‘Shareholder vs Stakeholder’ is such a tired debate – let’s move on!

August 27, 2019

It is 12 years since the chairs and CEOs of 11 global companies from the UK, India, Continental Europe and the USA declared in their report Tomorrow’s Global Company that the purpose of a company is:

 

‘to provide ever better goods and services in a way that is profitable, ethical and respects the environment, individuals, and the communities in which it operates.’

 

As Tomorrow’s Company has argued over two decades, the purpose of a company is initially set by its founder, and by entrepreneurs and subsequently its leaders and directors. As ownership of shares gets separated from the leadership of the company it would be impractical and nonsensical to argue, as The Economist does this week in its leader ‘What Companies are For’ , that somehow it is the absentee owners of a company that should determine its purpose.

 

In any case the whole debate between shareholder primacy and stakeholder theory is a sideshow, since the purist advocates of both positions focus on who has the right to extract rewards from the company, when the real challenge is how to create the conditions in which the company prospers and creates those rewards in the first place.

 

Too often the debate is conducted as if there were only two ways to look at a company – shareholder vs stakeholder. In fact, there are three. The third is the stewardship view of the company (see the figure below), which doesn’t put shareholders or stakeholders first. It puts the company first. The duty of directors is owed to the company. The directors and shareholders are both stewards. The shareholders choose the directors so that those directors’ hand over the company in better condition. The directors inherit from the founder and entrepreneurs the responsibility for setting purpose and direction and appointing people who will successfully and sustainably uphold it.

Three views of the companyMark Goyder | Mark Goyder

Nonetheless it is encouraging to find that, a decade on from the global financial crisis, business leaders at the USAs Business Round Table have abandoned the self-defeating slogan of shareholder primacy.  (Self-defeating because research shows that you don’t create wealth for shareholders by focusing on shareholders).

 

The Said Business School, supported by Hermes Equity Ownership Services and Berkeley Law School, have gone further. They call for a clear public statement by company directors detailing important stakeholders and defining time horizons. This proposal has echoes of the longstanding Tomorrow’s Company proposal for a Board Mandate.

 

Now we are getting somewhere. It is one thing to change the rhetoric. It means a lot more to get boards to behave as good stewards should, and publicly commit their company.

 

In essence this proposal is reminding boards that they are stewards, entrusted – formally by their shareholders and informally by the society that nurtures their business- with handing over the business to their successors in better condition.

 

The next step is to ensure that the shareholders- whether asset managers or Private Equity owners- do the same, and publicly declare the principles and the time horizons over which their investment will operate. At present there can be a disconnect between the long-time horizon of the ultimate savers with pensions to worry about and the short-term sales and bonus driven timescale of asset managers.

 

My colleague Ong Boon Hwee of Stewardship Asia and I have described how that can be done in ‘Entrusted’ – a new book to be published in October by World Scientific.

 

We ask:

 

How do we make our system of wealth creation no less adventurous, but at the same time more human, more honest, more responsible, more inclusive, more engaging and more respectful of the needs of our grandchildren?’ How do business leaders, investors, and policymakers create, lead and influence companies that we can all have trust in and be proud of, and thereby shows the way to a better form of capitalism – one which serves society as well as feeds and safeguards future generations?

 

And here’s how we answer our question.

 

We describe the achievements of leaders and owners of business of East and West who are showing the way, creating and stewarding and investing in companies which have a clear purpose, a focus on relationships and the long term, and an ownership mentality. We set out the principles of stewardship which have contributed to the success and survival of many businesses for centuries, and which have the potential to rescue our capitalism from its heartless short-termism.

 

And we conclude with an itemised agenda for action by

 

  • Individual savers
  • Pension funds
  • Insurance companies
  • Fund managers and analysts
  • Boards of companies – listed and unlisted
  • Governments

 

As we say in the book’s conclusion:

 

‘Stewardship is a recipe for mobilising the whole system of wealth creation so that it better serves human purposes’entrusted

 

 

People, have argued shareholder vs stakeholder for the last three decades. It’s a sterile debate. Both matter. It’s time to find a way to reconcile the two in the pursuit of a people-centred form of wealth creation. That’s the stewardship agenda.

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