Contention over the objective of large companies in different countries has reigned for years, the issue being held in high regard for among other reasons, the underpinning of corporate governance and the theories that define the extent to which corporate governance systems exist. The practice of corporate governance in different countries highlights these differences where two varying theories take precedence: the stakeholder theory as exercised in the German corporate governance model and the shareholder primacy theory as practiced in the Anglo-American corporate governance theory. The shareholder primacy theory dominates the Anglo-American jurisdiction while the stakeholder theory dominates continental European versions of corporate governance such as the German corporate governance practice. Despite the dominance of the shareholder primacy in the Anglo-American corporate governance, the passing of the Sarbanes Act of 2002 has influenced companies exercising this theory to lean towards the stakeholder approach to corporate governance.
Besides the Sarbanes Act, literature criticizing the Anglo-American theory has emerged with various experts advocating for the inclusion of stakeholders among shareholders. Other reasons for the need for a review of a company’s duty include the emergence of the enlightened shareholder with an understanding of the duties of management. Today, shareholders understand that management’s duty extends beyond enriching shareholders and that they have a mandate to the environment and communities. Also, as Fairfax (2005) contends, there has been an increase in the use of stakeholder rhetoric over shareholder in publications and corporate documents as well as an increase in social reporting following the increase in concerns for stakeholders by companies. Challenges to financial institutions have exposed differences in the Anglo-American system of corporate governance. Based on this analysis, this study analyzes the stakeholder theory and contrasts it with the shareholder primacy theory. The discussion extends to the superiority of the Anglo-American theory as practised in the U.S., including changes to the theory and their impact on corporate governance. Specifically, this study aims to answer the research questions by examining the differences between stakeholder theory and shareholder theory as well as arguments in support of stakeholder theory or the German corporate governance approach, in an attempt to justify the theory as it emerged and gains recognition in American jurisdictions.(HireEssayWriter for a similar paper)
Arguments and Rationale for Stakeholder Theory (German Corporate Governance Model)
Scholars such as Millon (1995) are of the view that “shareholder primacy damages the interests of non- shareholding stakeholders.” Equally, Freeman et al. (2004) contend that “Business is about putting together a deal so that suppliers, customers, employees, communities, managers and shareholders all win continuously over time… that is, at some level, stakeholder interests have to be joint or else there will exit, and a new collaboration formed.” The points highlighted by these authors are the need for shareholders to ensure that the organization thrives and that management should consider stakeholders else they will abandon their commitment to the company. Indeed, these events can severely influence a company’s ability to generate wealth. Secondly, management should ensure that all persons in the organization perform their role to enable the generation of social wealth. While shareholder value maximization theory, or the Anglo-American theory on corporate governance, advocates for similar objectives, the route to the attainment of the objects varies significantly. In this sense, the stakeholder theory discourages shareholder primacy for the attainment of all shareholders’ objectives. This approach means that a company must among other things – that is, satisfy the financial objectives of its shareholders, build successful relationships with suppliers, hire and motivate its employees, and enhance the customer experience in order to generate profits. Stakeholder value maximization, compared to shareholder wealth maximization, and as practised in Germany’s corporate governance, is how a company can achieve efficiency, be competitive and profitable, and achieve economic success.
The stakeholder theory provides for the assertion that is meeting stakeholder’s needs, they, in turn, show loyalty and benefit more than if the organization used the Anglo-American model of corporate governance. This follows the organization’s ability to generate social wealth over financial wealth to its investors. However, advocates of the Anglo-American model contend that management should prioritize shareholders value maximization; else, the organization fails to prosper. The extent to which this hypothesis would hold depends on the intersection between shareholders and the management of the organization and the consequences of agent-principal conflict. Indeed, the simplicity of such a situation would occur if the roles of all parties were clearly defined. Ideally, considering all stakeholders’ objectives could improve the organization’s reputation significantly and improve trust between the various parties. Also, considering stakeholders input could improve their relationship with management. As such, Firedman (1970) contends that stakeholders should be protected following their contributions to the organization that can be considered as property rights. These rights equal to those held by suppliers and other groups that have a claim to the organization. In Germany, and the broader Europe region, stakeholders are considered in high regard and equal to shareholders. As with shareholders, stakeholders risk their investments, financial or otherwise, in the organization – for instance, employees advance their skills in order to perform better in the organization, a factor that qualifies as an investment. Similarly, suppliers expand and acquire new assets in order to meet demand thus can be said to have invested in the company.(OrderCustomerPaper from us)
In regard to efficiency, management under the Anglo-American model of corporate governance do not associate with shareholders compared to stakeholders. This means that managers deal with suppliers and employees over various aspects concerning the organization. By practising stakeholder theory, organizations in Germany consider stakeholder’s concerns and their interests. Consequently, management gains a positive working relationship with employees and other stakeholders that improve the organization’s efficiency and effectiveness. Indeed, today’s organizations require various groups to operate autonomously; hence, it is reasonably expected that failure to develop a working relationship between these groups could affect the organization’s profitability. In essence, the stakeholder’s theory does not encourage the promotion of any one group’s objectives. In essence, the theory under the normative aspect considers the input of multiple groups to the success of the organization, thus claiming its legitimacy.
Despite the theory adopted by an organization to govern its corporate governance activities, the bottom line remains that the organization seeks to distribute wealth and value to its stakeholders equally. This objective for the stakeholder theory differs from that of shareholder value maximization theory that holds some groups prima facie over others. According to Donaldson and Preston (1995), the stakeholder theory holds “each group of stakeholder’s merits consideration for its own sake and not merely because of its ability to further the interests of some group, such as shareowners.” The theory advocates for the quality of all stakeholders following their collective intrinsic value and moral entitlement in the running of the organization. Notably, the attainment of such objectives would alienate shareholders for the need to assure the rights of stakeholders are met and their welfare taken care of. According to Phillips, Freeman and Wicks (2003), “The moral basis is that a duty is imposed on all organizations to all individuals who are involved with stakeholders – meaning, an organization’s failure to perform its moral duty would be a breach of human rights irrespective of who was the stakeholder prejudiced.” Conclusively, these arguments separate stakeholder from shareholders. The complexity of corporate governance recently has increased the number of stakeholders. For countries such as Germany, this means that practising corporate governance has become ever more challenging. Nonetheless, this model emphasizes attributes such as fairness and trust and embraces ethics and economics, which in the alternative models, poses a difficulty in balancing.
