Value-based Corporate Management for the Benefit of all Stakeholders
An Article in the Compendium of Market-Based Social-Ecological Economics
Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?
Table of Contents
The term stakeholder value refers to the earnings value or benefits to which all parties related to an entrepreneurial activity are entitled. Furthermore, the term stands for a value-based corporate strategy which aims at seeking a balance of interests among all stakeholders – this being in contrast to the neoliberal shareholder value strategy. To sustainably implement the stakeholder value strategy a social-ecological economic order is indispensable.
2. The Meaning of the Term
In the literal sense stakeholder value results from entrepreneurial activities yielding substantial earnings value or benefits to the wide range of corporate stakeholders. In a broader sense the term is also used for a value-based corporate management strategy of public limited companies in which, contrary to the shareholder value strategy, not only the interests of the owners (the shareholders), but also those of all other stakeholders are taken into account. The stakeholder value approach can be applied mutatis mutandis to companies of different legal forms and ownership.
The term stakeholder refers to all individuals and groups being directly or indirectly affected as risk-bearers and beneficiaries of entrepreneurial activities and, in turn, to individuals and groups who directly or indirectly influence the entrepreneurial value creation.
3. Key Stakeholders and their Interests
4. The Emergence of the Stakeholder Value Strategy
The reason why the stakeholder value strategy became an economic policy issue at all, is because financial markets were deregulated for the first time in economic history when the neoliberal globalization took its course in the seventies of the last century (for more details see the article Economic Globalization). Since then, global stock markets are dominated and controlled by institutional and other large investors who tend to boost their returns by influencing stock prices for quick profit-taking and by directly influencing corporate strategies. As a result, the balance of economic power and the behavior of corporate management have changed dramatically: Firstly, corporate board members are continually forced to inflate the stock prices of their companies by all means to meet the expectations of powerful investors and to retain a minimum of entrepreneurial independence, and secondly, to obtain creditworthiness under neoliberal conditions. Although such strategies work only in the short-term, they require the full attention and become the all-pervasive commitment of senior corporate staff. Because of this neoliberal development, the idea of stakeholder value was initially pushed aside, putting shareholder value – in the form of stock price increases, dividends and stock options – at the heart of corporate strategic orientation.
The neoliberal development has been »scientifically knighted« by U.S. economist Alfred Rappaport. In his book Creating Shareholder Value he describes the one-sided concentration on shareholder value as »the only social responsibility« that companies must assume in a market economy. His statement is consistent with the doctrinaire neoliberal logic that a high equity earnings value is the best and only feasible condition for the benefit of all stakeholders, and that anything going beyond this requirement would only harm the common good. Given the increasing social and ecological devastations caused by the neoliberal globalization, it is not surprising that Rappaport’s obviously selfish, system-conforming statement is facing opposition, and even encouraging a return to the balance of interests among all stakeholders, a balance that has been considered self-evident up to the 1980s.
Therefore, the idea of stakeholder value has finally become a major challenge for social and environmental responsibility of the private economic sector – in deliberate contrast to the dominance of shareholder value. A responsibility that has been trampled underfoot with the breakup of national economic policy frameworks, and that can only be resumed once the selfish neoliberal dogma has been overcome and replaced by democratically legitimated regulation. Consequently, the call on the private sector is only a first step, mainly to shape public opinion, but that alone will not bring about subsequent economic policy steps yet.
5. The Application of the Stakeholder Value Strategy
The legal basis of the stakeholder value strategy is, on the one hand, the right of owners/shareholders as well as entrepreneurs, acting on behalf of the owners, to take their own entrepreneurial decisions, and on the other, the social and environmental obligations connected with corporate property. These obligations are expressed in social and environmental standards such as workers’ rights and emission directives. To execute and perform the rights and obligations, and to address the conflicts arising from competing interests of various stakeholders, requires, above all, a mutually binding legal and economic order. Under these conditions, the interests of stakeholders are legally secure and can, if necessary, be legally enforced. Nevertheless, individual stakeholder groups are at first obliged to participate directly or through their representatives in mediation and arbitration normally being moderated by company management.
6. Stakeholder Value and Neoliberal Globalization
It is evident that, under the cost pressure arising from global competition in deregulated markets, the rights of owners and entrepreneurs to decide and act autonomously enjoy absolute priority over the social and environmental obligations connected with corporate property. Because of this development, the stakeholder value strategy has no chance to be fully adopted under the prevailing conditions of the neoliberal globalization, at least not in terms of a sustainable balance of interests among all stakeholders. In this context it is important to warn against the illusion that the social and environmental decline could be stopped by harmonizing and standardizing the already massively thinned-out national economic frameworks – for example under the heading of European economic government – without having to shake the dogma of neoliberal globalization. Although some normative social and environmental standards are again laid down in the EU reform treaty, as well as similar approaches in several UN conventions, these guidelines are nothing more than non-binding declarations of intent, standing in stark contrast to the free trade principles of the World Trade Organization (WTO), a specialized agency the UN. The neoliberal free trade principles are not only uncritically endorsed by the EU, but actively supported (see also the article World Trade Organization (WTO)).
As long as the normative power of self-interest – from which the free trade principles have emerged – affect our economic life, institutional and other large shareholders will pursue their shady dealings at the expense of small shareholders and other stakeholders.
Click here for the German-language version: Stakeholder Value (deutsch)
R. E. Freeman, J. S. Harrison, A. C. Wicks: Managing for Stakeholders: Survival, Reputation, and Success. A Caravan book, 2007.