Why Boards Must Look Beyond Shareholders

In this post-Enron era, after seeing how not only shareholders, but also employees and customers of this American corporation got conned, the business world is constantly re-evaluating the notion of corporate fiduciary duty and whereabout it may lay. The age-old ideology has it that the board of directors’ primary concern should be the interest of the shareholders, but is that so?

While it may be a common belief, so-called shareholder primacy is not based on any legal norms that would enforce it. Suppose it is not all that strange, since in order to maximize shareholders’ profits, boards would often have to make decisions contrary to Corporate Social Responsibility (which is legally established in some countries). Arguably, the board’s primary objective is to keep the corporation as such afloat, and if possible, foster its growth. In this scenario, shareholders represent just one of many audiences of stakeholders that boards need to bear in mind when making decisions. Others include their employees, customers, suppliers and society in a broad sense, represented by a variety of Environmental, Social and Governance (ESG) issues.

A Harvard Business School professor, Robert G. Eccles and his colleague, the researcher Tim Youmans, coined this concept. Together they suggest that boards should draft a short Statement of Significant Audiences and Materiality, which will serve as a publicly articulated vision of corporation’s role in society. And indeed, many companies are deciding to do so, and incorporate their Statements of Significant Audiences and Materiality into their Annual Reports.

Perhaps it is also because they feel pressured by their customers seeking ethical values. In the end, we grow more socially conscious by the day – we recycle, buy hybrid cars and responsibly grown food. We are beginning to hold corporations to the same standards, and they are starting to realise it. Some made it part of their core business, some largely just part of their marketing. That may be the reason why the importance of Corporate Social Responsibility is often questioned and dismissed as “greenwashing”.

On the other hand, dedicated NGO’s are trying to separate “green washers” from genuine efforts. Greenpeace, for instance, came up with The Detox Catwalk initiative, which urges the big players of the fashion industry to eliminate the use of hazardous chemicals not only in their own process, but also their suppliers’. A published list of brands sorted into “degrees of success” categories lets the consumer re-evaluate their purchase decisions.

In the cases of non-compliant brands, initiatives like this have potential of threatening profit maximization and therefore the interests of the shareholders. Ironically enough (and by gross generalisation) putting shareholders first may lead to jeopardising their interests. Perhaps the answer really is that the main concern of the board should be safeguarding the continuity of the corporation itself, because maybe then the optimal balance between the interests of shareholders, employees and society will be viewed as a necessity.

Veronika Bacova

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