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Key21 Shareholders versus stakeholders

The shareholder-stakeholder debate is one centered around ownership and authority. Who owns the corporation? Who has the authority to run the corporation? What rights do those who own the corporation have? What responsibilities do those who own the corporation have?

The traditional answer to all of the above questions is that shareholders own the corporation, had the authority to run it and can expect accountability and responsibilities as dictated by law. The fashionable answer to the question is that “stakeholders” have rights and authority in the operation of a corporation.

The term “stakeholder” had its origins in the 1930’s when Professors Adolf Berle and Merrick Dodd staged their great shareholder vs. stakeholder debate. Mr. Berle believed that those who fork over the dough, risk-wise, should have the tights and responsibilities for running a corporation. In short, the shareholders own and run the corporation. Professor Dodd, who took a slightly different position, argued that there are “absentee owners” (缺席所有者) who represent society at large and should have some say in corporate operations. At a minimum, they had the right to hold the corporation accountable for its actions or inactions. The debate pretty much died the death of most academic debates: seven people read the research and by the end of the 1930’s, the whole thing was pretty much forgotten.

In the 1960’s, the Stanford Research Institute resurrected the issue by advising that, in a strategic sense, corporations should consider the interest of stakeholders, defined to be “those groups without whose support the organization would cease to exist.” From this memo came modern-day stakeholder theory and its myriad of definitions as to who and what constitute stakeholders.

While the notion of shareholder is very clear, the notion of stakeholder remains a very fluid concept. The general definition is that a stakeholder is someone with a stake in the corporation: shareholders, of course, but also employees, customers, suppliers and communities in which corporations operate. Some theorists have even included competitors and the environment. For example, Professor Mark Starik has written an article:”Should Trees Have Managerial Standing?”

All of this fun obscures a fundamental distinction. The shareholder is a property owner who has invested funds with the expectation of a return. A stakeholder seeks to intervene in that property and contractual right simply because of an interest in environmental or community issues. There is no underlying contractual tight for stakeholders and their right and interests create confusion rather than clarification.

The problems with stakeholder theory are as follows:

• No one is clear on the definition.
• No one has specified what the role of stakeholders should be vis-à-vis shareholders.
• How would stakeholders provide input to corporations and what would happen if there were disagreement among stakeholders themselves?
• How does the board weigh the input of stakeholders and what liability would they have for following the shareholders’ vs. the stakeholders’ desires?
• What would happen if stakeholders’ desires resulted in losses to the shareholders?
• What will happen to the nature of the investment contract if stakeholders are allowed to intervene in corporate governance?

Nonetheless, the concept of stakeholders does bear on corporate decision-making. In a strategic sense, board members are well-advised to consider the impact of corporate actions on communities and employees before taking action. Companies are forced all the time to downsize because of new technology or competitive forces. Providing a plan for easing those downsized employees back into other jobs could benefit not just the employees but the company itself. By statute in many states, boards are permitted to consider the interest of stakeholders in determining whether to accept a takeover offer. The role of the company in a community can therefore be a valid factor in making a decision to reject a merger.

For corporate governance purposes, the theory of stakeholders remains an enigma. Directors should remain accountable to their shareholders and view stakeholder theory as a means for brainstorming during discussion sessions on critical strategic issues brought before the board.