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Shareholders v Stakeholders: Managing Interests & Expectations on the Company Board

Tuesday, March 27, 2012
Sarah Jane Leake | Bloomberg Law
"Industry has come under pressure to consider the wider effects of the decisions it takes in pursuit of profitability, and companies now explicitly or implicitly accept that they have responsibilities not just to shareholders, but also to employees, customers, creditors, suppliers, the local community and to society at large."1
The concept of corporate governance carries different connotations across the globe. The underlying idea is, however, the same in all countries. Essentially, it represents "the system by which companies are directed and controlled."2 In a wider sense, it refers to a "set of principles between a company's management, its board, its shareholders and other stakeholders."3

Shareholder Primacy

Corporations in Anglo-Saxon jurisdictions, such as the UK and the U.S., conventionally focus on the agency relationship between the principals, the shareholders, and their agents, the directors of the company. In contrast, continental European and Asian systems tend to embrace the interests of others within the corporation. In the UK and the U.S., a business corporation is typically "organized and carried on primarily for the profit of the stockholders [i.e., shareholders]."4 Profit maximisation, under the doctrine of shareholder primacy, is therefore the directors' overriding objective. It is increasingly being asked whether a director's main focus should be to make money or if he should "encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises."5 This is all the more important given evidence that companies primarily driven by profit maximisation to satisfy shareholder interests usually only do so for short periods of time.6 Yet, where a wider stakeholder group is taken into account (stakeholder theory), the primary focus on shareholder value starts to disappear. Despite this, some companies, both in the UK and internationally, have proven that it is possible to continue to maximise shareholder value while also taking on board the interests of the wider stakeholder constituency.

The John Lewis Model

The John Lewis Partnership (JLP), one of the UK's most successful companies, is an employee-owned partnership owned by trust on behalf of all of its employees, which, under its constitution, commits itself to successfully managing stakeholder relationships. Each employee, for example, has the opportunity to have a say in the way in which the business is run through branch forums, divisional councils, etc. and, moreover, are represented at board level. The JLP model has proven consistently successful. In the year to 29 January 2011, the company's post-tax profit amounted to

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