How corporations should be maximising long-term sustainability
It is generally accepted that the shareholders of a company are always stakeholders in such a company, however, it cannot necessarily be said that stakeholders are always shareholders. The term “shareholder”, as per the Companies Act 71 of 2008 (“the Act”), means the holder of a share issued by a company and who is entered as such in the certificated or uncertificated securities register, as the case may be. In accordance with section 52(1) of the Act, a “shareholder” also includes ‘a person who is entitled to exercise any voting rights in relation to a company, irrespective of the form, title or nature of the securities to which those voting rights are attached’.
Stakeholders on the other hand are, “those groups or individuals that can reasonably be expected to be significantly affected by an organisation’s business activities, outputs or outcomes, or whose actions can reasonably be expected to significantly affect the ability of the organisation to create value over time.”
The shareholder primacy model
According to the shareholder primacy model, directors in companies have the primary obligation to enhance shareholder value and maximise shareholder wealth. In other words, the existential purpose of running a corporate entity is tied to profit maximisation for shareholders. It is important to stress that although a company under this model would ideally pursue wealth maximisation for its shareholders, such drive for profit is not at all costs. The model still recognises certain restrictions to act within the ambits of the law. This form of corporate governance, however, does not take priority in the interest of other stakeholders.
The stakeholder theory
According to the stakeholder theory, a company ought to exist for the mutual benefit of those with relevant and/or significant interest in the company. The stakeholders, besides the shareholders, include those with interests in the company such as creditors, suppliers, consumers, employees, local communities, the society, the environment, etc. No single interest of one stakeholder is necessarily more important than the other. There is a balance on all competing interests from the different constituents, with the objective of ensuring sustainable success for the business.
A move towards the stakeholder-inclusive approach
The King IV Report on Corporate Governance for South Africa, advocates a stakeholder-inclusive approach, in which the governing body takes into account the legitimate and reasonable needs, interests and expectations of all material stakeholders in the execution of its duties, in the best interests of the company overtime. Instead of prioritising the interests of the providers of the financial capital, the governing body gives equal consideration to all sources of value creation, including social and relationship capital as embodied by stakeholders, with emphasis placed on viewing the organisation as an integral part of society and placing importance on being a good corporate citizen.
Arguably, the stakeholder-inclusive approach seems to be the preferred approach, as it acknowledges that the best interests of the company are not necessarily always linked to the best interests of the shareholder, and that the shareholders do not necessarily have a predetermined preference over all other stakeholders. Stakeholder-inclusivity means that the board does not consider other stakeholders merely as instruments to serve the interests of shareholders, but as having intrinsic value for decision-making in the best interest of the company, whilst serving the purpose of holistic sustainability of the company. The interests of stakeholders and shareholders are interdependent, and thus following the stakeholder-inclusive approach maximises the symbiosis to promote the company’s long-term sustainability. Merely chasing profit in the short-term, without any focus on the long-term sustainability of such a profit objective, is actually working counterproductive, by destroying the greater environment which enables you to make such profit.
This does not, however, mean that the board must blindly give precedence to all other stakeholders. The board should from, time to time, identify important stakeholder groupings, as well as their legitimate interests and expectations, relevant to the company’s strategic objectives and long-term sustainability. Stakeholders that could materially affect the operations of the company should be identified, assessed and be dealt with as part of the risk management process. These stakeholders should include not only stakeholders that could negatively impact the company, but also stakeholders who could add value to the company by enhancing the wellbeing and reputation of the company.
The interdependence of the shareholders and stakeholders makes it crucial for corporations to look after the interests of other stakeholders to ensure a long-term sustainable profit for the company. In that sense, by following the stakeholder-inclusive approach, the making of a profit for shareholders and the interests of other stakeholders are not mutually exclusive.
Legal Assistant, Johannesburg