Stakeholder or shareholder: who matters most?

This is a significant question most business students spend some time thinking about. Who are firms for? Is running a business about balancing the needs of a diverse group of stakeholders – or is it all really just about the bottom line? In other words, do the wants and needs of shareholders come before ‘stakeholders’? The Economist newspaper has an important article to add to the debate.

The article quotes the head of the Confederation of British Industry (CBI), who believes that an era in which the shareholder view has dominated may be coming to an end. Joining the debate is also the Harvard Business Review, who have recently published an article that argues it is a “tragically flawed premise” that firms should focus on maximising shareholder value, and argues that “it is time we abandoned it.”

Some economists argued in the 1970s that owners of companies were getting a bad deal from the managers that ran their businesses. That inspired a movement to get managers to focus on value for shareholders. Other stakeholders were regarded as a distraction. But times have changed. New fashions are emerging that argue that shareholder value should give way to “customer-driven capitalism” in which firms “should instead aim to maximise customer satisfaction.” Apparently the boss of Unilever, a consumer-goods giant, recently said to the Financial Times, “I do not work for the shareholder, to be honest; I work for the consumer, the customer…I’m not driven and I don’t drive this business model by driving shareholder value.”

A recent survey of the CBI’s members found that most expected that a “more collaborative approach would emerge with various different groups of stakeholders”. Others, like John Lewis, seem to believe: “Employees First, Customers Second” (the title of a forthcoming book by an Indian industrialist).

It’s easy to think this trend may come true, as the world sorts through the wreckage of the financial crisis. A firm’s share price on any given day can be a very poor guide to long-term shareholder value. And for a few years, a number of other companies seemed to put almost as much effort into managing their balance sheets as into wooing their customers.

But maybe that’s the central argument: short term pursuit of gain is rarely likely to benefit a business in the long run anyway. In this view, “If you concentrate on maximising value to shareholders over the short term, you put at risk the relationships that will determine your longer-term success.” And “increased shareholder value is one of the by-products of a focus on customer satisfaction.” If retaining talented staff is a managers’ hardest task, devotion to employees may be the best way to maximise long-term shareholder value.

The article concludes with words from one big American public pension fund: “This is a phoney war between shareholder capitalism and stakeholder capitalism…”