The Stakeholder Theory

It was in 1963 that the term “stakeholder” first appeared. It was used to describes \”those groups without whose support the organization would cease to exist.\” according to Stanford Research Institute. The company\’s stakeholders include all those who participate in its economic life (employees, customers, suppliers, shareholders), those who observe the company (unions, NGOs) , and of those it influences more or less directly (civil society, local community). Stakeholders are all people with an interest in the activities of the company. Several management theories define stakeholders as follows: \”In a corporation, stakeholders are individuals and groups that contribute, voluntarily or not, to the ability to create value and activity and that are its potential beneficiaries and assume the risks \”. Richard Cyert and James March have shown that the functioning of a company can be described as a coalition of actors whose objectives are often contradictory. They consider that decision-making is the result of all the powers exerted by all stakeholders. However Stakeholders don’t exert the same influence. Indeed they exert more or less influence on the decision-making process through the means of action they hold. It is generally recognized that shareholders have a great deal of power over a company\’s business because of their financial contribution. So, to what extent do the shareholders exert an influence on the companies\’ activities and decision-making ? In this paper we will discuss first about Shareholders and how they affect business and control activities of a corporation. We will then discuss about Stakeholders and their effects and influences on a business.

First of all, companies cannot live without a shareholder, even if it is public, except to consider that, in the absence of equity, the company is financed by bank debts or repayable advances, which means the same thing: the company depends on external financing to ensure its development, because its profits are in general insufficient to allow it in all independence. A small business may have just one shareholder, the founder, while a public company may have thousands of individual and institutional shareholders, such as pension funds, hedge fund or mutual fund companies. Shareholders are regularly pointed out for their willingness to influence, to their advantage, the management of companies. We will try to see through which channels they manage to influence the strategy of firms.  Shareholders are trying to influence corporate strategy in their favor. The most spectacular events are the restructuring or dismissal of the stock market whose sole purpose is to maximize \”shareholder value\” and share price on the stock market, sometimes to the detriment of the industrial development of the company. However, these decisions, although strongly encouraged by some shareholders, are the result of decisions made ultimately by the board of directors. We will try to see by what means the shareholders, more particularly the \”institutional investors\”, manage to make the management decisions tilt in the direction of their interests.  Share ownership of multinationals is made up of public actors, individuals, families, companies or financial institutions. These are also called \”institutional investors\”. Shareholders do not form a homogeneous group. There are two types of profiles: active and passive shareholders. Passive shareholders are not involved in the management of the business and are only interested in short-term returns. Here, the shareholder is only a portfolio manager trading in securities. Active shareholders try to influence the management of the company, to change its organization. Several determinants are proposed to explain the behavior of investors. In theory, a shareholder will be active or passive depending on his investment horizon (his intention to hold shares in the more or less long term), the share held (the greater the participation, the more the shareholder will be active) and the type of relationship maintained (supplier, insurer, banker, etc.) with the company. The most direct way for a shareholder to influence the decisions of a company is to take control of it and / or to invite itself to its management. The extreme case is stock market raids. A stock market raid refers to a set of financial and stock market transactions (takeover bids, exchange offers, etc.) aimed at taking control of a company, in a hostile way, via the financial markets. Investment fund managers owe their notoriety to stock market raids; like Carl Icahn or Nelson Peltz in the United States. Stock market raids are unfriendly operations that do not have the approval of the board of directors. The raider tries to take control of the company to reorganize (restructuring, sale by apartment …) in order to gain an added value thereafter. Another way for a shareholder to intervene in the management of the company is to interfere in the board of directors. In France, Vincent Bolloré has for example been able to become Chairman of the Supervisory Board of the Vivendi Group by being the largest shareholder with only 5.04% of the capital at the time of his appointment in 2014. These cases are rather an exception and are the made of companies with a widely dispersed shareholding, that is to say without a reference shareholder. A shareholder may try to influence the strategy by making contact and dialogue with the management team, by means of letters or direct meetings, informal or not. These meetings are usually the privilege of important shareholders. They try to influence the strategy of the group in the interest of their interests: to increase the stock market price, split different activities of the company or refocus on the core business, acquire or merge with a competitor, get into profitable new business sectors, etc. However, the main channel by which institutional shareholders may influence the actions of a company is related to the vote in general meeting. Shareholders who have not obtained satisfaction in direct meetings with the managers will be able to express themselves on this occasion, as well as those who do not have direct access to management. Each year, at the time of the general meeting of shareholders, a certain number of decisions must be legally put to the vote. The meeting reads the management report, approves (or not) the accounts of the company, decides on the allocation of the result and gives discharge to the directors of the company. The voting right depends on the number of shares held. The meeting sets the remuneration of the officers and directors and confirms those awarded for the past year. It appoints and dismisses the officers and directors. The setting of executive compensation is central to the shareholder strategy to guide corporate policy. Linking executive compensation over the course of the stock market, to short-term results, to offer part of the remuneration in action are measures that can be decided by the assembly to align the interests of the directors on those of shareholders. The assignment of results is also a prerogative of the general meeting. The board of directors submits a profit allocation proposal to shareholders, workers and the company. This must be approved by the general meeting. In case of refusal, the management body must review its copy and submit another proposal based on the remarks made at the meeting. Shareholders dissatisfied with the policy may take this opportunity to oppose certain measures or to sanction the management by refusing to vote the remuneration or by dismissing the director or a director. The general meeting can therefore be a place of confrontation between shareholders and management.

Finally, the meeting can decide on own share buybacks. A company can indeed buy back its own shares in order to raise the price. If the company buys its own shares, there are fewer shares available on the market. Their price will therefore increase. This type of measure, which is similar to the destruction of capital, is often a signal to shareholders, who see their securities appreciate artificially.    Shareholders may also exert indirect pressure on management. It involves financial communication and the assessments of financial analysts who act as signals sent to management and in the interest of the shareholder. Stock market law plays a decisive role in setting the standards of transparency that listed companies and investors must follow when trading securities. In addition, a group of agents, the gatekeepers, must ensure that investors are well informed: in the foreground, there are audit firms, responsible for certifying the accounts of companies, and financial analysts, responsible for advising investors on the advisability of selling or buying particular securities. It is hoped that prices will properly inform investors about the intrinsic value of companies. \” Auditors, analysts, and rating agencies have indeed been propelled \”guarantors\” of the good information of the stock market. They influence investors\’ decisions by providing advice on buying or selling securities. But analysts also have an influence on the management of companies. As several studies suggest, long-term investment decisions, investing in R & D, or the ability to innovate for a business seem to diminish as the number of financial analysts who follow the firm increases. By publishing recommendations or ratings, it is the management of companies that is evaluated by the financial analysts, and through it its managers. The safeguards of finance thus allow an influence on the strategies and organizational policies of companies by the publication of financial indicators – such as the Economic Value Aded – which ultimately reflect more the ability of the firm to create shareholder value than its real health in the medium-long term. Thus, the mode of influence of institutional shareholders could be described as \”solicitation-delegation\” insofar as the principle of delegation is maintained. In fact, the institutional shareholders do not claim to manage directors instead and maintain the division of tasks, but they constantly request the latter by communicating their own analysis of the situation. Without formally imposing, they indicate to the leaders strategic and organizational orientations that seem acceptable to them. Rather than a power of injunction, this is a power of suggestion. Shareholders therefore have a wide range of tools at their disposal. The majority of them are not directly involved in business management, and prefer to \”vote with their feet\” in the event of disagreement with management. The shareholder sells or threatens to sell his shares. A threat that targets the company leader: in fact, in the event of a massive sale of shares, the stock market price may decrease, which increases the probability of a buyout of the company (since its market value has decreases). When buying a business, the management team is almost always replaced. The vote with the feet is therefore a signal sent to the management so that it modifies its strategy.

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