Shareholder -{vis a vis}- Stakeholder

The Governance of Globalisation
Governance, UK, March 2002

The World Council for Corporate Governance, established last year, wants to see globalisation benefit the many, not the few. Issues of globalisation, governance, trade, poverty and sustainability are inseparable, says the Council’s president Dr. Madhav Mehra.

Globalisation will only succeed, argues Dr. Madhav Mehra, if it is inclusive. If global companies ignore the needs of poor populations, or the cause of the environment, their operations will be socially illegitimate and ultimately commercially unsustainable.

An exclusive focus on shareholder value as the be all and end all of corporate success doesn’t reflect the reality of value creation in the modern company, argues Mehra.

It was a flaw of governance during the 1990s bull markets, he says that shareholder value was seen as companies’ only objective, and not the by-product of running a successful business. “Corporate Governance was being confined to the disclosure of immediate profits for shareholders”, he says, when the challenge at hand is to “create value for the corporation as a whole”.

The pressure to produce shareholder value “destroyed wealth on all sides”, he says, citing the disaster at Enron which cost employees and shareholders so much. The same focus destroyed value at other companies such as Marconi or Global Crossing. “All these scandals are driven by the fact that people had short-term goals”.

Mehra cites one study which found that employees contribute 60 percent of the value that companies generate. This contribution is seldom accounted for, despite the fact that employees can make or break a business. He asks: “Why should employees work in a company that is only shareholder oriented?”

Moving from an industrial to a knowledge economy means that “a lot more value is now created by intangibles”, says Mehra.

Key among these intangibles is company reputation. Mehra argues: “Public perception is build by the amount of social good” a company creates. He laments that corporate social good” a company creates. He laments that corporate social responsibility is so often seen by executives as a “drag on the company” when it can actually be a “competitive differentiator”, in terms of a sound reputation for making a social, as well as an economic, contribution to the countries in which they operate.

“The issue has not been properly exploited”, he says, though he notes that it is the companies that have most to lose who have been most responsive. He cites the example of Shell’s wholesale review of its stakeholder dialogue and CSR policies following the Brent Spar and Nigerian controversies. But it’s not just Big Oil that should pay attention to the business risks that a poor reputation can pose. “There are lessons for almost every company”, he argues.

He regrets that shareholders and stakeholders are seen as having an “adversarial relationship”. He says: “This conflict should never have arisen. The key issue today is to create value for everyone”.