| Stakeholder
value and shareholder wealth
In 2003, Walmart was rated as the largest company in the world,
in terms of turnover, by Fortune magazine. Interestingly, it was
also considered the most admired company that very same year. This
bears ample testimony to the fact that an organisation which cares
for its stakeholders can in fact generate wealth for them as well.
Who
are stakeholders?
They are the parties who have a stake (interest) in the business.
The traditional thinking was that a business is only accountable
to its shareholders, and should selfishly be in pursuit of wealth
maximisation. This thinking has changed over the years, as firms
have realised the importance of the wider stakeholder community
in the decision making process. Stakeholders include employees,
management, customers, suppliers, banks, the government, as well
as the community in general.
Phil
Knight, a young athlete, created a company by the name of Nike,
which pursued an aggressive strategy of manufacturing shoes at an
extremely low cost in third world countries and selling them at
exorbitant prices in the developed world.
The
company made high profits and experienced tremendous growth, but
subsequently it was subject to bad publicity with regard to its
poor standards and unethical practices in its factories, which were
literally 'sweat shops'. The company ended up losing its market
share, as well as its image.
Why
should a firm care for its stakeholders?
The answer is very simple. It is the only form of building
sustainable wealth for the shareholders. It is possible for a firm
to maximise its profits in the short term, by not spending on employees,
minimising the facilities it provides to its customers, being very
hard on suppliers and paying them very slowly, adopting the minimum
environmental standards etc.
However,
the drawback of this approach is that in the long run, there may
not be any stakeholder support for the organisation, and it might
in fact, not be able to sustain shareholder wealth. Such an approach
may instigate employees to leave or form trade unions, customers
might abandon the firm in search of better firms, suppliers might
stop supplying, the government might impose penalties and the community
may harass the firm, resulting in an overall negative image.
How
do organisations care for stakeholders?
Most organisations today have clear approaches as to how
to care for their stakeholders.
* Customers-Continuously increasing the value provided to them
and selling products at reasonable prices.
- Toyota is renowned in the automobile industry for quality, and
value for money
* Employees -Developing, training and providing good remuneration
-MAS Holdings, a Sri Lankan company, is perceived as an attractive
employer
* Community -Carrying out community development work and promoting,
sports, arts and cultural events.
- Unilever sponsors the Sarasaviya Film Festival
* Suppliers- Developing partnerships and alliances with suppliers
-This has been the underlying theme in the success of Japanese
firms. Message for investors
When
you consider investing in an organisation, do look at the stakeholder
policies of that organisation. Those which have forward-thinking
policies towards their stakeholders may generate more value because
these organisations will have their consistent support. As for others,
they will rise up fast like Enron, and fall, eventually. |
