“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 in a developed and/or developing country.
This paper supports the reconciliation of both stakeholder and shareholder value theory in a developed country. Reasons for supporting this reconciliation are:
- Knowledgeable external stakeholders as a driving force to encourage businesses to embrace both theories.
- Capability of developed countries to pursue both theories in their businesses.
First, stakeholders 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 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.
In a developing country, this paper supports prioritisation of shareholder value theory over stakeholder theory. Reasons for prioritisation are:
- Developing country consumers may have practical restrictions that do not encourage sustainable environmental practise.
- 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. 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 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 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.
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.
 The term “traditional business” may be used interchangeably with the word “company” in this paper.
 This paper defines a developed country as any OECD member country in addition to Singapore, Hong Kong and Taiwan.
 For purposes of this paper, stakeholders refer to Governments, consumers and company shareholders.
 Specifically instrumental stakeholder theory (Donaldson & Preston, 1995).
 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.
 This paper defines a developing country as any non-OECD member country, excluding Singapore, Hong Kong and Taiwan.
 Generally, green products are more expensive than conventional counterparts as ingredients for green products tend to cost more than conventional counterparts.
 Land owned by PetroChina in Lanzhou, China was found to be contaminated with benzene.
 NBIM is an abbreviation for Norges Bank Investment Management, one of the largest sovereign wealth funds worldwide owned by Norway by Asset under Management.
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.