What is the purpose of a corporation? To make its shareholders rich, or to also create value for the employees, customers, suppliers and communities in which it operates?
Worldwide, a battle is being waged between two schools of thought: the traditional shareholder approach (the corporation should maximize investment returns) and the new stakeholder approach (the corporation has social and environmental responsibilities).
According to its founder, R.E. Freeman, stakeholder theory looks beyond the four basic parties of business (investors, employees, suppliers and customers) to recognize that other groups count. Government bodies, political groups, trade associations and communities also matter.
These days, society expects companies to have a broader focus and to achieve higher standards of corporate governance. The stakeholder approach is being lauded as the way to go. Yet, there has been scant research on how to integrate the interests of all the different stakeholders into the corporation's decision-making and management processes - and the consequent results. Where do corporate governance and corporate social responsibility (CSR) intersect?
The research paper "Maximizing Stakeholders' Interests: An Empirical Analysis of the Stakeholder Approach to Corporate Governance" by postdoctoral research fellow Silvia Ayuso; general management lecturer Miguel Angel Rodríguez; Ph.D. candidate Roberto García; and managerial economics professor Miguel Angel Ariño, all of IESE, takes a close look at the emerging stakeholder model of corporate governance. It does so by analyzing three factors: corporate social responsibility (CSR) at the board level, board diversity and stakeholder engagement. The paper examines the relationship between conformance to the stakeholder model of corporate governance and firm financial performance.
While most studies of its kind have focused on the United States, the paper draws on a large international sample of companies from 31 different countries.
The authors first look at a key issue of corporate governance: structure of the board of directors. Board structure refers to a board's organization, the number and types of committees, committee membership and the flow of information among the committees. The authors' research reveals that companies whose board takes responsibility for CSR are ultimately more effective. Boards that tackle CSR issues themselves - without delegating them to committees - are more effective at engaging with customers, employees and external stakeholders, such as local communities, NGOs, the government, etc. Boards that base their decisions on the interests of multiple stakeholders make a greater effort to understand stakeholders' needs and concerns. From a financial perspective, companies with CSR board responsibility deliver better results than companies with CSR committees.
The paper then turns to the topic of board diversity. Who is on the board and what are their ages, religions, ethnicity, professional backgrounds and experience? There are several arguments in favor of board diversity. For instance, in terms of the stakeholder theory, a more diverse board will have a social heterogeneity that will put a company in a better position to connect with various stakeholder groups. Diversity management is also an important indicator for CSR and corporate citizenship. However, when it came to a firm's financial performance, the authors find that board diversity only in terms of nationality has a positive effect.
As for the third dimension - engagement with stakeholders - the stakeholder theory states that firms must consider the interests of multiple stakeholders in managerial decision-making. Scholars have divided stakeholders into two groups. Primary stakeholders are essential for the existence of the business and have formal contact with the company (owners/shareholders, employees, customers and suppliers). The secondary stakeholder group includes social and political stakeholders who play a fundamental role in obtaining business credibility and acceptance of its activities. Within this group are NGOs, activities, communities, governments and competitors.
As for whether or not it is valuable for a firm to foment relationships with its stakeholders, the authors find that engagement with primary stakeholders positively affects financial performance when considering employee engagement but not when considering customer engagement. Engagement with secondary stakeholders improves financial results only in stakeholder-centered countries.
This brings us to another enlightening conclusion of the paper related to a company's international roots. Scholars of corporate governance tend to distinguish between a Continental-European or Japanese stakeholder system, which is more stakeholder-centered, and an Anglo-American one, which is more shareholder-centered. These highly stylized portraits are primarily used to explain differences between countries in finance, ownership, labor relations and the role of the market in corporate control, as well as to explore the possibilities of convergence or continued divergence in corporate governance practices.
"Depending on the legal tradition of the country where the company is based, we found evidence that board diversity and stakeholder engagement are positively related to firm financial performance," write the authors. "We found that CSR board responsibility and stakeholder engagement are more common in countries with stakeholder-centered models of corporate governance than in countries with shareholder-centered modes of governance. Therefore, it seems that the different national legal traditions affect not only types of finance, ownership, and labor relations but also the consideration of non-shareholder-stakeholder interests from a CSR and sustainability perspective."
Oddly, the United Kindgom, Canada and South Africa did not fit into this scheme, which may indicate that corporate strategy concerning CSR is favored by the specific institutional structures and political legacies of Europe when compared to other world regions.
This groundbreaking paper affirms that, depending on the legal tradition of where a company is based, a diverse board that takes responsibility for CSR and engages with its primary and secondary stakeholders can improve a company's financial results.