When studying business administration, much of your time will be spent examining various kinds of corporate entity, including size, legal structures, types and methods of partnership or cooperation, and accounting systems. Corporate objectives are a particularly high priority on Business Administration programmes. In the main, companies pursue one of two very different approaches to achieve their objectives: the shareholder-value approach or the stakeholder-value approach.
Differentiating the two approaches
We should start by defining the terms “shareholder” and “stakeholder”. Shareholders are the owners of corporate stock or shares; they are the interest group of equity providers. The term “stakeholder” refers to groups who have a legitimate interest in any of a company’s activities and are directly affected by their outcomes. In Business Administration, stakeholders are also described as an interest group. Typically, stakeholders include employees, suppliers, lenders, the public and above all, a company’s customers.
Stakeholders are also what might be described as “fixed-value” participants, in the sense that they are governed by contractually stipulated conditions. For example: A supplier is paid a fixed price X for supplying goods, a customer pays a fixed price Y to buy goods, and a lender invests a fixed amount Z in the company. All these set amounts are prescribed by the company. By contrast, a shareholder is a “residual-value” participant, meaning that their remuneration depends on the company’s profits as distributed, for example, in the form of dividends.
The shareholder-value approach
When a company takes a shareholder-value approach, this means that the management team focuses on satisfying the wishes of the company’s shareholders (stockholders). Because their wishes and economic objectives are primarily financial in nature – given that shareholders clearly benefit from the company’s profits –, the long-term maximisation of the company’s value is the top priority. More precisely, this might be expressed by rising share prices, for example. The objectives of other interest groups are only taken into account if they have a positive impact on the company’s profitability – they are merely the means to an end.
There is a simple formula for calculating shareholder value:
Shareholder value = market value of corporate equity
Market value of equity = total value of company – market value of corporate borrowing
The shareholder-value approach is practised primarily by large companies and is frequently lambasted by critics who believe that in the wake of climate change, socioeconomic values should play at least as important a role as corporate profit. Furthermore, this finance-focused approach limits a company’s freedom of action – even business giants must comply with requirements such as consumer protection, creditor protection, environmental protection and employee rights of participation and codetermination.
The stakeholder-value approach
This alternative approach is intended to reconcile objectives and means. The stakeholder-value approach does not rely on short-term returns, but on long-term thinking. It aims to fulfil – as far as possible – the aspirations and goals of the various interest groups affected by the company’s activities. With respect to generating revenue, the stakeholder-value approach does not simply focus on the “if”, but also on the “how”.
Increasingly, politics and economics are inspiring greater engagement with the shift to alternative energy and the problems of climate change. Companies positioning themselves in these fields can actively benefit from this inspiration.
Demographic change is another factor that must be taken into account. Trends indicate that in the future, skilled personnel will be a very scarce resource; the labour market is rapidly becoming a supplier’s market. Companies whose only green credentials consist of impressive balance sheets could find themselves falling by the wayside. For the younger generation, a good reputation and forward-looking values, including sustainability, are becoming increasingly relevant priorities.
For the time being, the senior management team is still responsible for deciding whether a company should focus on the interests of individual shareholders or take a more balanced approach. If you would like to find out more about the fundamentals of business administration, or refresh your knowledge of this rapidly evolving field, take a look at our series of Practical knowledge for business administrators seminars. The five-day programme will give you a comprehensive understanding of the pros and cons of the shareholder-value and stakeholder-value approaches, corporate typology, as well as the remits and priorities of executive managers and of other management functions. It will also explain the presentation and analysis of profit-and-loss (P&L) statements and/or balance sheets.