Wednesday, October 28, 2020
Home Business Corporate Government And The Stakeholder Vs Shareholder Model

Corporate Government And The Stakeholder Vs Shareholder Model

Men shaking hands

Today’s world is fueled by consumerism, and thus an endless number of corporations and brands exist. There are thousands of different types of any kind of product, and no two brands are the same. With so much of our economy depending on these businesses, it makes sense that there are numerous systems in play to keep everything operating smoothly.

How a company functions, which factors influence its decision making, how it’s viewed by the public, all depends on the people closely invested with said company. These people control the direction the company takes, and how it treats its assets. But what these people might want for the company and themselves might differ from what someone else wants. Thus come in the shareholder and stakeholder models.

What Is Corporate Governance?

Simply put, corporate governance is how a corporation is governed. But you probably got that from the name, so let’s get a bit more technical. A company’s corporate governance model basically defines each act the company carries out, as well as how it maintains its relations with all concerned entities. This model describes how the company will treat its management, its employees, and the public.

Corporate governance is the driving factor for a company’s reputation too, because it decides how a company presents itself to the public eye. Using whatever rules and regulations are put in place by management, the corporation structures itself accordingly. This is why there is so much diversity when it comes to how corporations are viewed. Some are known to be horrible places to work at, but also for producing quality products. Some are known as a very welcoming place to be employed at. And then some are known for their blatant violations of human rights and excessive lobbying to prevent any legal action against them.

What priorities the corporate aims for are set by the governance model too. Does it solely focus on producing good products? Does it dedicate its resources to a research department to innovate existing products? Or does it not aim for maximum profit and just gets by? It all depends on the people in charge and their way of thinking, which then translates to company policy.

What Are Shareholders?

Shareholders, also known as stockholders, are people who have bought a share of a particular company. Shares, or stocks, of a corporation are, in simple words, pieces of that corporation. When you buy a share in a company, you literally own a percentage of that company. These shares are what is sold in the stock market, and a shareholder obviously wants to see a profit.

If the company does well for itself and continues to grow, the price of the shares increases. A shareholder can decide when to sell a share he owns, for either a profit or a loss if the company has been going downhill. The growth of a company can easily be tracked by going through its stock price history.

The value of shares themselves depends on multiple factors. One of course, is the company’s performance in the market itself. If the company is failing to turn a profit, so will its shares. However, if the company grows, the shares increase in price as well. Another factor that can influence share prices is how many people are buying the shares in the first place. If a lot of shares are bought, people show faith in the company and buy even more. If people see shares losing value, they may sell them off in a panic, causing the entire price of the shares to come crashing down. Another factor that influences share prices is the company’s PR. For example, when Elon Musk smoked a joint on television, Tesla’s shares fell as people saw him as an irresponsible person that may hurt the company. Even a joke tweet from Elon Musk about Tesla shares being too costly caused the shares to drop in price in the thousands of Dollars range.

What Are Stakeholders?

Stakeholders are very different from shareholders. Shareholders can be considered stakeholders, but stakeholders are barely ever shareholders. To explain the difference between the two, remember that a shareholder is someone who simply owns a percentage of the company. Stakeholders meanwhile, are people who are related to that company in any way. So because shareholders are related to the company in such a way that they own a part of it, they can be considered stakeholders too. Stakeholders can be anyone related to the company; like the managers, the employees, and even the customers.

You might be noticing an expected conflict of view here. While the shareholders want the company to profit so that their shares net them a profit, stakeholders want the company to remain stable because their livelihoods are at stake. And now we can actually discuss the differences between employing the shareholder model and the stakeholder model.

The Shareholder Model

The shareholder model is, understandably, modelled to appease the shareholders. Corporations following this model of corporate governance listen most to what their shareholders want. Shareholders with a lot at stake can even be a part of the board of directors, and the board gets to make the biggest decisions for the company. If a board of directors feels a company is not functioning efficiently under the current CEO’s leadership, they even hold the power to fire him. Even founders of a company have been known to be fired from their own company by the board, like Steve Jobs from Apple.

Under the shareholder model of corporate governance, the corporation focuses on profits first and foremost. Worker safety and satisfaction comes second, usually only being followed to the bare minimum set by the government. However, the focus on maximum profit does not mean that the shareholder model encourages illegal activity. Corporations, usually, try to keep their actions legal. They might pull jerkish moves to maximize profit, but doing outright illegal things is usually unheard of.

The Stakeholder Model

If a corporation decides to model its governance after the stakeholder model, its functioning differs a lot. Shareholders can and do still exist, but the corporation doesn’t pander to them and their demand for profit. The corporation tries to make sure that each person affiliated with the company in some way, benefits from their governance. Stakeholder modelled corporations usually report higher worker satisfaction, and also face less wage inequality.

The stakeholder model does not mean that a corporation simply abandons trying to achieve profit. To do so would spell the doom of that company. Instead, profit isn’t made the sole purpose for that corporation’s existence. If the company feels it can benefit its workers and the general public in some way, it tries to do so. Charitable acts are held for actual goodwill, and not just as a PR stunt with excess profits to make the corporation more popular.

Conclusion

The shareholder and stakeholder models are just models after all. A corporation isn’t entitled to follow one strictly and completely ignore the other. Many corporations actually employ factors from both models, and try to make a successful model of corporate governance on that. To declare one model objectively superior to the other would be ignorant, as each has its own pros and cons. In the end, it all comes down to the management of a corporation itself, and how they feel things should be done.

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