Shareholder Value in Multinational Corporations

Introduction

Generally, businesses sell products or services to people in return for a price. Such products and services at a price that will allow the business to make profit if it is to operate for a long time. Corporations are business entities that can operate locally and internationally thus becoming Multinational Corporations (MNCS). As business entities, corporations operate in an environment consisting of shareholders, employees, customers, communities, government officials, creditors, suppliers and more (Takacs Haynes, Campbell and Hitt, 2017). Shareholders are presumably the owners of a corporation and they will expect returns for their investments into the business, thus, the directors strive to make the largest profits at reduced costs to maximise value for their money. Similarly, stakeholders like the community and suppliers have expectations of the corporation and assume that the directors will run the company in a way that takes into consideration, their needs.

Clearly, there are two categories of people in corporations whose interests often conflict: shareholders and stakeholders (Takacs Haynes, Campbell and Hitt, 2017). As a result economist and philosophers have developed and promoted theories to explain the validity of each scenario. Whereas the shareholder theory holds that the role of any business is to maximise profit for their shareholders, the stakeholder theory insists that a business has obligations towards other people other than shareholders thus should embrace its social responsibilities. The origins of shareholder value can be traced back to the role of directors in a company as defined in the Dodge v. Ford Motor Company case involving Ford Motors in 1919 (Clarke, 2017). Although the position stated by the Michigan Supreme Court has been overruled by subsequent decisions, it provides useful insight into the foundations of shareholder value and the role of company directors. In brief, the case upheld shareholder primacy stating that Henry Ford was required to run the company in the inserts of the shareholders and not for charitable purposes.

Proponents of the shareholder theory argue that a corporation has no moral obligations whatsoever. Consequently, it appears that MNCs like Apple have no moral obligations to anyone except its shareholders for whom it must make the highest profit at the lowest cost. This theory implies that a corporation shall have made good its social responsibilities when it maximises shareholder value. On the other hand, the stakeholder theory maintains that corporations have social responsibilities and should care about the wellbeing of others and not necessarily its shareholders. In essence, an MNC should have regard to the interest of its customers, employees, suppliers, community, environment and other stakeholders (Deakin, 2014). Since a corporation operates in a society it is only reasonable that they give back to the community and ensure that their actions does not negatively affect people and the environment.

Notably, the two schools of thought are representations of financial selfishness against selflessness. Today, executives are torn between maximising shareholder value and maximising stakeholder value. Whereas any business must make profit so that it remains as a going concern, a strict adherence to the shareholder primacy may lead to the use of unorthodox means of securing profit for the shareholders at the expense of the society and environment (Hart and Zingales, 2016). Corporations do not operate in a vacuum and should be alive to their surrounding and the attendant needs. Shareholder primacy is akin to corporate greed that promotes financialization of companies. Corporate governance practices has influenced corporations to invest more into social responsibility. However, it appears that some corporations are not sincere in their social responsibility investments since, they are either faintly funded or the same is done for strategic reasons including profitability.

It follows that corporate social responsibility has not been taken seriously by many MNCs around the world. The practice of share buybacks is rampant in many jurisdictions but it has been abused by executives for the selfish interests of shareholders. Additionally, executives are now being compensated with company stocks instead of cash payments from the company’s finances. For instance, between 2013 and 2019, Boeing spent at least $17 billion on dividends which accounted for 42 per cent of its profits. The company also spent $43 billion on share buybacks, which accounted for 104 per cent of its profits. In light of the Boeing crashes, it is arguable that its executives could have spent a better portion of these billions in addressing design flaws in some of their controversial models. The Boeing scenario paints a picture of corporate greed that has been left to run amok in the name of shareholder theory.

Problem Statement

In as much as shareholders have a right to make profit as owners of MNCs, there is a higher duty owed to stakeholders that should guide their operations. Corporate greed camouflaged as shareholder right to profit is a danger to the society, and the notion should be reined in a free and democratic society lest it runs amok like wild horse. There is need to address the prevalence of shareholder value maximization in relation to corporate social responsibility. More specifically, the following research questions needs to be addressed:

What are the current practices employed by MNCs in pursuit of shareholder primacy?

How does these industry practices affect stakeholders in MNCs?

What can be done to minimise or limit these industry practices for overall benefit of all stakeholders?

Objectives

The long term goal of this research is to influence change in the management of MNCs with regard to aligning a business goals with stakeholder interest. This study will provide a comprehensive review of literature and industry practices in relation to shareholder and shareholder interests. In pursuit of the above, the study has the following sub-objectives:

To investigate the MNC practices in relation to shareholder value

To evaluate the effect of MNC practices leaning towards shareholder primacy

To find out how MNCs can be managed in a manner beneficial to all stakeholders.

Preliminary Literature Review

Milton Friedman (1970), maintains that shareholders take the first priority over everyone else and maximisation of profits is the top goal of a corporation. The Nobel Laureate and renowned economist believed that the executives of a corporation should only be concerned with maximising shareholder wealth instead of social welfare. In his 1970 article, Friedman maintained that the social responsibility of business is to increase its profits so long as it stays within the rules of the game (Milton, 1970). He went ahead to glamorize corporate greed stating that successful countries are capitalistic and have free trade. Impliedly, Friedman believed that the free enterprise greed was good for the society since it allows the most aggressive persons to establish large industries for the benefit of others. However, Clarke and Friedman (2016) disagrees with Friedman emphasizing that poverty in a number of developing countries has been linked to unethical behaviours of MNCs that have and continue to exploit natural resources of those countries, overthrowing their governments and participating in bribery in pursuit of profits.

Jensen and Meckling (1976) built on Friedman’s proposition stating that to achieve maximisation of shareholder wealth, the executives and other corporate leaders should be offered incentives such as stock options. They argued that such incentives to the executives would align their interests with that of shareholders (Smith, 2014; Denning, 2013). It is this school of thought that rationalised the payment of executives with stock as way of compensation. Although, other commentators have expressed doubt as to whether incentives as the efficacy of incentives in corporation’s viability. As a result they state that incentives do not always have the excepted effect in light of market and social norms. It is possible that executives will engage in unethical activities to achieve high stock prices for the shareholders without regard to the corporation’s footprint in the society.

Studies have linked the 2008 collapse of the mortgage industry in the US with maximisation of shareholder value at the expense of customer satisfaction. Jack Welch, a former CEO of General Electric Corporation was a believer in maximising shareholder value but now terms the concept as immoral and one of the dumbest ideas in the world (Denning, 2017). He believes that a corporation should focus on making high quality products to maximise customer’s satisfaction as a long-term strategy. According to Denning, the idea of maximising shareholder wealth has been so deeply entrenched into the economy that it has influenced corporate strategy and resource allocation (Denning, 2017). It gives shareholders power and influence over managers who are under constant and increasing pressure to deliver faster and more predictable returns.

Research and Methodology

The primary research method for this study is literature review of past studies on the area of maximising shareholder value. This involving a review of secondary materials on the research area. Based on this understanding, this study will outline a theoretical framework explaining the current phenomenon and the necessary change. The next step will the analysis of the combined and compared secondary data on the phenomena. My sources of data in this research will entail: public sources, commercial sources and educational institutions. Finally, a discussion of the limits and advantages of the choice of methods will follow.

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References

Clarke, C., & Friedman, H. H. (2016). 'Maximizing Shareholder Value': A Theory Run Amok. Clarke, Clifton & Friedman, HH (2016). Maximizing shareholder value: A theory run amok. i-manager's Journal on Management, 10(4), 45-60.

Clarke, T. (2017). Corporate Governance and Inequality: Maximising Shareholder Value and Inflating Executive Pay. In Academy of Management Proceedings (Vol. 2017, No. 1, p. 15284). Briarcliff Manor, NY 10510: Academy of Management.

Deakin, S. (2014). Against shareholder empowerment. Beyond Shareholder Value, 36.

Denning, S. (2013, June 26). The origin of ‘the world’s dumbest idea’: Milton Friedman. Forbes.com. Retrieved from

Denning, S. (2017). Why maximizing shareholder value is a threat to US business. Strategy & Leadership, 45(6), 3-10.

Hart, O., & Zingales, L. (2016, October). Should a company pursue shareholder value?

In Conference Economics of Social Sector Organizations, The University of Chicago Booth School of Business https://www. chicagobooth.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of financial economics, 3(4), 305-360.

Milton, F. (1970). The social responsibility of business is to increase its profits. New York Times Magazine, 13, 32-33./p>

Smith, Y. (2014, January 24). The myth of maximizing shareholder value. Naked Capitalism. Retrieved from

Takacs Haynes, K., Campbell, J. T., & Hitt, M. A. (2017). When more is not enough: Executive greed and its influence on shareholder wealth. Journal of Management, 43(2), 555-584.