Tending to Shareholders: Managing for the Long Term

Here's a link to an excellent Financial Times article called Tending to Shareholders by Anant K. Sundaram, of Dartmouth's Tuck School of Business. Thanks to Bill Werther & David Chandler, the guys who literally wrote the book on Strategic Corporate Social Responsibility, for bringing this to my attention through their email newsletter this week.

Professor Sundaram asks the question, for whom should a company be managed? Should it be managed primarily for the shareholders, or for other stakeholder groups? The answer to this question differs from country to country. In Germany, for example, companies are viewed as being run for the state, the people and the employees.

Sundaram argues that corporations should be run primarily to benefit long-term shareholders. Corporate managers will find it impossible to please shareholders and other constituencies at the same time. Attempts to do so often result in none of the groups being pleased. And members of these other stakeholder groups can always become shareholders by purchasing shares. Similarly, if disenchanted with the way a company is being run, the shareholders may vote to oust management or vote with their feet by selling their shares. This puts downward pressure on the company's stock price and may force a change of policy.

An example of the loss of focus here in the U.S. is Costco, which has been criticized by analysts for being too focused on employees and spending too much on wages and benefits. From the shareholders' perspective, it seems that Costco should pay just enough above what the competition is paying to attract and then retain employees who are capable of performing the work in sufficient numbers. Anything more is being taken out of the shareholders' pockets.

Sundaram also argues that the court system provides protection to constituencies other than shareholders. Suppliers, customers and employees are protected by various laws and can sue the company when their rights are violated.