To Measure or Not To Measure?

“Currently, there is no one proven model for social impact measurement. The conversation to find better ways to measure and create collective impact requires active participation, reflection, coordination and action. Only then, would we truly be able to deliver actual value to the social sector.”

A reflection paper by Zhao Binru Bryan, as partial fulfillment of a BBA (Honours) module, “Measuring Success in Philanthropy and Impact Investing”.

This paper seeks to discuss whether managers in the field of the public sector or nonprofit organizations (NPOs) should, or should not use performance measurement for performance management. According to Hatry (2014), performance measurement refers to the regular collection of output and/or outcome data throughout the year for the NPO’s programs and services. Performance managers would then use these performance data to help them make decisions that continually improve their services to their customers. In this paper, the concept of philanthropy is extended to ‘entrepreneurial philanthropy’, comprising of ‘venture philanthropy’ as well as ‘impact first impact investing’ (John, Tan and Ito, 2013). Financial and human capital are deployed to primarily achieve social impact and outcomes.

The adage that “you can’t manage what you can’t measure” appears to be unequivocal. Without performance measurement, managers would not be able to make decisions pertaining to evaluation, control and budgeting (Behn, 2004). Both Brest (2003) and Gates (2013) emphasize the importance of measurement of progress and outcomes in NPO programs. Performance measurement thus serves as a feedback loop to ascertain if the program is on track or not, and if necessary corrections should be made. Moreover, Brest and Born (2013) define the achievement of social impact as an increase in the quantity or quality of the enterprise’s social outcomes beyond what would otherwise have occurred. Determining the social impact that is solely attributable to the program through quantitative or qualitative indicators may help NPOs determine the validity of its theory of change. For instance, the Abdul Latif Jameel Poverty Action Lab at the Massachusetts Institute of Technology was able to prove that the eligibility for merit-based scholarships led to better academic grades amongst students, with improved student and teacher attendance (Brest and Krieger, 2010). Measurement through randomized controlled studies proved that the intervention works. This serves as useful information for the program managers to continue with and make further improvements to the program. Even if the results had proven negative, or inconclusive, they still serve as useful information for subsequent studies to become more targeted.

Based on the theoretical and empirical evidence presented, measurement that is tied to outputs and outcomes is essential for performance managers to make objective and informed decisions. However, measurement is not an end in itself and being able to measure performance does not necessarily equate to the ability to manage performance.

“Not everything that counts can be counted and not everything that can be counted counts”.

The first half of this statement posits that it may sometimes be impossible to obtain quantitative data for performance management. Brest (2003) acknowledges this through the example of a performing arts organization, which should place emphasis on the quality of its production as well as the size of the audience. While the size of the audience is a quantitative indicator that is comparable and objective, this is difficult to achieve for the quality of production. It could instead, be assessed by critics. However, Brest also argues that data such as quality of production, though subjective, may be quantified for comparative purposes. Brest notes, however, that this should be done with the program’s goals and outcome in mind. This clearly shows that measurement should be carried out merely as a tool to assess outcomes and impact. Barkhorn, Huttner and Blau (2013) further debunk the validity of the first half of the statement. Through designing an Advocacy Assessment Framework, they were able to quantify and compare advocacy efforts of different NPOs. This quantitative estimator for the likelihood of success pushes the boundaries of evaluating advocacy, traditionally thought to be a risky area of business.

The second half of the statement considers the circumstances where the quantification of outputs does not necessarily guarantee the achievement of the intended outcomes. The Acumen Fund had used an output metric measuring the sales and distribution of bed nets as a proxy to measure the outcome of malaria prevention (Ebrahim and Rangan, 2011). However, not considering if the bed nets were even used represents an information gap to establish causation and impact. This presents a limitation in performance measurement for management of outcomes. However, Trelstad (2008) explains that understanding outcomes and demonstrating the counter-factual is both complicated and costly. He recommends measurement by outputs and using literature reviews to justify the output’s link to impacts. While this may circumvent the problem of measuring outputs to outcomes, it reveals another argument against measurement, in that it may be costly and not produce useful results.

“Measurement is expensive and its results are often ignored”.

Brest (2003) recognizes that data collection becomes more difficult and expensive when trying to measure intermediate and ultimate outcomes. Often, NPOs have limited time, money and lack the administrative expertise to track social outcome (Tuan, 2008). Although the cost of measurement may sometimes be borne by foundations and funders, this process still incurs a huge time cost for the NPOs. In addition, the measurement results may sometimes be ignored. Tuan (2008) highlights REDF primary funder’s decision to discontinue using SROI metrics, as the SROI results had no impact on any investment decisions in the REDF portfolio. Likewise, the William and Flora Hewlett Foundation had also decided to exit its Nonprofit Marketplace Initiative after some review. A report “Money for Good” from Hope Consulting revealed that the American donors’ demand for information to identify top-performing nonprofits was much lower than expected. Only 3% of Americans would compare between NPOs when making a gift. However, Harty (2014) presents an alternative viewpoint. He posits that advances in technology had led to lower costs of information and more timely results. Evidence-based decisions and program evaluations have also led to a widespread increase in demand for reliable evidence in the NPO sector. The examples of REDF and Hewlett Foundation reveal that measurement results may sometimes be ignored. However, one must note that the SROI framework was intended to measure the returns to society as a whole, and not to track individual program outcomes. Likewise, the Nonprofit Marketplace Initiative also served to improve the information availability for the whole American population. In fact, 85% of the population cares about performance of the NPOs, which are measured by indicators (Hope Consulting, 2014). As such, it is not justified to say that results are often ignored.

“The more any quantitative social indicator is used for decision making, the more it will be subject to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor”.

Fitzgerald (2013) points out that emphasizing social impact reporting may result in NPOs being too concerned with securing funding from donors and funding agencies. There is also a possibility that focusing too much on measurement may lead NPOs to take on activities that are only measured by quantitative metrics (Brest, 2008). This might lead to perverse incentives for creaming and cherry picking. The Oklahoma Milestone Payment System, an outcome-based payment system, created incentives for managers to screen out difficult customers (O’Brien and Cook, 2005). However, such creaming practices may be countered through higher payment levels for higher support needs (O’Brien and Revell, 2005). While quantitative social indicators may lead to unintended consequences, social impact can also be measured by qualitative metrics. These qualitative metrics can serve as a check and balance on the programs, and be considered in tandem with quantitative results for performance measurement.

The above discussion leads to a viewpoint that managers in the field of NPOs should use performance measurement for performance management. Empirical evidence also suggests that pre-investment venture capital practices do matter for the expected performance of social investment funds (Lam, Leong and Lek, 2010). With that being said, it is imperative to keep in mind that the process of measurement is not an end in itself. Devoting too many resources to measurement may result in managers neglecting the social impact and outcomes of the programs. Often, the customers and beneficiaries are overlooked, and yet they are the results that provide leading indicators for long-term program effectiveness (Twersky, Buchanan and Threlfall, 2013). As such, a strong engagement with the partners and beneficiaries is crucial to obtain high quality information and data. Currently, there is no one proven model for social impact measurement. The conversation to find better ways to measure and create collective impact requires active participation, reflection, coordination and action. Only then, would we truly be able to deliver actual value to the social sector.

References

Barkhorn, I., Huttner, N., & Blau, J. (2013). Assessing Advocacy. Stanford Social Innovation Review, 1-8.

Behn, B. (2004). Why Measure Performance. Bob Behn’s Public Management Report, 1(11), 1-2.

Brest, P. (2008, 11 20). Paul Brest, President, William and Flora Hewlett Foundation: Smart Philanthropy in Tough Times. (P. N. Digest, Interviewer)

Brest, P., & Born, K. (2013, 8 14). Stanford Social Innovation Review. Retrieved 3 15, 2015, from Unpacking the Impact in Impact Investing: http://www.ssireview.org/articles/entry/unpacking_the_impact_in_impact_investing

Brest, P., & Krieger, L. H. (2010). Problem Solving, Decision Making, and Professional Judgment. Interpreting Statistical Results and Evaluating Policy Interventions, 185-206.

Brest, P. (2003). Update on the Hewlett Foundation’s Approach to Philanthropy: The Importance of Strategy. William and Flora Hewlett Foundation 2003 Annual Report.

Ebrahim, A. S., & Rangan, V. K. (2009). Acumen Fund: Measurement in Venture Philanthropy (B). Harvard Business Case.

Fitzgerald, J. (2013). “Just Do It” – Making and Measuring Social Impact. Asia-Pacific Centre for Social Investment and Philanthropy, 1-9.

Gates, B. (2013, 1 25). The Wall Street Journal. Retrieved 3 15, 2015, from Bill Gates: My Plan to Fix The World’s Biggest Problems: http://www.wsj.com/articles/SB10001424127887323539804578261780648285770

Hatry, H. P. (2014). Transforming Performance Measurement for the 21st Century. The Urban Institute, 1-91.

Hope Consulting. (2010). Money for Good: The US Market for Impact Investments and Charitable Gifts from Individual Donors and Investors. 1-107.

John, R., Tan, P., & Ito, K. (2013). Innovation in Asian Philanthropy: Entrepreneurial Social Finance in Asia. Singapore: The Asia Centre for Social Entrepreneurship and Philanthropy (ACSEP) in National University of Singapore.

Lam, S. S., Leong, S. M., & Lek , S. M. (2010). Venture Capital Practices: Do They Matter for the Expected Performance of Social Investment Funds? ACSEP Research Working Paper Series No. 14/01, 1-35.

O’Brien, D., & Cook, B. (2005). Oklahoma Milestone Payment System. 1-18.

O’Brien, D., & Revell, G. (2005). The Milestone Payment System: Results based funding in vocational rehabilitation. Journal of Vocational Rehabilitation, 101-114.

Trelstad, B. (2008). Simple Measures for Social Enterprise. Innovations: Technology, Governance, Globalization, 3(3), 105-118.

Tuan, M. T. (2008). Measuring and/or Estimating Social Value Creation: Insights into Eight Integrated Cost Approaches. Bill & Melinda Gates Foundation Impact Planning and Improvement, 1-45.

Twersky, F., Buchanan, P., & Threlfall, V. (2013). Listening to Those Who Matter Most, the Beneficiaries. Stanford Social Innovation Review, 1-7.

The Conflict between Stakeholder Theory and Shareholder Value Theory

“[W]hile it remains incomplete in its current form, stakeholder theory is undeniably instrumental in steering the path for businesses in their goal for value creation, be it for shareholder or societal good.”

A reflection paper by Tan Chun Hsien Shawn, as partial fulfillment of a BBA (Honours) module, “Measuring Success in Philanthropy and Impact Investing”.

For decades, the maximisation of shareholder wealth has been the dominant objective of capitalists and corporations (Lazonick & O’Sullivan, 2000). This objective has been an inextricable component of our laws in modern society, the management practices that govern businesses, and even forms the basis of rational economic theory (Saint & Tripathi, 2006). More recently, this view has been challenged with the growing popularity of stakeholder theory. This paper thus seeks to introduce and identify the conflict between the two concepts, to explain how stakeholder theory has been crucial in causing the gradual transition away from shareholder value theory toward a new equilibrium.

Shareholder Value Theory

Shareholder value theory proposes that the primary duty of management is to maximise shareholder returns (Smith, 2003). The roots of this view can be traced back to Adam Smith and the central tenets within his book The Wealth of Nations (Pfarrer, 2010). The theory was framed in its current form by Milton Friedman, who argued that the only social responsibility of businesses was to increase its profits (Stout, 2012). This thought was further reinforced by a paper by Michael Jensen and William Meckling, who described the firm as a legal fiction in which shareholders were principals and managers were their agents (Jensen & Meckling, 1976), and managers who pursued goals other than maximising the wealth of shareholders were reducing social good by imposing agency costs. Such academic backing led shareholder primacy to achieve dominance by the end of the millennium.

However, in the wake of global scandals and crises, the premises of the shareholder-oriented perspective have been increasingly questioned (Smith, 2003). In particular, Enron, exemplary in its corporate governance for maximising shareholder value by fixating on its stock price, inadvertently collapsed due to bad business decisions and accounting fraud (Stout, 2012). A recent article by Forbes also documents the denouncement of shareholder value maximisation by a number of prominent CEOs and top management (Denning, 2015), citing problems such as a focus on short-term returns, a diversion of resources away from innovation, and causing economic stagnation and inequality. It is against the backdrop of the gradually receding prominence of shareholder value theory that stakeholder theory can be discussed.

Stakeholder Theory

In comparison with shareholder value theory, stakeholder theory has a far shorter history. The term stakeholder was first used within an internal memorandum at Stanford Research Institute in 1963. While it received initial flak by Igor Ansoff, who viewed stakeholders as a secondary constraint on the main objective of the firm, the stakeholder concept surfaced in the 1970s in several instances of strategic planning literature (Freeman, Harrison, Wicks, Parmar, & Colle, 2010), with the popularisation of the concept ascribed to Richard Edward Freeman in 1984. Since then, the theory has risen in prominence since 1995 (Laplume, Sonpar, & Litz, 2008), and currently represents a shift in perspective within the on-going debate on corporate purpose.

The stakeholder of an organisation can be defined as a group or individual who can affect or is affected by the achievement of organisational objectives (Freeman, 1984). As such, stakeholder theory suggests that the purpose of the corporation should take into consideration all who have an interest in an organisation’s activity (Greenwood, 2008), including shareholders, customers, employees, and the general public (Fontaine, Haarman, & Schmid, 2006). Thus, the objective of management should be to balance the competing interests of these stakeholders (Sternberg, 1996). As such, the theory is seen as a holistic approach to corporate purpose and provides strategic depth to the management of interests through three different approaches: descriptive (explaining corporate behaviour), instrumental (finding links between stakeholder strategies and performance), and normative (interpreting organisational function from a moral standpoint) (Donaldson & Preston, 1995). These theoretical approaches frame the issue on stakeholder interests for further analysis.

While once dominant, shareholder value theory is now contested by the premises of the stakeholder approach. It is in this light that both can now be compared, assessing the factors for change.

The Conflict

Many arguments have been put forth by proponents of stakeholder theory, countering implications of shareholder value theory. One competitive analysis revealed that companies[1] focusing on stakeholders outperformed others even during times when the focus was on shareholder wealth (Pfeffer, 2009), suggesting practical effectiveness of the theory. Furthermore, as the range of performance measurement tools increases, there is reduced need to rely solely on financial measures as well.

In assessing the arguments for shareholder theory, Lynn Stout pointed out in her book that despite the pervasive extent of shareholder value ideology, it remains a managerial choice, rather than a legal obligation or practical necessity (Stout, 2012). Thus, with the exception of self-enrichment, there is much discretion provided by the law with respect to other corporate goals, such as employee protection and serving the community. These goals can and should be pursued by management.

Indeed, stakeholder theory offers a more holistic approach that includes more parties than shareholder theory. Yet it has its detractors as well. According to economist Michael C. Jensen, stakeholder theory should not be considered a valid competing theory since it does not provide a complete specification of the corporate objective function (Jensen, 2001). Unlike the clarity provided by the single objective of shareholder value theory, stakeholder theory directs managers towards many objectives, creating confusion, conflict, inefficiency, and competitive failure for the organisation (Jensen, 2001). Other authors have concurred with this view, stating that accountability to all stakeholders is not only unworkable, but also so diffuse that the accountability created is non-existent (Sternberg, 1996).

A final argument against stakeholder theory is that it undermines fundamental features of society (Sternberg, 1996). For one, it denies owners the right to dictate the use of their assets, stipulating that assets should be used for the benefit of all stakeholders. Due also to this feature and the added entrustment of assets by owners to managers, agent-principal relationships are compromised as well.

Conclusion

Despite the fervent propositions from both sides, the issue of whether the debate has real implications is a question in itself. A survey conducted in 2005 by the University of Melbourne revealed that ideological acceptance may not transit into practical managerial behaviour. Findings from the study showed that even though shareholder primacy had clout among managers, the proposition that directors will pursue shareholder’s interests at the expense of other stakeholders is illegitimate (Anderson, Jones, Marshall, Mitchell, & Ramsay, 2005). While shareholders continue to be seen as the most important of stakeholders, findings revealed that directors prioritise other stakeholders, such as employees, and their interests as well.

Notwithstanding this phenomenon, it is clear that the global business community is in transition to a new ideological consensus. Both the shareholder value theory and the stakeholder theory are theories of value creation, but with different prescriptions to that end. In evaluation, one of the strongest arguments for stakeholder theory is that taking additional stakeholders into account to some extent can be more financially beneficial for the firm in today’s economic landscape (Pfarrer, 2010), perhaps even more so than in shareholder theory. Although contentions remain that stakeholder theory prioritises non-financial market stakeholders at the expense of the firm, empirical observations through competitive analyses of profitable companies in recent years prove this view to be misconstrued (Pfeffer, 2009). Thus, there seems to be a shift not only in ideology, but also in successful managerial business practices, away from the notion of shareholder value maximisation.

That being said, stakeholder theory as it is forms an incomplete approach on both the firm’s corporate purpose and the measurement of its objectives. Thus, more recent theories on both sides of the argument have attempted to synthesize these two goals. For one, enlightened shareholder value theory proposes that companies should pursue the goal of shareholder wealth maximisation with a long-run orientation, seeking sustainable profits by paying attention to relevant stakeholder interests (Millon, 2010). Enlightened stakeholder theory, on the other hand, uses the premises of stakeholder theory, but uses the maximisation of the long-term value of the firm as a criterion for stakeholder prioritisation (Pichet, 2008). We can observe here that there is an apparent convergence from the initially opposing theories, which points to a potential equilibrium at some point between the two theories.

In conclusion, despite the long historical roots of shareholder value theory, we see that stakeholder theory has gradually yet fundamentally changed the perspective of owners, managers, and society. Thus, while it remains incomplete in its current form, stakeholder theory is undeniably instrumental in steering the path for businesses in their goal for value creation, be it for shareholder or societal good.

[1] E.g. Southwest Airlines, which never had layoffs despite an industry shutdown after the September 11 attacks.

Bibliography

Anderson, M., Jones, M., Marshall, S., Mitchell, R., & Ramsay, I. (2005). Evaluating the Shareholder Primacy Theory: Evidence from a Survey of Australian Directors. University of Melbourne Legal Studies Research Paper.

Denning, S. (2015, May 2). Salesforce CEO Slams ‘The World’s Dumbest Idea’: Maximising Shareholder Value. Forbes.

Donaldson, T., & Preston, L. E. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications. The Academy of Management Review, 20(1), 65-91.

Fontaine, C., Haarman, A., & Schmid, S. (2006). The Stakeholder Theory. Edlays education, 1, 1-33.

Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Boston: Pitman.

Freeman, R. E., & McVea, J. (2001). A Stakeholder Approach to Strategic Management. Darden Business School.

Freeman, R. E., Harrison, J. S., Wicks, A. C., Parmar, B. L., & Colle, S. d. (2010). Stakeholder Theory: The State of the Art. Cambridge: Cambridge University Press.

Greenwood, M. (2008). Stakeholder Theory. In R. Thorpe, & R. Holt, The SAGE Dictionary of Qualitative Management Research. London: SAGE Publications Ltd.

Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance, 14(3), 8-21.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305-360.

Laplume, A. O., Sonpar, K., & Litz, R. A. (2008). Stakeholder Theory: Reviewing a Theory That Moves Us. Journal of Management, 34(6), 1152-1189.

Lazonick, W., & O’Sullivan, M. (2000). Maximizing shareholder value: a new ideology for corporate governance. Economy and Society, 29(1), 13-35.

Millon, D. (2010). Enlightened Shareholder Value, Social Responsibility, and the Redefinition of Corporate Purpose Without Law. Washington & Lee Legal Studies Paper 2010-11.

Pfarrer, M. D. (2010). What is the purpose of the firm?: shareholder and stakeholder theories . In J. O’Toole, & D. Mayer, Good Business: Exercising Effective and Ethical Leadership (pp. 86-93). The Institute for Enterprise Ethics.

Pfeffer, J. (2009, July). Shareholders First? Not So Fast… Harvard Business Review: Corporate Governance.

Pichet, E. (2008). Enlightened Shareholder Theory: Whose Interests should be Served by the Supporters of Corporate Governance? Corporate Ownership and Control, 8(2-3), 353-362.

Saint, D. K., & Tripathi, A. N. (2006). The Shareholder and Stakeholder Theories of Corporate Purpose. Samatvam Academy.

Smith, H. J. (2003). The Shareholders vs. Stakeholders Debate. MIT Sloan Management Review, 44(4), 85-90.

Sternberg, E. (1996). Stakeholder Theory Exposed. Economic Affairs, 16(3), 36-38.

Stout, L. (2012). The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, And The Public. Oakland: Berrett-Koehler Publishers, Inc.

Stakeholder and Shareholder Value Theories in Developed and Developing Countries

“Although it is preferred that companies reconcile both theories as pursuing stakeholder theory is generally more sustainable than pursuing shareholder value theory, there are circumstances where it makes more economic sense for the company to prioritise shareholder value theory over stakeholder theory.”

A reflection paper by William Santosa Lim, as partial fulfilment of a BBA (Honours) module, “Measuring Success in Philanthropy and Impact Investing”.

By definition some people might find stakeholder and shareholder value theory to be mutually exclusive. But this paper argues mutually exclusivity of two theories depends on development state of countries where theories are applied. To facilitate this argument, the paper shall discuss support for either/both theories in context of sustainable environmental practise for traditional businesses[1] in a developed and/or developing country.

Figure 1: Flowchart on recommended theory(ies) to pursue for companies

Figure 1: Flowchart on recommended theory(ies) to pursue for companies

Developed Country[2]

This paper supports the reconciliation of both stakeholder and shareholder value theory in a developed country. Reasons for supporting this reconciliation are:

  1. Knowledgeable external stakeholders as a driving force to encourage businesses to embrace both theories.
  2. Capability of developed countries to pursue both theories in their businesses.

First, stakeholders[3] in developed countries have become more knowledgeable about sustainable environmental practise like green products. Due to their knowledge, businesses may find it wise to listen to stakeholders’ requests for sustainable business in order to maintain their profit growth. This is a sign that perhaps companies in developed countries can reconcile the two theories. By taking into consideration stakeholder theory[4] and listening to shareholders, company can maximise profits under shareholder value theory. After all without stakeholders’ support for the company, simply maintaining profit may be a challenge.

For example Unilever (single largest consumer of total palm oil supply at 4%) was targeted by green activists in 2008 about how their large use of palm oil in company products (e.g. Dove) causes environmental degradation. Following such activist action, Unilever committed to sourcing palm oil from sustainable sources by 2015. Rather than let protesters attract negative media attention on a company’s business practise, it may be wise for companies operating in developed countries to handle such complaints in early stages seriously. That way companies can appease stakeholders while protecting its brand reputation and profit in developed countries.

Second, while shareholder’s knowledge can ignite company’s willingness to reconcile both theories, ability of the companies to do so is another important factor. Without both willingness and ability, any attempt to reconcile both theories will be futile. For a company to pursue sustainable environmental practise, the company must have access to applicable technology or resources for them to do so.

Continuing with the case of environmental protection, companies operating in developed countries have better access to eco-technology than companies in developing countries. This is because developed countries have a larger eco-industry relative to developing countries. With a larger eco-industry, companies typically create more eco-innovation by working alongside the eco-industry more closely (Barsoumian, Severin, & van der Spek, 2011). A potential explanation of this observation could be as the eco-industry gains critical mass, cost of eco-technology investment may be reduced. This may encourage companies to further invest in eco-technology. But it must be noted that other factors like stakeholder’s priority on environmental protection could have affected pace of development of eco-industries in different countries.

Developing Country[6]

In a developing country, this paper supports prioritisation of shareholder value theory over stakeholder theory. Reasons for prioritisation are:

  1. Developing country consumers may have practical restrictions that do not encourage sustainable environmental practise.
  2. Government policy does not incentivise pursuit of sustainable business practise.

First, needs of developing country consumers may differ significantly compared to developed country counterparts. One possible contributing reason could be percentage of population living below poverty line. OECD countries (average 10%) tend to have lower percentages of population living below the poverty line than non-OECD countries (average 25%). For developing country citizens living below the poverty line, their priority may not be purchasing more expensive green products[7]. Rather, sustenance with basic goods may be their priority for survival.

Hence while developing country consumers may desire sustainable environmental practise, economic realities may ultimately be more influential on their decision to purchase green versus normal products (Burgess & Steenkamp, 2006). It is not that developing country consumers do not want to support sustainable environmental practise. Rather their financial status do not allow them to do so. After all a prerequisite to support such practise is that the consumer can survive to support it.

Second, while developed countries like the US has committed to environmental sustainability like emitting 26 – 28% less greenhouse has by 2025, a developing country Government may not prioritise environmental sustainability as much as growth. When that happens, companies may not be incentivised to pursue environmentally sustainable business practise. For example, China’s local Government officials have historically been told to prioritise economic growth above environment concerns. This may have encouraged companies like PetroChina[8] to dedicate little effort in environmentally-friendly business practise until recently.

As mentioned for a company to reconcile both theories, the company must be willing and able to pursue both theories for business. However in a developing country, the willingness of companies to pursue both theories are sorely lacking, due to a lack of consumer and Government directives. Hence for companies operating in developing countries, they might be better off pursuing shareholder value theory to maximise profit. This is because pursuing stakeholder theory may not be appropriate at stage of development of the country. Rather doing so might cause the company to lose market share if they for example, sold expensive green goods to consumers who cannot afford them in the first place.

Multinational Company (MNC) Operating Across Developed and Developing Countries

Previous sections of this paper focusing on companies operating in developed or developing countries had an important assumption: That the company’s business interest was focused solely on developed or developing countries only. However the situation may differ for MNCs that operate across developed and developing countries. This paper supports MNCs to err on the side of conservatism and reconcile both theories. This is because stakeholders from developed countries are more aware of worldwide happenings with the internet compared to prior times without the internet.

For example, financial investors like NBIM[9] regularly updates a list of excluded companies from their investment process (negative screening). These companies are screened out based on whether they conduct unethical business in any part of the world. Rio Tinto Plc. is a UK-based mining MNC. It was included in NBIM’s list of excluded companies as Rio Tinto Plc. had significant mining operation in Indonesia, which caused severe environmental damage. From this point, it can be seen that any MNC with business spanning across developed and developing countries should reconcile both theories. This is because sophisticated stakeholders from developed countries will expect the MNC to conduct business worldwide with similar standards to business conducted in developed countries. While reconciling both theories may reduce competitiveness of MNCs in developing countries, the loss of competitiveness may be outweighed compared to potential boycotts of the MNC’s products or services in the developed countries.

Conclusion

In conclusion, this paper would like to emphasize that there is no one-size-fits-all solution for a company on which theories to pursue. Rather, a business must consider the development stage of the country that they are mainly operating in. If a company is mainly operating in a developed or developing country, it would be wise for the company to reconcile both theories or prioritise shareholder value theory over stakeholder theory respectively. However for the case of MNCs operating across developing and developed countries, they should pursue reconciliation of both theories. As a final note, this paper observes that shareholder value theory may ultimately be a subset of stakeholder theory. Although it is preferred that companies reconcile both theories as pursuing stakeholder theory is generally more sustainable than pursuing shareholder value theory, there are circumstances where it makes more economic sense for the company to prioritise shareholder value theory over stakeholder theory.

[1] The term “traditional business” may be used interchangeably with the word “company” in this paper.

[2] This paper defines a developed country as any OECD member country in addition to Singapore, Hong Kong and Taiwan.

[3] For purposes of this paper, stakeholders refer to Governments, consumers and company shareholders.

[4] Specifically instrumental stakeholder theory (Donaldson & Preston, 1995).

[5] OECD countries in “Table 1. Global environment market” are shown to have significantly larger eco industry sizes than non-OECD countries as measured by OECD standards.

[6] This paper defines a developing country as any non-OECD member country, excluding Singapore, Hong Kong and Taiwan.

[7] Generally, green products are more expensive than conventional counterparts as ingredients for green products tend to cost more than conventional counterparts.

[8] Land owned by PetroChina in Lanzhou, China was found to be contaminated with benzene.

[9] NBIM is an abbreviation for Norges Bank Investment Management, one of the largest sovereign wealth funds worldwide owned by Norway by Asset under Management.

Bibliography 

Barsoumian, S., Severin, A., & van der Spek, T. (2011, July 1). Eco-innovation and national cluster policies in Europe. Retrieved from European Cluster Observatory Web site: http://www.clusterobservatory.eu/eco/uploaded/pdf/1315915223865.pdf

Burgess, S. M., & Steenkamp, J.-B. E. (2006). Marketing renaissance: How research in emerging markets advances marketing science and practice. International Journal of Research in Marketing, 23 (4), 337-356.

Donaldson, T., & Preston, L. E. (1995). The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications. Academy of Management Review, 66 – 67.

LegaleSE

ACSEP wrote the introductory chapter to LegaleSE, A Legal Handbook for Social Enterprise, which was launched by the Law Society of Singapore Pro Bono Services Office on 7 December 2013. The chapter was entitled “What is a Social Enterprise? Do you have a social enterprise? Historical and Current Standards” and provided a brief overview of the social enterprise landscape in Singapore and around the world. The book aims to provide legal guidance to socially-driven individuals to help them start, grow and even terminate a social enterprise successfully. Professor Lam Swee Sum presented some highlights from the chapter during the “Good Business Done Right” panel discussion at the launch event.

Download the handbook at: http://probono.lawsociety.org.sg/Documents/pdf/LegaleSE%20Handbook.pdf