux, 2005, p.28). From this perspective, the outstanding right of the shareholders creates a suitable motivation and increases their ability to motivate the applicable corrective mechanisms. With the stockholders, positioned last but in possession of unrestricted right to the extra financial resources, acquire the highest quality performance by the organization. The have a powerful reason of holding the management accountable to the objective of profit maximization (Aglietta and Reberioux, 2005).

According to Parkinson (1993, p.41) the aim of profit intensification is apparently vindicated based on the assumption that organizations add to the intensification of the aggregate wealth of the society when seeking to maximization of their own earnings. From this enduring rights viewpoint, Gomez and Korrine (2008) argues that shareholders perform an essential punitive role of ensuring that the management pursues revenue expansion by performing as a countervailing control to the executive hence guaranteeing the optimization of community’s welfare.

Agency theory arose from a modest principal-agent perception to a connection of conventions notion of the company. The agency approach represents a further drastic antagonism to the standard substantial collectivist by rejecting the concept of ownership, and presenting the claim that the company is merely a device with the objective of facilitating contracting between individuals (Parkinson, 1993, p.178). The fact that shareholders are owners of capital managing an organization, should not be tangled with owning the firm. Agency relationship was an idea that was introduced to ensure the provision of an account of the association between shareholder as the principal, and manager as the agent. This was developed with the supposition that the shareholders preserve the authority of controlling and directing the undertakings of the management. As a way of reducing agency costs, this refers to the damage to shareholders arising from the executive deliberations decisions that do not serve the monetary interests of the shareholders. Shareholders seek an alignment of the management desires with their own by monitoring organizational operations. According to Aglietta and Reberioux (2005, p.29), argue that failure by the management to consider these interest led to the legitimization of aggressive buyouts in the US as well as the development of complex financial configurations. These included leveraged mergers, the increase in late 1980s manifested the regeneration of shareholder value as an essential aspect in the development of corporate governance strategies.

Financialization and the critique of shareholder value

Assumptions on agency notion coincide with more conspicuous roles for investment markets in the economy. According to Aglietta and Reberioux (2005), this occurrence is financialisation of the market. Financialization is guided by two approaches. The progression in the liquidity of investment markets is considered as the initial movement. The second is the increase of speculation reserves, liable for managing increasing savings. According to Erturk et al (2008) the development and liquescence in financial markets draws focus market liberalization and in designing refined financial products. The hasty development of imitative products such as and an incomprehensible diversity of novel gadgets increased trade over-the-counter instead of exposed interactions.

Erturk et al (2008) while explaining the details of increased speculation funds proclaimed that the increase in the revenues of a company progressively financed conventional shares by intermediate financial managers in both the United Kingdom and United States in mid-20th century. In 1957 for instance, about 65% of stocks in the United Kingdom were in the control of households while institutions controlled the remaining 35%. According to Froud et al (2006, p.40) by 2003, there was a radical shift, with household controlling 15% of shares while institutions controlled the remaining 85%. The transfer from household to institutional ownership was a transformation in the dynamics of the financial market. This is because with influence and authority over the management through the sale of securities and participatory influence (Aglietta and Reberioux 2005). This led to the development of organizational pension and the development of cumulative role of organizations in capital markets in the age of pension fund socialism. In this age workers were regarded as corporate owners who acted as subordinates to the management in operationalization of the organization it equipped shareholders (Froud et al 2006).

Shareholder value maximization as an objective for Anglo companies

Maximizing shareholder value is a tangible, futuristic, practical, and earnest aim, the quest of which stimulates then allows the management to make significantly better deliberate and corporate decisions compared to those they would have made while pursuing alternative goals. Shareholder value maximization is essential in enhancing the wellbeing of the stakeholders. This is based on the realization that, it only through wealth creation through customers that stakeholders can continue to enjoying a flow of increased revenue. In addition, it facilitates organizations to ensure the creation of jobs (Erturk et al 2008).

This statement creates three important assumptions. These include the understanding that the process of incorporating shareholder value as an integral in the determination and measure of the ability of a firm to create wealth. Shareholder value maximization facilitates the production of a competitive advantage. Through shareholder value maximization, it is possible for companies to serve the interests of all other stakeholders (Gomez and Korrine, 2008).

With regard to the first postulation, it is possible to develop the argument that company value, which is inclusive of the standards presented by financial petitioners, including creditors, borrowers, and favoured stockholders, can be considered as indications of wealth. The essence of differentiating between shareholder and company value is based on the assumption that the management and the directors deliberate with the objective of transferring worth from debtors to shareholders and hence decreasing aggregate corporate and collective value while growing shareholder worth (Phillips 2003).

There exists a notion that shareholder value maximization is essential in facilitating the production of the best long-term effectiveness. This can be criticized because a progressively influential group of critics hold the thought that the product market instead than the investment market aims must be guiding company decision-making procedures (Phillips 2003). The worry is that organizations adopting shareholder value intensification as their main determination lose focus in the creation of a product or service as their fundamental duty. Shareholder value maximization generates a gap between organizational mandate and the incentives, needs, and competences of the organization’s workers who have unswerving control over actual, existing, organizational performance. Through shareholder value maximization, organizations do not always inspire workers, despite sometimes sharing in some of the advantages through profit, bonuses. Shareholders are often anonymous without obligations to holding their shares for any length of time (Phillips 2003). In some instances, shareholder-value maximization sometimes fails in inspiring personnel. In such situations, it may encourage the maximization of individual financial well-being as a genuine (Erturk et al 2008). Instead, their desire is to ensure that organizations to create an ethical purpose that ensure the provision of a clear focus in the creation of a competitive advantage for the company. Through this competitive advantage, it becomes possible to unite its purpose and strategy into a complete, comprehensible executive structure that has the ability of motivating stakeholders and the legality of the organization’s activities in the community (Froud et al 2006).

The supposition that stockholder intensification is compatible with the provision of services aimed at satisfying the interests of other stakeholders within the organization can be considered as the most controversial. Advocates of shareholder value intensification argue that the maximization of shareholder value is not only greater as a trustee standard or executive aim but also as a communal standard (Erturk et al 2008).

If the aim is to ensure the maximization of the effectiveness with which community exploits its capital, then the appropriate and exceptional aim for every organization in the community is to ensure the maximization of the long-term aggregate worth of the company. Organizational worth cannot be exploited with dissatisfied clients and personnel or underprivileged services. The assertion agrees with the stakeholder theory, which asserts that value-maximizing companies can be apprehensive about associations with other constituencies. It is relatively difficult for a company to maximize value by ignoring the desires of its stakeholders (Aglietta and Reberioux 2005).

As part of the stakeholders, shareholder value maximization permits the management and board to ensure the resolution any conflicts for long-term benefit of every constituent in an organization. For instance, their recommendation for the development of a determination of the trade relations between clients and stockholder motivated reserves (Erturk et al 2008). Whenever the board and the management invest in improved customer satisfaction, they enable shareholders to receive a satisfactory gains from their venture. In such situations, there are limited conflicts between maximization of shareholder worth and maximization client gratification. In situations where, there is inadequate monetary gain to stockholders from efforts to intensify the level of client gratification, the battle should be solved for the by minimizing shareholders advantage as a way of weakening of the monetary wellbeing and long-term competitive advantage of a company.

Stakeholder theorists contend that shareholders comprise a percentage of main stakeholders and that other stakeholders have a stake in and are affected by organizational achievement or failure. Proponents of stakeholder theory argue that a special emphasis on the maximization stockholder fortune is both imprudent and morally incorrect (Erturk et al 2008). In its place, the company and its management have an unusual duty of ensuring that the owners obtain reasonable returns on their venture. However, but the company is defined by special responsibilities to other players, which surpass the requirement of the law (Aglietta and Reberioux 2005).

Shareholder value and corporate behaviour

The mission for constant advanced shareholder revenues through organizational effort can be perceived as ideal. it has nonetheless, generated actual concerns for organizations (Erturk et al 2008, p.21). The concept of maximization of shareholder value has resulted in alterations in the power relationships within an organization and categorically affected organizational strategy (Aglietta and Reberioux 2005, p.1).

An essential focus on shareholder value maximization in an organization has disputably been growth in income disparity. For instance, the increase in earnings achieved by a firm’s executives based on agency-theory informed incentive schemes based on maximization of shareholder value objective. Benefits resulting into revenues enjoyed by the management are not shared with other players such as the workers in established organizations (Froud et al 2006, p.58). For instance, it is noted that the proportion of the earnings of regular employees and Chief Executive Officers in the United States experienced about 200% in early 20th century. Dore (2008) contends that in the process of developing an association between inequality and the rise of shareholder value, procedures of wage discrepancy are intensifying at an exponential rate established economies. This is despite the stagnation of the median incomes, the highest percentile, particularly those in management gave been able make remarkable improvements. Furthermore, the executives do not operate on outdated renters with the utmost earnings given to those in monetary services while disregarding the other players.

When perceived from impact on the performance of an organization, there are other concerns of shareholder worth are definedby Williams (2000, p.6.) who makes the assertion that shareholder worth, in contemporary America has resulted in an escalation of some form of reorganization. These include mergers, divestment and downscaling, this has resulted in the reduction of the capital base for usually momentary advantages. Lazonick and O’Sullivan (2000) argue that, United States corporate strategy was traditionally positioned towards retaining of the revenue earned and reinvesting that revenue into organizational activities. Nevertheless, the increase in market pressure that supplemented the search for shareholder worth in the late 19th century contributed to growth in corporate governance. Corporate strategy developed into rationalizing of organizational employment services and sharing of organizational revenue With the shareholders. According to Williamson (2003) the emergence of similar movements in the United Kingdom where payment advancements surpassed venture growth by about 75% in late 19th century. Shareholder value encourages the development of a short term, limited venture and little output methodology to corporate governance.

From the perspective Dobbin and Zorn (2005), the growing emphasis on the maximization of shareholder interests provides explanations for hostile buyouts since it focused on stock price as an element of corporate attention. An outcome of the buyout inclination, founded on the maximization of shareholder value, was that it ensured an effective end to diversification (Dobbin and Zorn 2005). In mid-19th century, when Chief Executive Officer compensations was predominantly based on monthly remunerations, the general agreement among organizational managers was that the more established the firm, the higher the salaries, resulting in the development of conglomerates and improved organizational reputation (Dobbin and Zorn 2005). From the shareholder value theory of organizations, buyout organizations dismantled conglomerates to demonstrate that the constituent parts were available for sale in the market at process higher than the preceding estimates in the market (Dobbin and Zorn 2005). This perspective presents the argument that, hostile buyouts play an essential economic role by introducing punishment to ineffective executives hence resulting in increase in the price of shares (Jensen, 1984).

According to Dobbin and Zorn (2005, p.191) the development of shareholder value approach led an increase in the influence of monetary professionals. This provided a description of how this constituency dejected organizational modification through the promotion of a fascination with the price of stock, preoccupation with convention and revenue forecasts. As a concern of these increasing pressure in the market, the management and financial officers reacted by using accounting tactics (Dobbin and Zorn 2005, p.193). The collapse of Enron according to Aglietta and Reberioux (2005) is an illustration of how the sovereignty of shareholder sovereignty results in unsuitable organizational strategy and financial deception. Enron’s case presents three accounting policies. This is inclusive off-balance sheet bookkeeping, the ability to and manipulate financial statements. The Enron case focuses the inability of existing governance structures which include the incompetence of the audit function. The case of Enron case is an exemplification of a systemic predicament prompted by emphasizing the essence of shareholder value and the prevalence of capital markets (Keay 2006).

Allegory of shareholder ownership

Majority of the conservative financial, agreement based and commercial rational supporting the maximization shareholder value is grounded on the notion that those who make decisions to invest in an organization are the owners (Horrigan, 2008). This assumption has however been criticized with regard to its ability to ensure improved organizational performance. For example, mid 19th century, George Goyder (1951) began expressing opinions alike to those formerly outlined by the proponents of the assumption. While referring to the principle of distinct lawful entity, Goyder (1951) asserted that theoretically, the notion that shareholders own a company is a legitimate narrative. There is an acknowledgement that under company law shareholders poses rights cannot be perceived as constituting organizational ownership. Shareholders have the right of participating in the residual revenue of the profitable apprehension and to reimbursement of the revenue. While articulating the same assumption, Williamson (2003) contends that, the controversies arising from this issues makes it necessary to question the notion that shareholders own a firm.

Shareholders are owners of a percentage of a firm’s shares. While Parkinson (1993) admits that shareholders do not own organization’s possessions as an element law, they are substantially the owners since they contribute to the firm’s capital. This view agrees with the assumptions propounded by agreement concepts of an organization, which acknowledges that shareholders are not owners of an organization’s possessions, but they own capital. Divergent view presented by Ireland (2001, p.163) presents allegory that is strengthen by the assumption that shareholders are actual contributors to the operationalization of a firm, instead of placing bets on their future profitability. For Ireland (2001, p.163) this does not assert the importance of the stock market as an essential source of organizational investment while concealing the existing differences between organizational shares and assets. As Ireland (1999, p.49) argues, these observations are an indication that by refuting the reality that companies exist as independent entities existence as stipulated by agency theory, then it is possible to find the link between the assets owned by shareholders and those owned by the company (Ireland 1999). The agency theory asserts that, the sovereign property and idiosyncratic forms are often perceived as organizational investment with the objective of maximizing them in corporate growth and development (Ireland 2001) which generates arguments on the relationship between agreements and the financial performance of organizations. According to Mumford (2000), companies own large percentage of their capital majority of which the company generates from retributions, and that most of the investments exemplify the earnings of its own. The is evidence that the assertion that shareholders contribute to the financial wellbeing of an organization is false. The uncertain position of shareholders as owners of a company generates the conclusion that it is not possible to manage organizations with the shareholder interests as the primary focus. This is because organizational assets cannot be used in serving the interests of partial owners (Williamson, 2003, p.514).

Shareholders as the risk bearer

The reasoning that shareholder interests should be given supremacy because of their risk-taking role by based on their existence as residual claimants is challengeable. According to (Aglietta and Reberioux, 2005, p.34) basing shareholder value on the association between the right to control the management and risk taking is considered delicate because the level of risks that shareholders anticipate is often insignificant. There is often advance knowledge of the risk associated with shareholders investing in a company and this explains the insignificance. However, for the employees, the risk level is font mysteries and unanticipated hence the need to develop measures aimed at protecting the workforce (Aglietta and Reberioux 2005). Moreover, the liquidity of stock markets permits the trading of shares. This allows shareholders to engage in the expansion and spreading of their risks as a way of diverting the possibility of loss upon liquidation of companies. These options are unavailable to other stakeholders such as the workers. The assertion that shareholders face the greatest risk in an organization signifies falsity with the noticeable realities. Other stakeholders have the likelihood of suffering together with debt-holders when firm bankruptcies. Compared to shareholders, there are stakeholders with the ability of appreciating less portfolio divergence.

Director duties

The legal structure of organizational management which have been perceived as outdated have complied the management of organizations to work in the interests of the shareholders. This is while ignoring the deficiency of a company’s rights to registered assets and the limited risk associated with shareholder ownership (Goyder 1951). Giving prominence to the interest of the shareholders while ignoring stakeholder interests results in incoherent accountability that is the source of resistance and discontent in organizational management.

A persuasive argument favoring the framing directors’ responsibilities to servicing shareholder interests is founded on the desire by the management to function objectively as a way of engaging in resolute behavior. This is because it is relatively difficult to ensure maximization in more in multiple platforms. While incisively termination the stakeholder theory Jensen (2001) argues that the theory is deficient of a diagnostic methodology that management should use in addressing trade-offs. However, when ignoring value maximization, it is not possible to realize value maximization at organizational level. Jensen uses the concepts of shareholder value maximization and stakeholder theory in the development of a measure for making trade-offs between stakeholders with regard to long-term value maximization.

From a legal perspective, it is important to develop effective suppositions to the notion that the view that the management must operate on a solitary maxim where a group overrides other groups to whose welfares the firm should be principally accountable. However, Mumford (2000) argues that it is possible to develop a similar case by necessitating that the main role of the management is to maximize the value of the firm. The development of this approach would be more reasonable, considering that it provides a way of formulating the responsibilities of the management. The conviction that directors do not have the ability of handling a range of responsibilities is questionable.

Economic and Social Welfare Assumptions Underpinning shareholder value maximization

It is possible to challenge the identification of maximizing shareholder value with maximized social welfare on different grounds, these are inclusive of the reality of externalities and of domination behavior. Furthermore, the money that wage recipients give to the management in finance is considered as part of the general pool of financial resources for the company. The employees are often considered as part of minority constituents in modern day corporate governance even in the wealthiest nations. In these countries, many employees do not have monetary property and most of them have inadequate to finance comfortable retirement (Keay 2006).

Legal issues and shareholder primacy

Countries operating on common law ensure the provision of stronger legal shielding for financiers compared civil law nations. In addition, they ensure the provision of a better context and the ability to finance companies by dispersing shareholders, and for the growth of capital markets. This responsbility is founded on an agency theoretical viewpoint. In addition, it has the ability of generating debates that it assists in to marginalizing the rival stakeholder viewpoint. These assertions have been considered significant in the formulation of policies and working methodologies of different financial institutions (Ahlering and Deakin 2007). The developed common law nations can be likened to the shareholder centered approach to capitalism of the Anglo-American corporate law. This is despite the existing assumption that in other countries there are contradictory categories of civil law, which are characterized as stakeholder-centered.

Shareholder predominance has conventionally been observed as the foundation of corporate governance structures in Anglo-American companies. According to Gamble and Kelly (2001, p. 110), through the corporate governance structures ideologies have been replicated in the configuration and structure of United Kingdom company legal structure which obliges the management to progress shareholders interest from a holistic perspective. The historic defense of the importance accredited to shareholder value is founded on four professed advantages. Efficiency is one of the advantages. Shareholder primacy exploits the knowledge and experiences of directors. According to (Salacuse, 2004, p.77), the requirement that they have a responsbility of dealing with other societal deliberations is incompetent and irrational. In the view of Vinten, (2001, p.91), dominance of shareholder value and the idea maximization of shareholder interest require firms to be answerable to their owners. According to (Pettet, 2001, p.61) the dominance of shareholder value introduces the notion that private property generates the position of supremacy and while recognizing that shareholders should have the freedom of resolving and developing strategies of dealing with their property. According to Wallace (2003), in the process of generating resources, firms by definition have the responsbility of meeting and fulfilling other societal requirements and necessities. The main criticisms that have been presented against the shareholder preeminence idea are that it inspires a the development of short-term goals which focus on the role of companies while ignoring the development of long-term approaches. This reduces the probability of developing effective stakeholder relations. Proponents of stakeholder arrangement contend that it is the responsbility of organizations to develop techniques of ensuring fair distribution of the benefits generated from the company. This is because all stakeholders play a role in the determination of the eventual portion of the profits generated (Wallace 2003).

Inasmuch as shareholder value maintained its dominance in the United Kingdom and the United States as the main objective of the company, the undisputed nature of this pre-eminence began changing from the mid-19th century. The perceived advantages arising from positive engagement of shareholders in organizational management is likened to the notion that stakeholder value has continued to gain supremacy. According to Deakin and Konzelmann, (2003) this is continues to happen with stakeholder value concepts acquiring increasing its popularity in the appropriate legal texts. However, at policy level the major lawful tools, used in ensuring the protection of shareholder value concepts have remained unscathed. This is because through constant change and evolution the mechanism has been subjected to concrete application. The use of this approach in in the UK corporate law ensures the protection of shareholder interests and the responsbility system defining the role of directors. These responsibilities are not allocated to the shareholders but to the company through the management. From an organizational perspective, these responsibilities are not allocated to shareholders but to the company. The shareholders are however eligible to raise questions concerning on the activities that indicate that directors are neglecting their responsibilities (Horrigan 2008). The plagiaristic action is a solution that was conventionally used by shareholders in attributing the relevance of common law in affirming their authority in the management of an organization. In “the rule in Foss v Harbottle” following the principal lawsuit on the relationship between the management and the stakeholder, the lawsuit presented the argument that the law presents an offshoot act which acts as a technique for individual shareholders to pursue lawsuits on behalf of an organization. This is especially against purportedly irresponsible management. This approach fails because it is biased towards the interest of the management at the expense of shareholders in its setup (Keay 2006). The protective requirements integrated into the rule ensuring that in making such decision was dedicated towards fulfilling the interests of the organization while ignoring the desires of individual shareholder. This generated the implication that implied that individual shareholders faced challenges in their ability to access to the courts on behalf of the firm. The rule played an insignificant role in revising the complications that are linked to the decision making process by a group of shareholders.


Companies have the obligation adopting effective and efficient corporate governance structures as a way of facilitating growth. The objective of corporate governance is therefore to build an environment that enhances confidence and trust among competing and conflicting interests. In organizations where there is lack of shared consensus about organizational mandate, on the entity that the management must ensure accountability, and the methodology that they can use in decision-making, there is a substantial hindrance to improving on the efficiency of the corporate governance function. The view that maximizing shareholder interests should be the main objective of the organization originates from the lawful status as residual role of shareholders. Other participants in an organization, such as suppliers and employees, have detailed claims on the financial operations of the organization. Unlike other stakeholders, shareholders acquire return on investment from the outstanding following the payment of other stakeholders. Hypothetically, making shareholders outstanding petitioners ensures the creation of the greatest profits as a way of maximizing the organizational value and generating the greatest advantages to the surrounding. The question of whether shareholder primacy should be the focus of corporate boards is question is answered inversely on the international platform. In European and Asian continents, the management and boards of directors focus on the interests of stakeholders such as the workforce, supplying agents, the government and the surrounding community.

The assumption that shareholder value maximization facilitates the production of the greatest long-term competitiveness can be criticized. This is because a progressively influential group of critics hold the thought that production instead than investment aims should be guiding corporate decision-making processes. Shareholder predominance has conventionally been observed as the foundation of Anglo-American corporate governance ideologies, which obliges directors to progress shareholders interest from a holistic perspective. However, critics have argued that shareholder preeminence fails in maximizing organizational value because it encourages the development of short-term goals while ignoring the long-term approach. This reduced the ability of a company to promote and enhance its relationship with other stakeholders. Proponents of the stakeholder arrangement contend that organizations have the responsbility of developing procedures that ensure fair distribution of the benefits created by the company. This is because that all stakeholders play a role in the determination of the eventual size of profits.


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