Who are the Stakeholders?

Stakeholders are more or less by definition anybody that has a role to play in the process of value creation. So besides the shareholders, the employees have a role to play, the suppliers have a role to play, the society in which the company does business; they have a role to play. In other words, stakeholders have to do with the process of value creation, are affected by the process of value creation. And the easiest way to think about it is that shareholders are just one of the very many stakeholders. In other words, sometimes is this tension, this dichotomy between do we focus on shareholders and do we focus on stakeholders. It’s a question that is phrased in terms do we focus on this one part of the company that we call the shareholders or do we focus on a more general, a broader group of stakeholders, one of which are these shareholders. And, and it seems to be the case, and, and I emphasize that it seems to be the case that stakeholder focus would be a broader issue. And I will argue in just a minute that is not quite the case. And the reason why that is not quite the case is you may want to ask whether there is a conflict in the first place. More often than not we tend to see as this is or either I do things for the shareholders, or I do things for the stakeholders, and it is not like that. Many people would actually think about this in more proper terms than and either or the decision. And, and the easiest way to think about is put it in the following way.

Do you think you can really do good things for your shareholders? 

Do you think that you can really benefit your shareholders by ignoring the interest of all the other parties that have something to do with the process of value creation? In this example, suppose that I pay really badly to my employees, and I do that on behalf of my shareholders. I am going to squeeze my employees. So I pay less, I get more profits, and then I channel those profits to my shareholder.

How smart is that policy?

Can I do that over and repeatedly?

 Eventually people will catch up, and eventually, the only people that I will be able to hire by the very low wages that I am attempting to pay are unskilled people. People that are will not go to create value for shareholders, in the first place. So, so it’s important that you keep in mind that sometimes we think that we may be able to do things to the detriment of some parties and to the benefit of shareholders, but, sooner or later, we’re going to realize that that is not really the case. In other words, and to put this the other way around, only by taking care, properly, of all the people that have some participation in the process of value creation, will I be able to benefit the shareholders. Therefore, my first point on this is it is not so much of a conflict. Really, you cannot benefit shareholders even if that is your final, final goal. You cannot really benefit shareholders to the detriment of all the other parties that have a role to play in the process of value creation.

Now, why do we tend to focus, at least in finance, on shareholder value?

Well, there are at least three reasons for that.

  • Reason number one is what we mentioned in passing before. Some people think that is a narrower criterion. And they think that is a narrower criterion simply because shareholders are one of the very many stakeholders. But as we also said before, remember, you cannot really benefit the shareholders by ignoring all the other stakeholders. Therefore, at the end of the day, if you properly take care of all the stakeholders of the company, then you are going to be benefiting the shareholders. Therefore, although from the point of view of counting, it seems to be that stakeholders are broader. From the point of view of how do we actually think about the process of value creation by trying to benefit the shareholders, then I cannot do that without actually doing something proper to all the other stakeholders. So in other words, we focus on shareholders because we think that the only way that you are going to benefit them is if you take into account properly, the interest and benefits of all the other stakeholders in the in the company.
  • The second reason why, particularly in finance, we want to focus on, shareholder value is that we can always quantify that. We can do it more than one-way, and as you see there, I put in, I am putting objectively in quotations, and I am putting objectively in quotations because. We can always come up with a number, but of course, that number depends first on that you and I agree on how we are going to measure the process of value creation because there’s not one variable. There are many different possibilities. And, therefore, you know, if you and I disagree on what is the more proper variable to measure value creation, and then we may end up with an objective number, both you and me. But these two numbers will not or may not match each other. Therefore, on the one hand, we do not have to agree on how we actually measure the process of value creation. Alternatively, we may agree on the variable and we may disagree on the inputs. If you remember, that’s what happened with the Even if you and I agree that, we can calculate a company is the cost of equity. By using the CAPM, what we throw into the CAPM for the market and the beta may be different between what you think, I think, or someone else actually thinks. Therefore, when we say objective, we mean that we mean that, that means that we can calculate a number, and that number is something that we can use to make decisions.
  • The third and final reason why we find, as we tend to focus on shareholder value is what we said at the very beginning. And that is, remember that, at the end of the day, shareholders are the owners of the company. This problem actually has been studied for many, many years which is called the principle agent problem.? The principle, in this case, is the owners of the capital. Well, the owners of the capital, the shareholders, they cannot be together and actually run the company on a day-to-day basis. Therefore, they delegate the day-to-day operations of the company. All the decisions that need to be made to the agent, and the agent, in this case, is the manager. Therefore, the problem, what is called the principal-agent problem is the fact that what is good for the managers may not necessarily be good for the shareholders.

In other words, what is good for the agent may not necessarily be good for the principle, and all these issues that we are going to discuss are, how do we bring them together? 

How do we actually get managers to do what shareholders would like them to do? 

But at the end of the day, always keep in mind; shareholders are the owners of the capital. They are the owners of the company and when they delegate the day-to-day operation of the company. The implicit mandate is very simple, make the best possible use out of this capital. That is created as much value as possible with this capital. That is going to be socially good but it is going to be also good for the corporation.

AdminCapital Budgeting TechniquesWho are the Stakeholders? Stakeholders are more or less by definition anybody that has a role to play in the process of value creation. So besides the shareholders, the employees have a role to play, the suppliers have a role to play, the society in which the company does business; they have a role...Investment analysis basics