We are Nowhere Near Stakeholder Capitalism

We are Nowhere Near Stakeholder Capitalism

According to Vijay Govindarajan and Anup Srivastava in their article “We are Nowhere Near Stakeholder Capitalism,” they argue that most companies who claim to have adopted the stakeholder-oriented management strategy in a real sense haven’t done as their actions and decisions reflect. For example, they argue that CEOs continue to be sacked and hired based on revenues, profit, and the prices of the share. Fund managers whose work is to decide on the investment activities continue to be praised and rewarded based on the performance of the investments they decided on in reference to the prevailing market condition. Board of directors continues to be appointed by the stockholders, with their main goal being to protect the profits and revenues generated. Therefore, it’s most unlikely that CEOs will one day wake up and change their management strategies and focus on sales, benefits, and the prices of shares and concentrate on the broader perspectives of the environment, society, and the government. Maybe some would, but for most of them, the main goal will continue being focusing on profits, maximization of shareholders’ value while at the same time giving little attention to the environment, society, and the governance aspect.

Maybe some would, but for most, the primary goal would continue to maximize the value of the shareholders while keeping the ESG goals in mind and not the other way round.

If we have to consider how most businesses are funded, then change seems unlikely. Most financial support for corporations comes from investors. These entrepreneurs expect to be rewarded with financial returns, and this, in most cases, forms the basis of the main objective of the corporations. The government-mandated accounting systems are created with the shareholders in mind. Take an example of an income statement whose two most essential elements of revenues and profits are hugely used in driving decisions in corporations. The final figure of the net income is calculated based on the firm’s ability to pay dividends to the shareholders, and not its support to the society or environment or stakeholders.

While we acknowledge that substantial change is being made in relation to developing the theory and encouraging companies to focus more on stakeholders rather than shareholders, there is still much believe that we aren’t close to that transformation as most people might claim or many organizations might indicate in their vision and mission statements. Consider a South African oil company SASOL which claim to offer unified reporting (based on financial objectives and the ESG investments). The company honestly disclosed that: “We impact negatively on natural capital by using nonrenewable resources, and through our emissions and wastes,” and “we also impact adversely on human and social and relationship capital through competition for resources such as water.” but also explained that “by converting natural capital into value-added products, we boost the stocks of all the other capitals,” which merely indirectly means that they concentrate more on earning profits and increasing their revenues. Therefore, from the perspectives of many scholars, this company doesn’t develop integrated financial reports, and they make different to the say of the capital providers.

Therefore, although many people appreciate and support the transformation to the adoption of the stakeholder-oriented management systems, it’s hard to believe that considering we understand what happens in those board rooms meeting. Issues on profits are given more attention as compared to social, environmental, and governance issues. CEOs continue to be hired and fired on the basis of revenue, benefits, and share prices, and the society is still eulogizing people based on their wealth and not based on what they did with their wealth to support the community. If we analyze the content developed from the 2020 World Economic Forum at Davos, we may start believing that public corporation has changed their central theme and goals from benefiting or instead acting based on the requirements of the shareholders to directing much of their resources and attention to helping the community at large. However, considering the actual situation of the firms and how every system has been established and running, this transformation is still immature, and real change is yet to be witnessed. Real change will only take place if the transformation of the firm’s performance measurement systems to fit the needs of the society and not just the requirements and the demands of the shareholders.

For example, Dan Pontefract, in his article, gives an example of two companies. Unilever, which is a multinational company, has its organizational goal to develop a sustainable working environment to create a better future daily with brands and quality products that make people feel good and look good at the same time enjoy every moment in life. Nowhere in the organizational purpose is stated that their goal is to maximize profits. However, do you think that their main objective is to be concerned with what their customers feel and the quality of goods they consume? That is not the reason they exist in the market. Their main aim is to ensure that the revenues are increasing and that profits are ever high only that they cannot say this directly either in their mission or vision statements. Compare Unilever Company to Kerr-McGee Corporation, which is an oil and gas firm that was acquired in 2006 by Anadarko Petroleum before it was obtained. The mission statement of the company was: “Create value for shareholders through the energy business.” At least this company was real in its operations. The message communicated in the mission statements is that never mind society, community, humanity, and employees and their main aim were to ensure that enough was being made for the shareholders. In return, Anadarko which is the company that acquired Kerr-McGee which is an oil and gas exploration corporation has its organizational mission as “to deliver a competitive and sustainable rate of return to shareholders by developing, acquiring and exploring for oil and natural gas resources vital to the world’s health and welfare.” These two companies show no sign of transformation from a shareholder-oriented management system to stakeholder-oriented management systems. At least, they do not hide their main objectives and motives behind the mission and vision statements.

In conclusion, as per the literature and the researches of various scholars, it seems that very few of them have concentrated on arguing that most companies are still using the shareholder-oriented management strategy. Most of the scholars and business experts explain that most companies have transformed from the traditional and the outdated shareholder-oriented management strategy and have adopted the stakeholder-oriented management strategy where they are more concerned about customers, employees, supplies and the environmental, social and governance (ESG) goals as compared to being concerned with profits and revenues. However, regardless of numerous public corporations changing their mission and vision statements to reflect a great concern to stakeholders, is their main aim always ESG goals? This remains to be a debatable question. However, it’s tough to determine the actual goals of a corporation leave alone what they reflect in their organizational purpose. Thus we cannot conclude that most companies have transformed to adopt the stakeholder-oriented management system from the shareholder management system and vice versa as there exist numerous questions to be answered.