Solution
Sangeeta answered on
Aug 03 2020
Introduction
To start with, great fraction of the traditional Company Law doctrine holds that companies need to be managed for promoting, above all, shareholders’ rights (Armour et. al., 2003). Practices in support of non-shareholder sector like suppliers, customers, staff members or the society as a whole could be considered like a means of Management for increasing its personal prestige and power (Vincent, 2001). The interests of the Stakeholders could be understood as conflicting Shareholders rights for obtaining reasonable proceeds for their investment (Blair, 2005). Further, taking the above discussion into consideration this particular paper attempts to provide a report to be submitted to the AICD evaluating the evidence that the responsibility of a company director is to place shareholder interests above those of other stakeholders. As provided in the case, AICD is concerned that many company directors hold the opinion that the company’s board of directors has a responsibility to place the interests of shareholders above all other stakeholder interests.
Shareholders’ Value Approach
The traditional sight of the company has largely been a shareholder directed one. Additionally, this acts like an important concept in the development of the corporate governance means within the Anglo American society (Gamble and Kelly, 2011). As per this concept, the company is managed for the good of the shareholders who are owed a fiduciary responsibility through the board of directors (BOD) performing like their representatives during the development of strategies that need to be taken up through the corporation. The board of directors is selected through the shareholders for acting on their behalf and ensuring that the functions of the company are well in line with their stated interests (Armour et. al., 2003). Moreover, the shareholders are considered as being the owners of the company for the reason that they uphold to be the continuing risk ca
iers of the company’s proceeds as well as the strategy a
angements are aligned with their welfares. Moving ahead, the shareholder value concept is assisted by the connection of the contracts approach that in disproportion to the organic approach, asserts that all stakeholders are protected through means of agreement with the company and require no additional safety (Gamble and Kelly, 2011).
Together with the several advantages associated with the shareholder value concept, two that hold chief importance include the effectiveness argument along with development of a sound accountability means. Considering the effectiveness argument, it is stated that this particular approach develops the most appropriate condition for wealth maximization and offers a sense of impetus for companies to develop the products and services needed by the customers (Turnbull, 2007). Needing the management to handle the social impacts of operating the business would lead to inadequacies and decline of the company (Armour et. al., 2003). Additionally, in context to the development of an effective accountability model, the solitary task of the directors' is basically profit maximisation for its shareholders. As a result, they are accountable to the shareholders for the company’s outcome (Armour et. al., 2003). This isn’t the situation under the stakeholder value concept where the board of directors are thought to look after the interests of several diverse groups. Consequently, this leads to being accountable to nobody. Since the shareholders are the residual bearers of the risk, they hold the important reason for keeping a watch upon the management (Gamble and Kelly, 2011).
Stakeholder Value Approach
The stakeholder vision of the company is seen as being a growing concept, which challenges the assertions of the shareholder value concept. Supporters of this approach assert that the shareholder value concept has become an out-dated concept. The objectives and aims of the company are varied within present day’s modern sphere where human capital holds higher significance as compared to the physical assets value (Armour et. al., 2003). Moreover, the chief stakeholders under this approach are basically staff members, vendors, creditors, buyers and lastly, the atmosphere (Deakin, 2005). Additionally, the approach asserts that the hard efforts of all stakeholders enthusiastically associated with the corporation’s outcome must be seen consistently. No other group must be offered control in excess of another. Consequently, the approach asserts that shareholders are too one among the constituencies within the wider stakeholder group as well as must be treated as such rather than being offered the exclusive authority of controlling the corporation (Gamble and Kelly, 2011). Supporters of this approach also hold the view that shareholders aren’t the only residual bearers of the risk, in addition to them it’s also the other stakeholders who share an important part of this risk (Freeman, 2004). Whilst, the shareholders face the likely loss of investments, employees deal with the modifications in the terms as well as conditions of the agreement and perhaps end up dropping their job. Consumers experience cost hikes and decreased quality of the product whereas the local society might suffer from hostile ecological impact occu
ing from company practices (Armour et. al., 2003). Hereafter, shareholders shouldn’t be offered the special power in the development of company objectives and policies. Instead, a more stakeholder directed concept must be considered for dealing with such issues.
Moving ahead, for flourishing, corporations are constantly searching for skilful and dedicated workforce, accountable vendors, sound relationships with the local society and government and lastly,
and faithfulness from the buyers (Gamble and Kelly, 2011). The stakeholder value concept offers the company with the chance of achieving these goals and motivates stakeholders to make investment towards in lasting relation development measures with the corporation (Gamble and Kelly, 2011). Additionally, stakeholder value approach motivates a long term model for operating an organization (Deakin, 2015). While, shareholder value lays high emphasis upon the price of share as well as short term productivity, stakeholder value concentrates upon developing a sustainable company holding lasting motivating connection with several stakeholder groups. Nevertheless, opponents of stakeholders approach assert that the approach might perhaps result in lacking managerial course and postponements in decision forming. With augmented groups of stakeholder whose interests must be taken into consideration, managers might see themselves in a situation of predicament. As a result, an ordinary responsibility means would also require being devised. Additionally, in establishing the corporation’s goals the representations belonging to different stakeholder groups would need to be such that it doesn’t harm the corporation with respect to postponed decision forming. As timing sense is seen as being an important factor in running an effective project (Gamble and Kelly, 2011).
Enlightened shareholder value approach
Subsequent to the corporate outrages that occu
ed during the period of past several years like WorldCom and Enron, legislators within several diverse countries have made an effort to devise means, which could eliminate the possibility of these occu
ences recu
ing during the coming years (Deakin, 2015). Although, the United States
ought forward the Sa
anes Oxley legislation, the United Kingdom - through the reference of the Company Law Review Steering Group - moved a little away from the absolute shareholder value concepts towards an approach termed as ESV (Enlightened Shareholder Value) concept (Letza et. al., 2006). The outlooks of the Steering Group were integrated into the 2006 Company Law Reform Bill, discussed within the Parliament and afterwards accepted. The ESV concept upholds profit maximization as being the chief aspect of the company, nevertheless different from the shareholder prevalence argument it doesn’t dismiss there (Gamble and Kelly, 2011). Moreover, the ESV concept persists to lay emphasis upon the importance of decision forming, which leads to long term value generation of the company through offering respect to the interests of the company’s stakeholders as well as through building lasting relations of faith with them (Armour et. al., 2003).
Moving ahead, after this particular Bill was approved, it
ought about the successive modifications in the 2006 Companies Act by the systematization of directors responsibilities that were before un-organized. The highly significant modification that was
ought about through the institution of Section 172 was the duty of promoting the company’s success (Stapledon, 2006). This particular segment of the Act levies a duty, which necessitates the director to perform in the manner he/she regards, in good faith, will be most expected to encourage the company’s success and this responsibility is even now owned by the members in general (Gamble and Kelly, 2011). While exercising this responsibility the director must, to the level he/she considers practically appropriate to do so, offer respects to the interests of the corporation’s staff members, the relation with the vendors, consumers, the atmosphere and the overall society. Even though, this list isn’t exhaustive, it targets a reasonable overview of what exactly the ESV concept signifies and possibly a step towards the co
ect course (Deakin, 2005). This is the foremost time that the rule has clearly needed the directors of the corporation to offer respects to the stakeholders’ interests.
Conclusion
To conclude, it can be clearly stated from the above discussion that the chief responsibility of a company director is to place shareholder interests above those of other stakeholders. Many company directors hold the opinion that the company’s board of directors has a responsibility to place the interests of shareholders above all other stakeholder interests. Together with the several advantages associated with the shareholder value concept, two that hold chief importance include the effectiveness argument along with development of a sound accountability means (Deakin, 2005). Considering the effectiveness argument, it is stated that this particular approach develops the most appropriate condition for wealth maximization and offers a sense of impetus for companies to develop the products and services needed by the customers. Needing the management to handle the social impacts of operating the business would lead to inadequacies and decline of the company (Armour et. al., 2003). Additionally, in context to the development of an effective accountability model, the solitary task of the directors' is basically profit maximisation for its shareholders. As a result, they are accountable to the shareholders for the company’s outcome (Armour et. al., 2003). This isn’t the situation under the stakeholder value concept where the board of directors are thought to look after the interests of several diverse groups. Consequently, this leads to being accountable to nobody. Since the shareholders are the residual bearers of the risk, they hold the important reason for keeping a watch upon the management.
Moving ahead, stakeholders approach might perhaps result in lacking managerial course and postponements in decision forming. With augmented groups of stakeholder whose interests must be taken into consideration, managers might see themselves in a situation of predicament. As a result, an ordinary responsibility means would also require being devised. Additionally, in establishing the corporation’s goals the representations belonging to different stakeholder groups would need to be such that it doesn’t harm the corporation with respect to postponed decision forming (Chemla, 2005). As timing sense is seen as being an important factor in running an effective project. Shareholder control of companies tags along from the private property rights as well as the need that allotted agents ca
y out their contractual obligations. In simple terms, it originates from liberty and self-ownership in economic engagements. Companies, being agents for shareholders, need to live up to their willingly approved contractual responsibilities towards consumers, vendors, staff members and lastly, owners (Armour et. al., 2003). Thus, they all gain advantage from such a
angements. Apart from that, an organization’s chief obligation towards others is refraining from threatening or involving in initiatory ferocity against them as well as their lawfully possessed assets.
Further, as stated in the above sections the traditional sight of the company has largely been a shareholder directed one. Additionally, this acts like an important concept in the development of the corporate governance means within the Anglo American society. As per this concept, the company is managed for the good of the shareholders who are owed a fiduciary responsibility through the board of directors (BOD) performing like their representatives during the development of strategies that need to be taken up through the corporations.
References:
Armour, J., Deakin, S. and Konzelmann, S. (2003) Shareholder Primacy and the Trajectory of UK Corporate Governance, British Journal of Industrial Relations, Vol. 41, No. 3, pp. 531-555.
Blair, M. (2005) Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, The Brookings Institution: Washington DC.
Chemla, G. (2005) Hold-ups, Stakeholders and Takeover Threats, Journal of Financial Intermediation, Vol. 14, pp. 376-397
Deakin, S. (2015) The Coming Transformation of Shareholder Value, Corporate Governance: An International Review, Vol. 13, pp. 11-18
Freeman, E. (2004) Strategic Management: A stakeholder approach, Pitman, Boston
Gamble, A. and Kelly, G. (2011) Shareholder Value and Stakeholder Debate in the UK, Journal of Management Studies, Vol. 9, No. 1
Letza, S., Sun, X. and Kirk
ide, J. (2014) Shareholding vs. Stakeholding: A Critical Review of Corporate Governance, An International Review, Vol. 12, pp. 242-246.
Stapledon, G. (2006) Institutional Shareholders and Corporate Governance, Oxford: Clarendon press
Turnbull, S. (2007) Stakeholder Corporation, Journal of Cooperative Studies, Vol. 9, pp.18-52.
Vinten, G. (2001) Shareholder vs. Stakeholder - Is there a governance dilemma? Corporate Governance, Vol. 9, pp. 36-47
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