UK: EDITORIAL - THE BLURRED VISION OF STAKEHOLDING.

UK: EDITORIAL - THE BLURRED VISION OF STAKEHOLDING. - The easiest way to make a job difficult is to make the goals unclear. For those who are responsible for running a company, the background chatter about stakeholding should not be allowed to make their

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Last Updated: 31 Aug 2010

The easiest way to make a job difficult is to make the goals unclear. For those who are responsible for running a company, the background chatter about stakeholding should not be allowed to make their jobs more difficult. In particular it should not be allowed to introduce any confusion about the ultimate goal of a business whose capital structure is share capital. The aim of such an enterprise is not to satisfy the interests of all its stakeholders but to satisfy the interests of its shareholders. Where the directors of a company are the same as its owners, there is no confusion: it is up to them to run the business to achieve whatever goals they see fit. Thus a private company whose owner-managers wish to make a lower return on their capital in order to offer a better lifestyle to their employees or more investment in their local community can do exactly that. In a public company where the directors are acting as agents for its shareholders, the interests of the shareholders are well understood: they wish the company to maximise their total financial returns.

The notion of stakeholding becomes relevant when working out how best this is achieved. It was several decades ago that the term was first used in a commercial context. Managers were looking to formalise their recognition that the prosperity of their enterprise was closely tied to the quality of the relationships it had with certain key interest groups.

These interest groups were labelled stakeholders (a misnomer which served as an acceptable shorthand at the time but has contributed significantly to the confusion surrounding the status of these interest groups in a company's affairs). What may to some appear as little more than good business sense, has subsequently assumed the grandiose title of stakeholder theory: that the interests of the shareholders are best served by looking out for the interests of the stakeholders.

It is a happy coincidence that this is the way that most people would choose to run a company - be nice to those with whom you do business. It also damps down some of the underlying tensions between capitalism and democracy, reducing the temptation for governments to legislate. These attractions should not lead managers of public companies astray; they should continually be assessing what is the best practice for their business to maximise shareholder return. It may well be that looking after stakeholders is the best route to achieve this as the wealth generated for shareholders by long-established decent companies like Marks & Spencer suggests. But the danger is that the well-being of the stakeholders becomes an end in itself. This reduces the clarity of objective - and the ability to communicate it - which is key to the success of organisations and leads to erratic and incomprehensible decision-making. At this point, stakeholder theory becomes little more than a charter for weak and confused management.

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