Week 12: International Governance
I. Corporate Governance from Alternative Perspective
1. Agency theory perspective: corporate governance is mainly about the incentive
systems and monitors designed to protect shareholder interests.
2. Stakeholder perspective: corporate governance is the mechanism that ensures
corporations take responsibility for directing their activities in a manner fair to all
stakeholders.
II. Stakeholder View of the Firm
1. Stakeholders—people or groups with legitimate interests in various aspects of the
company’s activities. Companies have varying responsibilities to each of their
stakeholders1.
2. The Managers’ Goal: In a stakeholder view, the managerial objective is to
maximize sustainable organizational wealth by optimizing the relationships
among each stakeholder group2.
Company Stakeholders
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Secondary Stakeholders
Primary Stakeholders
COMPANY
MANAGERS
Creditors
Society
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These relationships between managers and stakeholders are based on a moral or ethical foundation.
Many companies now have an organizational unit tasked with communicating with stakeholders.
Example 11.1 Wal-Mart's Battle.
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3. Legal Foundations: The legal underpinnings of the stakeholder view of the firm
stems from property rights. The U.S. government, various state governments, and
courts have formalized the rights of stakeholders in corporations.
4. Corporate Social Responsibility: Proponents of the stakeholder view argue that
companies have a social obligation to operate in ethically, socially, and
environmentally responsible ways. This active approach is referred to as CSR or
corporate citizenship.
5. Archie Carroll has offered a four-part taxonomy of CSR:
Level I: Economic
Level II: Legal
Level III: Ethical
Level IV: Philanthropy
III. Governance and Stakeholder Theory
1. Current issue: Aligning managerial incentives with multiple stakeholder groups
and measuring overall performance can become a noisy and chaotic process3.
2. Organizational theory states that the firm will only value CSR goals if the
company executive exhibits strong leadership in instilling corporate
responsibility within the company’s culture.
3. Stakeholder Theories:
(1) A descriptive theory is used to describe what firms are doing and how they
are doing it.
(2) An instrumental perspective provides principles and practices that should be
implemented to achieve (or avoid) certain results.
(3) A normative approach is used by advocates of CSR or corporate citizenship.
IV. Criticisms
1. It is difficult to assess the stakeholder view because it is not a well-defined theory.
2. Even critics of CSR agree that companies should act responsibly and should be
seen doing so.
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There is still no consensus on how to measure and report on changes in stakeholder welfare.
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3. However, critics also argue that deviating too far from the profit-maximizing role
of companies would be harmful to society.
4. Economic progress comes from profit-related activities.
5. When managers involve themselves in stakeholder engagement activities, higher
costs and impaired business performances are likely to follow.
V. Dow Jones STOXX Sustainability Index
Comparing the performance of European firms that sustain corporate citizenship to
600 other European firms:
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Dow Jones STOXX…
Dow Jones STOXX 600…
Index Level
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Figure 11-2
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VI. International aspects of corporate citizenship
1. Corporate citizenship has different historical roots in different regions of the world
and is viewed with different perspectives.
2. A stakeholder view of the firm is also reflected in many laws internationally.
3. A survey of firms actively engaged in CSR:
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VII. Summary
1. The stakeholder view of the firm does not focus on the maximization of
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shareholder wealth but rather an optimization of the sustainable economic wealth
of all stakeholders.
2. The modern evolution of the stakeholder view of the firm advocates that
companies have a social obligation.
3. Corporate citizenship can be considered as a monitor.
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