Shareholder value vs Stakeholder value in Modern Corporate Governance

This research proposal explores the challenges faced by companies in determining whether corporate governance should focus more on fulfilling the interest of shareholders or stakeholders. It also expands on how current theories should be adjusted to meet the new demands brought about by the issue of sustainable reporting. The study aims to determine whether the value obtained by focusing on shareholders is more important than the value obtained by focusing on stakeholders. The research will expand and perhaps give some recommendation on how the current theories should be adjusted to meet the new demands brought about by the issue of sustainable reporting. The study is relevant to ACC320 Contemporary Issues in Accounting.

Shareholder value vs Stakeholder value in Modern Corporate Governance 1
ACC320 Contemporary Issues in Accounting
Research Proposal
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Shareholder value vs Stakeholder value in Modern Corporate Governance 2
Introduction:
Should corporate governances focus more on fulfilling the interest of shareholders or should it
focus more on stakeholders? This is one of the challenges faced by most of the companies. The
challenge started following the introduction of idea of sustainable reporting. Determining the answer to
this question would be handy not only for academic purposes but also for companies wishing to know
the direction they should take.
Practical Motivation:
Ability to answer the question as to whether corporate governance should focus more on
fulfilling the interest of shareholders or whether it should focus more on stakeholders is very crucial to
companies, accountants, shareholders and all stakeholders. This is because shareholders and business
managers are increasingly faced with a double imperative (Carlsson 2007) to integrate a creation of
immediate financial value for shareholders (or Shareholders) and creation of comprehensive and
sustainable value for stakeholders (or stakeholders). The lifting of this contradiction requires them to
master eclectic models in the fields of economics and law, but also sociology and ethics (Carlsson
2007). Aligning their decisions, discourses and behaviours with CSR repositories implies a
reconfiguration of their governance system. The corporate governance (corporate governance) covers
all the institutions, rules and practices that legitimize the power of leaders (Carlsson 2007).
Theoretical Motivation:
The current research will expand and perhaps give some recommendation on how the current
theories should be adjusted to meet the new demands brought about by the issue of sustainable
reporting. According to the traditional approach, it assumes that the incentive and control systems of
the latter depend in particular on the firm's financing structure, and more particularly on the
composition of its shareholding (Porta et al., 1997). According to the extended approach to
governance, supported in particular by Charreaux and Desbrieres, (1998), the problem of the
effectiveness of governance systems can only be posed within the framework extended to all
stakeholders. It must be studied from a systemic perspective, considering the firm's concrete value

Shareholder value vs Stakeholder value in Modern Corporate Governance 3
creation processes. This prescription responds to the criticisms made by Rajan and Zingalès (2001)
against the purely shareholder view of governance, which they believe is inappropriate for new forms
of enterprise. Through "responsible governance", directors and company leaders must seek to integrate
economic goals, social and environmental intentions (Perez, 2005). The new model would be based on
modifying and tailoring the existing theories to match the new needs of corporate governance theory.
This is because there are gaps on how the need to focus on shareholders and the need to focus on
stakeholders should be reconciled.
Literature Review:
The notion of corporate governance is based, according to Donaldson and Preston (1995), on
the concept of "social contract" between the company and its direct stakeholders (shareholders,
employees, suppliers, customers, etc.) and indirect (administrations, local communities, interest
groups, opinion leaders, civil society ...). It is defined by the European Commission as companies
voluntary integration of social and environmental concerns into their business activities and
relationships with their stakeholders "(Green Paper, 2001). It was notably translated by the notion of
Triple Bottom Line (Elkington, 1998), which is based on three pillars respectively economic (the
search for profitability and sustainability of the company), social and societal (the quest for social
equity and respect for human rights) , and environmental (the desire to protect the environment and
preserve natural resources). Carroll (1991) proposes a four-tier pyramid of corporate CSR: economic
responsibilities, which force the company to produce and make profits; legal responsibilities that
require the company to comply with applicable legislation and standards; philanthropic
responsibilities, which reflect the company's desire to improve the well-being of society; ethical
responsibilities.
The contractual theories and the instrumental approach to agency theory offer great proximity
in that they focus on a single managerial objective, namely value creation, analyzed in the first case
according to a purely shareholder and, in the second case, a partnership approach (Bradley, Schipani,
Sundaram and Walsh 1999). Stakeholder’s theory differs from the first in the sense that it is the social

Shareholder value vs Stakeholder value in Modern Corporate Governance 4
integration of the economic entity that takes precedence over the creation of financial value. Societal
information is of intrinsic value here in that it explains the impact of the company's activity and
therefore its way of carrying out transactions or exchanges with its environment. As such, the societal
reporting fulfils a justification function, that is to say that it is interested in the role of the company in
these exchanges: how does the company respond to the expectations expressed by the actors in society
and what does it get in return? Societal reporting is used as a mechanism for clearing and maintaining
the social contract that authorizes and organizes exchanges between the company and the various
actors of society (Bradley, Schipani, Sundaram and Walsh 1999). Although the instrumental view of
stakeholder theory opposes the goal of maximizing value creation for shareholders alone, advocated by
agency theory, it nonetheless advocates cost-effective management which favors the continuity of the
operation and thus the maintenance of the jobs and the respect of the contractual conditions concluded
with the suppliers, the customers and the creditors. Its ambitions thus seem consistent with those of the
theory of dependence on resources, according to which social responsibility must be combined with
financial logic, via considering the firm's strategy the stakeholder requirements it needs to survive
(Pfeffer and Salancik, 1978). Only social and environmental actions facilitating access to new
resources therefore seem to have to be privileged.
Alignment with these frames of reference implies a reconsideration of the theory of
governance, because it partially calls into question the purpose of the company, defined by the
classical theory (Freeman 1984), which aims to reduce agency costs, securing the investor's capital and
seeking profit in the short term. This alignment extends the company's responsibilities both over time
(in the long term) and in the socio-economic space (stakeholders). Blair (1995) the concept of
pluralistic enterprise (or plural firm) open to its partners, to that of monist company centered on its
shareholders. This pluralistic representation of the firm implies a redefinition of the theory of value
creation. Milgrom and Roberts (1992) propose to substitute the notion of partnership value for that of
shareholder value, to share this value among all the stakeholders according to the contributions of each
to the process of value creation. They observe that this distribution has a direct influence on the
process because of the transaction costs of unavoidable conflicts between partners. Each of them bears

Shareholder value vs Stakeholder value in Modern Corporate Governance 5
a residual risk associated with its specific investment in the company. Donaldson and Preston (1995)
find that "ingrained" leaders in the firm play a central role in the equitable distribution of created
value. Such approaches, according to Charreaux and Desbrière (1998), simply contractual, but also co-
constructed in duration and space. They recommend assessing the governance system in terms of its
ability to create partnership value and reduce the loss of value due to conflicts between stakeholders.
In attempting to find out what is more valuable to company’s corporate governance, Adams,
Licht, and Sagiv (2011) delved specifically in analysing specific variables that have influence on
whether the CEOs will support shareholders or stakeholders. They explored the variables related to
stakeholderism and shareholderism. Some of the variables they explored include shareholderism,
conformity, tradition, universalism, self-direction, power, security, gender, employee rep, age, CEO,
equity holding. The findings revealed that board members are more likely to make decision that
favours shareholders rather than stakeholders. The findings further shows that board members tend to
follow internal goals rather than external goals.
Evidently, most of the variables that have been tested in previous studies focus on
stakeholderism and shareholderism. They include conformity, tradition, universalism, self-direction,
power, security, gender, employee rep, age, CEO, equity holding. The findings revealed that board
members are more likely to make decision that favours shareholders rather than stakeholders. The
findings further shows that board members tend to follow internal goals rather than external goals. The
existing studies are always inclined towards the sharaholder’s value rather than the socio-economic
value. For example, the agency theory (Jensen and Meckling, 1976) states that the priority of any
company must remain the maximization of shareholder value. With this in mind, societal reporting
must enable financial players to have a better understanding of the risks that the company faces in the
medium and long term (natural as well as - and above all - legal) risks. This design corresponds to the
current trend of better identifying off-balance sheet liabilities, which are related to the sustainability of
the resources needed to produce, as well as those related to potential conflicts associated with
restructuring. To consider the question of sustainable development from the point of view of

Shareholder value vs Stakeholder value in Modern Corporate Governance 6
contractual theories thus presupposes that social and environmental actions are likely to create
additional value, or at least to avoid the occurrence of potential social or environmental risks, which
could lead to a reduction in cash. In other words, societal dimensions would participate in the process
of value creation and should therefore be considered in sharing this value. That is why overreliance on
agency and stakeholder theory is no longer recommendable in the modern era because success of
businesses is no longer determined by the economic benefits alone. There is therefore a need to
determine whether the value obtained by focusing on shareholders is more important than the value
obtained by focusing on stakeholders
Hypotheses:
Hypothesis 1: Companies that focus more on stakeholders are likely to perform better than companies
that focus more on shareholders
Hypothesis 2: There is no significant difference between stakeholder value and shareholder value in
terms of their impact on the success of the company

Shareholder value vs Stakeholder value in Modern Corporate Governance 7
List of References
Adams R, Hermalin B, Weisbach M (2010) The role of boards of directors in corporate governance a
conceptual framework and survey, Journal of Economic Literature 48 (2010), pp.59-108
Adams, RB, Licht, AN and Sagiv L (2011) Shareholders and Stakeholders: How Do Directors Decide?
Strategic Management Journal, 32 (12), pp. 1331-1355
Agle BR, Mitchell RK, Sonnenfeld JA (1999) Who matters to CEOs? An investigation of stakeholder
attributes and salience, corporate performance, and CEO values, Academy of Management 42 (1999)
pp. 507-525
Blair MM (1995) Ownership and Control: Rethinking Governance for the Twenty-First Century , The
Brookings Institution.
Bradley M, Schipani CA, Sundaram AK, Walsh JP (1999) The purposes and accountability of the
Carlsson RH (2007) Swedish corporate governance and value creation: owners still in the driver's seat,
Corporate Governance: An International Review 15 (2007), pp.1038-1055
Carroll AB (1991) "The Pyramid of Corporate Social Responsibility: Toward the Moral Management
of Organizational Stakeholders," Business Horizons , Vol. 34, pp. 39-48.
Charreaux, GJ and Desbrieres, B (1998) Corporate Governance: Stakeholder Value Versus
Shareholder Value, Available at
SSRN: https://ssrn.com/abstract=262902 or http://dx.doi.org/10.2139/ssrn.262902
corporation in contemporary society: corporate governance at a crossroads, Law and Contemporary
Problems 62 (1999), pp.9-86
Donaldson T. and Preston LE (1995), "The Stakeholder's Theory of the Corporation: Concepts,
Evidence and Implications," Academy of Management Review , Vol. 20 (1): 65-91.
Elkington J (1998), Cannibals with Forks: The Triple Bottom Line of 21st Century Business , New
Society Publishers.

Shareholder value vs Stakeholder value in Modern Corporate Governance 8
Freeman E (1984), Strategic Management: Stakeholder Approach, Massachussetts, Pittman Publishing
Inc.
Jensen M and Meckling W (1976), "Theory of the firm: managerial behavior, agency costs and
ownership structure," Journal of Financial Economics, 3(1976), pp. 305-360.
Milgrom P., Roberts J. (1990), Bargaining costs, Influence Costs and the Organization of the
Economy Activity , Cambridge University Press, pp. 57-59.
Perez R (2005): "Some Reflections on Responsible Management, Sustainable Development and
Corporate Social Responsibility", Journal of Management Science, Vol. 211-212 (January-April): 29-
46.
Pfeffer J and Salancik GR (1978) The External Control of Organizations , New York, Ed. Harpers and
Row.
Porta et al. (1997), "Trust in Large Organizations," American Economic Review, Papers and
Proceedings.
Rajan RG and Zingale L (2001), "The Influence of Financial Revolution on the Nature of the
Firm", American Economic Review, 91(2001), 2.

Shareholder value vs Stakeholder value in Modern Corporate Governance 9
Appendix:
Appendix I – Annotated Bibliography for Selected Articles
Author/s Date Title Journal Type of
Paper
(Theoretical
or
Empirical)
If empirical,
dependent &
independent
variables
Summary of contribution to the research
question

Shareholder value vs Stakeholder value in Modern Corporate Governance 10
Renée B.
Adams, Amir N.
Licht and Lilach
Sagiv
2011 Shareholders and
Stakeholders: How Do
Directors Decide?
Strategic
Management
Journal
Empirical Shareholderism,
conformity, tradition,
universalism, self-
direction, power,
security, gender,
employee rep, age,
CEO, equity holding
The findings revealed that board members
are more likely to make decision that
favours shareholders rather than
stakeholders. The findings further show
that board members tend to follow internal
goals rather than external goals. The
findings will help in answering the
research question because it directly helps
in explaining the issue of corporate
governance. The findings will be crucial in
the present research because it will guide
on what variables should be considered
given that there are several variables that
can be used to guide future researches. The
findings will be crucial in my research
question because it will guide me on how I
will guide me on how I will structure the
variables

Shareholder value vs Stakeholder value in Modern Corporate Governance 11
Bradley R. Agle,
Ronald K.
Mitchell and
Jeffrey A.
Sonnenfeld
1999 Who Matters to CEOs?
An Investigation of
Stakeholder Attributes
and Salience, Corporate
Performance, and CEO
Values
The Academy of
Management
Journal
Empirical Power, legitimacy,
and urgency of
stakeholders
The article suggested that the decision for
CEOs to focus on shareholders or
stakeholders is partly determined by the
power, legitimacy and urgency of
stakeholders and this means that if the
stakeholders are powerful, the chances that
their needs would be given higher
attention is high. In addition, stakeholder
power, legitimacy, and urgency have
strong influence on the focus of CEOs.
The findings from this article will offer
some ideas on what to look in the next
section of the proposal. For example, as I
indicated, I will focus on whether
stakeholder value is better than
shareholder value. Using the findings from
this article, I will know what to look when
evaluating stakeholder value

Shareholder value vs Stakeholder value in Modern Corporate Governance 12
Renée B.
Adams,
Benjamin E.
Hermalin and
Michael S.
Weisbach
2010 The Role of Boards of
Directors in Corporate
Governance: A
Conceptual Framework
and Survey
Journal of
Economic
Literature
Theoretical Key motivators of
directors, CEO and
Board, CEO
compensation and
CEO expectations
The findings revealed that directors have a
duty to protect shareholders' interests. Yet,
their interests are unlikely to be perfectly
aligned with the shareholders. The article
further reveals that some firms have
incentives designed to encourage the
directors and CEOs to focus on
shareholder’s interest. Compensation,
according to the article, is designed as a
way of achieving agency theory goals. The
findings are relevant to my research
questions. In fact the article would form
one of the articles I will use to support the
idea of stakeholder value. It will shape the
new model in suggesting some of the
things that should be included in the
existing models

Shareholder value vs Stakeholder value in Modern Corporate Governance 13
Thomas
Donaldson and
Lee E. Preston
1995 The Stakeholder Theory
of the Corporation:
Concepts, Evidence, and
Implications
The Academy of
Management
Review
Theoretical Descriptive/
empirical,
instrumental, and
normative variables
of stakeholder theory
From descriptive approach , it is believed
that most of the managers believes that it
is not ethical to concentrate solely in the
interest of shareowners and not in the
interest of employees and customers. The
article further revealed that Managers may
not show directly that they are working to
meet the needs of stakeholders but the vast
majority of them apparently adhere in
practice to one of the central tenets of the
stakeholder theory. The findings will help
in unearthing the key factor that hinders
some managers from making explicit
reference to stakeholder’s theory. The
findings will also contribute on some of
the aspects omitted in the past studies and
hence help in shaping the final model

Shareholder value vs Stakeholder value in Modern Corporate Governance 14
Michael Bradley,
Cindy A.
Schipani, Anant
K. Sundaram,
And James P.
Walsh
1999 The purposes and
accountability of the
corporation in
contemporary society:
corporate governance at a
crossroads
Law and
Contemporary
Problems
Theoretical Changes in work,
changes in capital
market, changes in
organizational forms,
changes in regulatory
environment
Changes in work result in problematic
managerial control. Changes in capital
market, on the other hand result in many
consequences such as difficulties in
assessing operating and business risk,
undeveloped cross-border disclosure and
regulation and cascading agency problems.
Changes in organizational forms such as
emergence of network forms has resulted
in enterprises with fuzzy boundaries.
Lastly, changes in regulatory environment
has forced most companies to adopt new
laws related to sustainable governance.
The findings will be crucial in trying to
answer the proposal question because it
will offer additional base knowledge on
why some aspects of corporate governance
happen the way they happen