Chapter 04: Shareholders

and Stakeholders
 Introduction
• Stakeholder: The term ‘stakeholder’ can encompass a wide range of interests: it refers to any individual or group on which
the activities of the company have an impact. Stakeholders include: employees, suppliers, customers, banks, and other
creditors; the government; various ‘interest’ groups, for example, environmental groups; indeed anyone on whom the
activities of the company may have an impact

• Shareholder Definition: an individual, institution, firm, or other entity that owns shares in a company. Shareholders as
being distinct from other stakeholder groups. shareholders invest their money to provide risk capital for the company and,
secondly, in many legal jurisdictions, shareholders’ rights are enshrined in law whereas those of the wider group of
stakeholders are not. Of course, this varies from jurisdiction to jurisdiction, with creditors’ rights strongly protected in
some countries, and employee rights’ strongly protected in others.
 Stakeholder groups

Employees:
• Employees are invested in the company for their livelihood and future pension benefits.
• Present-day concerns include pay, working conditions, and how the company's strategy affects them.
• Long-term growth and prosperity of the company are crucial for employees, especially regarding future pension benefits.
• Annual reports often detail how companies address employee interests, covering training, working conditions, and equal opportunities.
• Employee share schemes aim to increase employee ownership and align their interests with company performance.
• Maintaining a positive relationship with trade unions is essential for effective communication and understanding employees' perspectives.
• Compliance with employee legislation, including equal opportunities and health and safety, is necessary for companies.
• Whistleblowing procedures are vital for employees to report inappropriate behavior without fear of retaliation.
 Stakeholder groups

Providers of credit
• Providers of credit encompass banks and various financial institutions.
• They seek assurance that borrowing companies can repay debts.
• Confidence in the company's financial health is crucial for ongoing lending and favorable borrowing terms.
• Annual reports, management accounts, and forecasts are sources of information for credit providers.
• Maintaining the confidence of credit providers ensures continued access to funds and favorable borrowing rates for the company.
Suppliers:
• Suppliers are concerned about timely payment for goods and services provided to companies.
• They also seek assurance regarding the company's sustainability to maintain a consistent outlet for their offerings.
• Specialized suppliers face severe impacts if their client companies encounter financial difficulties.
• Timely payments from companies are essential for suppliers to manage their own cash flow and meet their expenses.
• Companies should prioritize settling debts with suppliers promptly to maintain a positive relationship and ensure a continued supply of goods
and services.
• In practice, some large companies may delay payments to suppliers, leading to financial strain for the suppliers or a refusal to supply the
company in the future.
 Stakeholder groups

Customers: desire consistency in product availability from a company to support their purchasing habits.
• Companies strive to build customer loyalty through various marketing efforts, fostering familiarity and repeat purchases.
• Products purchased by customers may become integral parts of their own products, necessitating reliability in supply from the
company.
• Assurance of continued availability and quality of products is crucial for customers to maintain their own production processes.
• Customers are becoming increasingly conscious of social, environmental, and ethical aspects of corporate behavior.
• They seek assurance that the companies they engage with act in a socially responsible manner, influencing their purchasing
decisions.

Local communities: are interested in the sustained employment provided by companies operating in their region.
• Efficient operation of local companies contributes to maintaining employment levels and preventing rising unemployment.
• Economic downturns in companies can lead to increased unemployment, affecting local schools and the housing market.
• Local communities prioritize environmentally friendly practices from companies to prevent pollution in the area.
• They seek a balance where companies thrive while considering local and national environmental concerns.
 Stakeholder groups

• Environmental groups advocate for companies to adhere to national and international environmental standards.
• Standards such as the Ceres Principles and Global Reporting Initiative Sustainability Guidelines are increasingly emphasized.
• Environmental concerns are now seen as integral to business operations rather than optional.
• There's a growing understanding that environmentally responsible companies can be as profitable, if not more so, in the long term.
• Responsible companies prioritize worker safety, minimize pollution, and promote recycling.
• Environmental responsibility benefits both society and the company itself in the long run.

• The government aims to ensure that companies operate in a socially responsible manner, considering social, ethical, and
environmental factors.
• It analyzes corporate trends to inform decisions on employment, monetary policy, and market dynamics.
• Government policies include fiscal measures like capital allowances, investment incentives, and taxation related to companies.
• Fiscal policies influence investment decisions and economic activity across various industries and regions.
• Taxation revenue from companies contributes to government funding for public services and infrastructure.
 Guidance on shareholders’ and stakeholders’ interests

• - Various codes, principles, and guidelines address the role of shareholders' and stakeholders' interests in
corporate governance. These publications provide guidance on how the corporate governance system can
accommodate these interests effectively. They offer frameworks for aligning the interests of shareholders and
stakeholders with the company's objectives and operations. Some of the most influential publications in this
regard are analyzed in this section to offer insights into best practices and standards.
Organisation for Economic Co-operation and Development (OECD)
• The OECD report on Corporate Governance (1998) recognizes companies' mission of enhancing long-term
shareholder value while acknowledging societal pressures.
• The OECD Principles of Corporate Governance (1999, revised in 2004) emphasize the role of stakeholders in
corporate governance.
• Stakeholder rights are influenced by legal provisions and mutual agreements, with the framework
encouraging cooperation between corporations and stakeholders.
• Stakeholders play a role in the long-term success of businesses, with the governance framework permitting
mechanisms for stakeholder participation and access to relevant information.
• The OECD publication "Using the OECD Principles of Corporate Governance: A Boardroom Perspective"
(2008) provides real-life examples of implementing the Principles in the boardroom.
• Examples include direct communication with employees during site visits and consulting with shareholders
and stakeholders on philanthropic initiatives.
 Guidance on shareholders’ and stakeholders’ interests

The Royal Society of Arts (RSA) and Tomorrow’s Company

• The Royal Society of Arts (RSA) in the UK commissioned the Tomorrow’s Company Report (2005), advocating an
inclusive approach for businesses in their relationships with stakeholders.
• The report emphasizes the interdependence between employees, investors, customers, and suppliers, urging businesses to
adopt a long-term view rather than focusing solely on increasing shareholder value.
• Tomorrow’s Company, established as a not-for-profit organization, continues the RSA's work, aiming to create a business
future that aligns with the interests of staff, shareholders, and society.
• Tomorrow’s Global Company: Challenges and Choices (2007) calls for collaboration between companies, governments,
NGOs, and others to address global issues while creating shareholder value.
• Tomorrow’s Investor (2008) highlights the looming pensions crisis and suggests ways to improve transparency,
accountability, and investor engagement.
• Tomorrow’s Investor: Building the Consensus for a People’s Pension in Britain (2010) identifies shortcomings in the UK's
pension system and outlines key questions for policymakers to address for effective reform.
 Guidance on shareholders’ and stakeholders’ interests

• The Hampel Committee was established in the UK in 1995 to review the implementation of recommendations from the Cadbury (1992)
and Greenbury (1995) committees.
• The Hampel Report (1998) emphasized that good governance considers the interests of stakeholders but asserted that the primary
objective of listed companies is to preserve and enhance shareholder value.
• Management should develop appropriate relationships with stakeholders while prioritizing the long-term interests of shareholders.
• Directors, as a board, are responsible for stakeholder relations but are ultimately accountable to shareholders.
• Clarifying directors' responsibilities to shareholders is crucial for governance and accountability.
• Hermes Principles (2002, 2006, 2010)
• Hermes, one of the largest institutional investors in the UK, published The Hermes Principles in 2002, emphasizing the long-term interest
of shareholders.
• The Principles advocate that companies running in the long-term interest of shareholders will also benefit the wider economy,
necessitating effective management of relationships with employees, suppliers, customers, ethical behavior, and environmental
consideration.
• In 2006, Hermes introduced its Hermes Corporate Governance Principles, comprising Global Principles based on the International
Corporate Governance Network's standards and Regional Principles aligned with local governance codes or guidance.
• The Hermes Responsible Ownership Principles, published in 2010, detail expectations for listed companies and Hermes' commitments to
responsible ownership.
 Guidance on shareholders’ and stakeholders’ interests

EU Accounts Modernization Directive

• The EU Accounts Modernization Directive aimed to enhance comparability across financial reporting in EU member
states.
• It established common standards for disclosure levels and content for medium and large companies within the EU.
• Effective from April 1, 2005, the Directive required additional information in the Director’s Report to provide a
comprehensive review of a company’s business.
• The Directive mandates that the review must include analysis using financial key performance indicators and, where
appropriate, other key performance indicators, including environmental and employee matters, to understand the
development, performance, or position of the company's business.
Guidance on shareholders’ and stakeholders’ interests

• Companies Act (2006)

• The Companies Act (2006) introduced the concept of 'enlightened shareholder value' in directors' duties, emphasizing a
balanced approach to decision-making that considers the long-term success of the company and wider stakeholder interests.
• Directors are required to act in a manner that promotes the success of the company for the benefit of its members as a
whole, taking into account various factors including the company's employees, business relationships, community impact,
environmental considerations, and ethical standards.
• Unless classified as a small company, the Directors’ Report must include a business review compliant with the EU
Accounts Modernization Directive and the Companies Act 2006, providing a fair review of the company’s business and
disclosing principal risks and uncertainties.
• The business review must cover main trends and factors affecting future development, performance, and position of the
company's business, as well as information on environmental, employee, and social/community issues, including policies
and their effectiveness.
• Financial key performance indicators (KPIs) and other KPIs related to environmental and employee matters should be
included in the business review to effectively measure the development, performance, or position of the company's
business.
• The Department for Environment, Food, and Rural Affairs (Defra) issued voluntary guidance on environmental key
performance indicators (KPIs) in January 2006, which companies may include in their environmental reporting disclosures
and business reviews.
Guidance on shareholders’ and stakeholders’ interests

• King Report (2002, 2009)

• The King Report (2002) is a comprehensive guideline for corporate governance in South Africa, building on the 1994
report and emphasizing an integrated approach that considers the interests of various stakeholder groups.
• It underscores the fundamental nature of the inclusive approach in business operations, urging companies to define their
purpose, values, and stakeholders when developing strategies to achieve corporate objectives.
• Updated in 2009, the King Report continues to emphasize the importance of the inclusive approach and the consideration
of stakeholder interests in corporate governance.
 Roles of shareholders and stakeholders
• - The involvement of shareholders and stakeholders in corporate governance varies depending on national laws, customs, and individual
company approaches.
• In countries like the UK and the USA, the focus is on the relationship between shareholders and directors, with little provision for
stakeholder representation on corporate boards.
• Conversely, German and French corporate governance systems allow for employee representation at board level and sometimes
representation of finance providers, viewing companies as partnerships between capital and labor.
• However, employee representation on boards may lead to sub-optimal decision-making, as decisions favoring the workforce over the
company's overall interests may prevail.
• The multiplicity of objectives arising from accountability to both shareholders and stakeholders can pose challenges for effective board
functioning and decision-making.
• Shareholders and stakeholders often have intertwined interests, and the distinction between them is not always clear-cut.
• Pension funds, insurance companies, and individual shareholders may also be stakeholders, blurring the lines between the two groups.
• Corporate governance frameworks should acknowledge the complex ecosystem of stakeholders, including regulators, customers, suppliers,
and local citizens, to effectively manage risks and generate long-term shareholder wealth.
• An 'enlightened shareholder value' approach considers stakeholders such as the environment, employees, and local communities as critical to
long-term shareholder wealth and effective risk management.
• Redefining agency theory to prioritize the corporation over shareholders, viewing the board as autonomous fiduciaries, and shifting the
board's role from monitors to mediating hierarchs may be more applicable and palatable in stakeholder-oriented countries like China,