The Role of Stakeholders

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The Role of Stakeholders
October 2000
Olivier Frémond

The recent history of the stakeholder debate has highlighted the perceived rivalry between the shareholder model versus the stakeholder model: •Shareholder model - the purpose of the corporation is to promote shareholder value

•Stakeholder model - the purpose of the corporation is to serve a wider range of interests

1

The role of stakeholders
Good corporate governance helps… to ensure
Good
that corporations take into account the interests
of a wide range of constituencies, as well as of
the communities within which they operate, and
that their boards are accountable to the company
and the shareholders. This, in turn, helps to
assure that corporations operate for the benefit
of society as a whole.
-Preface, OECD Principles of Corporate Governance (1999)
-Preface, OECD
(1999)

(OECD quote paraphrased: CG ensures that interests of many constituents are taken into account. This helps to assure that corporations operate for the benefit of society as a whole.)
•Now we see that this debate is over a false dichotomy
•The debate has moved on as the perspective outlined in the OECD principles has gained in prevalence. OECD member countries include both shareholder and stakeholder models of corporate governance so this consensus is important

•Stakeholders and shareholders alike are searching for methods of ensuring the long term health and prosperity of the company
•We still may debate what the best system for promoting the long term health of the company may be, just as we may still debate who exactly the stakeholders are

2

Definitions vary
s
s
s
s
s
s
s
s
s

Employees
Shareholders
Management
Creditors
Trade unions
Customers
Suppliers
The local community
Future generations

•Employees: There is widespread agreement that they are a prime stakeholder •Shareholders: Some would say that shareholders are the first stakeholder •Management: Controversial, but some believe that managers are stakeholders For example, Evan and Freeman argue that managers have an additional duty -that of maintaining the health of the company by keeping stakeholder demands balanced-- which makes them stakeholders

•Creditors: Creditors’ rights are often protected under contract and backed by collateral so they are seldom treated as “owners” as the shareholders are •Trade unions: Some argue that this group is redundant with the employee group •Customers: Most stakeholder models include customers

•Suppliers: Often considered a stakeholder
•The local community: Broader definitions of stakeholders widen the concept to include responsibilities to local communities and, more generally, civil society •Future generations: Sustainable development is at the center of the stakeholder debate and this suggests a responsibility to future generations --those who will one day be reliant upon the physical environment-- as a stakeholder group •So where is the common ground between these disparate groups?

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What is the common ground?
Transparency
s Accountability
s Fairness
s Responsibility
s

•Stakeholders and shareholders agree that effective corporate governance requires the following principles, which I am listing with examples of their implementation:
•Transparency: Full disclosure of financial and non-financial information •Accountability: Ensuring that management is effectively overseen (and, where necessary, replaced) by appointing an independent and competent governing body

•Fairness: Equitable treatment of investors
•Responsibility: Ensuring the corporation fulfills its proper role in society Corporate governance systems vary in how they achieve these goals, but by focusing on one group --in this case employees-- we can further develop the notion of how a stakeholder group can strengthen the corporate governance system.

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Employee participation in CG: Examples
Rights to consultation
s Duties of board members to consider
stakeholder...
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