The Corporation and its Stakeholders

Valeant

A multinational pharmaceutical company based in Canada. Their strategy = acquiring existing companies, cut costs (typically labour costs), and increase prices.

Strategy valeant:

1. Acquire existing firm

2. Lay off employees → lowering costs

3. Increase product price (of that don’t have much competition and a large consumer base)

What do patents do?

Give you protection in exchange for money and full-transparency of how you make it.

How do patents protect firms?

Firms can protect and appropriate the value of their products using patents, so they can benefit from it.

What is an alternative to a patent?

Trade secrets - the exact opposite of a patent you do not get legal protection, but you share absolutely no information about what you are doing. Example = recipe of Coca Cola.

Why did valeant lead to political backlash?

This strategy proved to be unsustainable (only temporarily sustainable). In your attempts to maximise profits, you must devise strategies that are socially responsibleH

How did valeant profitable again?

1. Change in management (CEO replaced)

2. Change of mission

3. Change of name

What criticisms does amazon have despite incredible economic success?

• Potential damages to the traditional brick-and-mortar stores (employment loss in the retailing sector)

• Tough organisational culture, as manifested by high turnover rates

• Use of market power potentially at the expense of customers → buy potential competitors and kill them (unfair competition)

Will buying a startup affect amazon?

The concept you are describing is known in economics and antitrust law as a "killer acquisition."

It occurs when a dominant firm (like Amazon) buys a smaller startup not to absorb and use its technology, but to shut it down and eliminate a potential future competitor before it can grow large enough to threaten their market share.

Companies relationships

Companies are embedded in a web of relationships with many other parties, customers, employees, government, etc, known as stakeholders

Stakeholders

Provide resources to firms in exchange of some rewards, they hold any type of stake not necessarily economic or equity-based as shareholders are

What is important to consider in corporate actions?

Broad implications of corporate actions as we strive to meet environmental and other societal goals

Positive externalities of consumption

Vaccines, education, local benefit, medicine, solar panel installation (green energy), security

Negative externalities of consumption

Smoking, alcohol, drugs, single-use plastic, noise pollution, air pollution

What is the purpose of the modern corporation?

To use its resources and engage in activities designed to increase its profit so long as it engages in open and free competition without deception or fraud.

What is the responsibility of executives according to Friedman? Shareholder theory

Executives = employees of the owners. Their responsibility is to run the business in accordance with owners’ desires (typically to maximise profit)

What does Friedman argue in the shareholder theory?

Corporate executives should focus solely on maximizing profits for shareholders rather than pursuing social causes. 

How does the shareholder theory view spending money on social responsibility issues?

When an executive spends company money on social goals (like reducing pollution or helping the community beyond what the law requires), they spend the owners', customers', or employees' money. This spending can lower shareholder profits, raise prices for customers, or reduce wages for workers without their direct consent, which is like a tax.

Are executives like civil servants?

According to the shareholder theory, executives who pursue social responsibility impose tax like civil servants who are not elected.

Three principles of the stakeholder theory (Friedman:

Separation fallacy, no stakeholder primacy, and competitive advantage

Stakeholder theory - separation fallacy

Rejects the idea that business decisions can be separated from ethical or social decisions. Every business choice (like a layoff or a factory relocation) has an economic consequence and a social/moral impact simultaneously.

Stakeholder theory - No stakeholder primacy

This rejects the idea that shareholders (owners) are the only important group. Instead, customers, employees, suppliers, and the community all have voice, rights, and legitimate claims on the value the company creates. Their importance can shift depending on the situation.

Stakeholder theory - competitive advantage

This redefines how a company wins in the market. Since money (financial capital) is fungible and easy to get for most major firms, it cannot give you a long-term edge. A true competitive advantage comes from unique, trusting relationships with all stakeholders.

What are shareholders?

A shareholder, also called a stockholder, is an individual, company, or institution that owns at least one share of stock in a company.

What is capital gain for shareholders?

Appreciation of shares

Get dividends

What kind of issues do shareholders vote on?

vote in shareholders assemblies on issues regarding the composition of the board of directors, other decisions, but also have the right to make proposals on which other shareholders vote.

What is Unilever?

A British-Dutch consumer goods company headquartered in Rotterdam, Netherlands. It produces food, beverages, cleaning agents, and personal care products. It is a portfolio of different brands.

Stakeholders

Persons and groups that affect, or are affected by an organisation’s decisions, policies, and operations. Provide something to a company in exchange for some reward. Include: consumers, employees, and suppliers, and shareholders

What firms tend to be more socially-oriented and why?

Privately-held firms and firms with shareholders close to the firm’s headquarters.

What are privately-held firms?

A privately held firm is a business whose ownership shares or interests are not traded on public stock exchanges and are instead held by founders, families, or a small group of private investors

Share-holder theory

Separability assumption: Friedman assumed you can cleanly separate making money from doing good. A business focuses entirely on profits, and then individual citizens or charities use their own money to fix societal problems.

What is the problem with the separability assumption of the shareholder theory?

It is nt often satisfied: profit-making and damage-making are intertwined. A company cannot easily separate its wealth generation from the pollution, low wages, or social damage it causes while making that wealth. It is almost always cheaper and safer to prevent a problem (ex-ante) than it is to clean it up after the damage is done (ex-post)

Why are governments often very inefficient at tackling problems - as the shareholder theory suggests?

Traditional public policy and governments are often too slow, bureaucratic, or politically divided to effectively solve urgent societal issues (like climate change or inequality).Because governments struggle, many believe companies should step in and ensure their business goals match the ethical, social, or environmental preferences of the people who fund them (the investors).

What is the problem with companies stepping in due to inefficient governments when it comes to societal problems?

If a company is closely-held (owned by a small group or a single person), aligning values is easy. The single owner /investor dictates what the company stands for. However, for listed firms (large, publicly traded companies), this becomes incredibly difficult. They have millions of diverse shareholders. Aggregating everyone's individual preferences into a single corporate policy creates massive coordination and communication problem.

Potential solutions to coordination issues in large listed firms (publicly traded)

Shareholder voting: Allowing investors to vote directly on specific corporate policies or social initiatives, rather than just voting for board members.

Polling investors: Regularly surveying and polling shareholders to understand their stance on specific societal issues, giving management a clearer picture of what their investors value.

Market vs Non-market stakeholders

Market stakeholders are engaged in a market transaction with the company, while non-market stakeholders are involved without contractual transactions.

Examples of market stakeholders

Consumers, contractors, suppliers, resellers, employees

Examples of non-market stakeholders

press, government regulatory agencies, local community residents, competitors with agreements

Internal vs External stakeholders

Internal = in the company, External = outside the company

Internal stakeholders example

Investors, employees, shareholders, owners, management, executives

External stakeholders examples

Customers, suppliers, vendors, governments, local community residents

Which theory sees the firm as property of its owners, stakeholder or shareholder?

Shareholder theory

Difference in purpose between stakeholder and shareholder theory

Shareholder theory = to make profits

Stakeholder theory = to satisfy a need in society and to create other value in addition to profit

What do firms do according to the stakeholder theory?

Create value for society

Who as accountability / power in the shareholder theory vs stakeholder theory?

Shareholder theory = managers and bod are agents of shareholders and have no obligations to any others

stakeholder theory = accountability is towards key stakeholders

Whose interest are deemed most important in shareholder vs stakeholder theory?

In the shareholder theory, owners’ interests take precedence, while in the stakeholder theory, all stakeholders’ interest are taken into account.

Descriptive Perspective on the Stakeholder Theory

Realistic and concrete description of how companies work. Managers in their daily activities direct their energies towards all stakeholders, not just owners. Producing good financial results requires managing tensions and engaging with multiple actors.

Normative Perspective on the Stakeholder Theory

Right thing to do, an individual who contributes to the corporation or takes some risk has a moral right to some claims of the corporation’s rewards.

Instrumental Perspective on the Stakeholder Theory

A strategy that improves firm profitability

Example of the instrumental perspective on the stakeholder theory

taking care of employees improve labour productivity, increasing firm performance, so shareholders are better off

Pessimistic view on Stakeholder management

Distracts the public from the firm’s core activities (window-dressing) and involve donations to stakeholders which eventually reduce profits

Optimistic view on the Stakeholder Theory

Increases accountability and public awareness, reducing negative effect of corporate actions and is instrumental to the firm’s performance (brand, new customers, greater stakeholder productivity)

How can tension be created with respect to stakeholders?

The coexistence of multiple stakeholder can create tension

What does stakeholder analysis involve?

Identifying the relevant stakeholders and understanding both their interests and the power they may have to assert their interests - the nature of each group’s stake.

What 4 types of power do stakeholders have?

Voting power, economic power, legal power, and informational power

Stakeholder’s voting power?

The right to cast a vote (shareholder assemblies, employees in trade union, etc.)

Stakeholder’s economic power?

Suppliers, customers, bargaining power, can affect price, contractual power for direct leverage, etc.

Stakeholder’s legal power

Regulatory powers and government can revoke licences, imposes taxes, and issue fines, enforce laws.

Stakeholder’s informational power

Access to valuable data, accountability and transparency (information can be used against companies), decision-making dependent on information, can be used as leverage

Examples of market stakeholders

Employees, shareholders, customers, suppliers, retailers/wholesalers, creditors

Creditors

A person, organisation, or government that lends money or gives goods and services to another party with the expectation of being paid back

Creditors versus Shareholders

Creditors are lenders who are contractually owed fixed amounts of money, while shareholders are part-owners who hold a residual claim on a company's assets and profits

Nature of an employees’ interest

Stable employment, fair pay for work and benefits, work in a safe, comfortable, environment

What is a stakeholder’s interest?

The specific concern, need, or priority that an individual or group has in the decisions, activities, or outcomes of an organization or project

What is an employees’ nature of power?

Union bargaining power, work actions or strikes, publicity, trend of exit (cost to replace)

What is a non-compete agreement?

A legal contract where an employee promises not to work for a competitor or start a rival business after leaving a company

What are shareholders’ nature of interest?

ROI (dividends) and stock value

What is ROI?

Return on Investment - expressed as a percentage or ratio, It shows how much money you made or lost compared to how much you spent.

Dividends

The income part of an investment

Do dividends have a set value?

No, they do not have a permanent set value; a company's board of directors decides the exact payout amount per share and can change, pause, or stop it at any time

What are shareholders’ nature of power?

They have voting rights, and rights to inspect company books

What is the nature of interest of customers?

Value and quality for money spent, safe, reliable products, accurate information

What is the nature of power of customers?

Purchasing goods from competitors, not purchasing goods

What is the nature of interest of suppliers?

Regular orders for goods, paid promptly, use capacity efficiently, treated ethically

What is the nature of power of suppliers?

Refusing to meet orders and supplying to competitors

What is the nature of interest of retailers/wholesalers?

Quality goods at reasonable cost, offer reliable products

What is the nature of power of retailers/wholesalers?

Buying from other suppliers, can boycott companies

What is the nature of interest of creditors?

Repayments of loans, collect debts and interest

What is the nature of power of creditors?

Calling in loans, repossess or take over property

What are examples of non-market stakeholders?

Communities, non-governmental organisations, business support groups, governments, the general public, competitors

What is the nature of interest of communities?

Employs local residents, protect local environment, ensure local area development

What is the nature of power of communities?

Refusing additional credit, lobbying government for regulation

What is the nature of interest of non-governmental organisations?

Conformity to legal and ethical standards, social and economic development

What is the nature of power of non-governmental organisations?

Publicising the issues, lobbying government for regulation

What is the nature of interest of business support groups?

Research and information

What is the nature of power of business support groups?

Providing legal or group support

What is the nature of interest of governments?

Economic development, social improvements, raise revenues through taxes

What is the nature of power of governments?

Regulations and laws, licences and permits, allowing or disallowing commercial activity

What is the nature of interest of the general public?

Protect social values, minimise risks, prosperity for society

What is the nature of power of the general public?

Networking, pressing government, condemning or praising

What is the nature of interest of competitors?

Compete fairly, Cooperation, seek new customers

What is the nature of power of competitors?

Pressing government, suing companies that compete unfairly

What is uber?

A tech platform whose smartphone apps connect driver partners and riders, providing ride hailing services, developing applications for road transportation, navigation, ride-sharing and payment-processing solutions,

Uber Market Stakeholders

Uber drivers, customer

Uber non-market stakeholders

Insurance companies (American insurance association), governments (taxes/legal requirements), competitors (Lyft), the general public, consumer attorney, California App-Based Drivers’ association, Taxi companies, High-tech trade associations and internet-based firms

How much power do drivers have in Uber?

They are not scarce, anyone can drive a car, but they could coordinate and make demands

How much power do customers have in Uber?

Customers can decide not to use it (boycotting), and use substitute modes of transportation. But ultimately, unless price radically changes, how much will demand change?

How does the media, and the public have informational power over Uber?

Uber has a high reputation to uphold as trust forms part of getting into a car. Big public companies where information is widely available have high reputational costs.

How does the type of shareholder affect reputational costs?

Dominant shareholder = put face on the company = more sensitive

Small fragmented shareholders = portfolio’s, unaware = less sensitive

What is business?

Part of society and engages in ongoing exchanges with its external environment.