“The genius of capitalism is to pacify a destructive human characteristic, greed, into benign self-interest, something we know as “incentive.” ‘ James A. Baker, former American Secretary of State 1. INTRODUCTION The topic and aim of this essay is to explain why corporate responsibility to stakeholders affects higher stock valuation? In the aftermath of corporate scandals such as Enron and Tyco it has become crystal clear how important corporate responsibility to stakeholders is. These two companies are the prime examples of what happens when management and board of directors do not act responsibly but act only to maximise their personal interests. As a consequence of disregard of stakeholders’ rights, we have today a crisis of confidence in the way public companies do business. In order to understand the impact of corporate responsibility on stock value, let us first define the most important roles to be played in company’s daily operations by most important stakeholders: management, shareholders and board of directors.
Who is responsible to whom and whether their interests and responsibilities can come in conflict affecting the overall value of an enterprise? Finally, this work will be focused on American public companies due to availability of data and fact that this business model is still the most efficient and transparent one in the modern world. Analysing and comparing case studies of Enron, Tyco and top S&P performing companies authors will be able to prove why corporate responsibility makes or breaks the company and affects its stock valuation. 2. THE MAIN PROTAGONISTS AND THEIR ROLES In theory, the American business model focuses on the shareholder value and profits as the main target and main corporate responsibility. The interests of other stakeholders are on the second place. The most important stakeholders in this model are: .
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The board of directors, whose duties are: – To select a Chief Executive Officer – To decide on his / her compensation – To oversee / evaluate functioning of CEO and senior management on a day-to-day basis. The CEO and senior management, have following responsibilities: – To manage the corporation in an effective and legal manner in order to produce value for stockholders – To produce and disclose financial statements that fairly presents the financial condition and results of operations of the company – To devise a strategy and identify and manage risks. Investors, whose main interest is that their investment in the company brings more return then other available opportunities on the market So, after defining the roles of the main protagonists, we can presume that for a company to function properly the relationship of the management and the board with stockholders must be characterised by openness and relationship with employees and public by fairness. According to Monks and Minnow (1995) corporate responsibility to stakeholders should stand for “a tendency towards a decent, fair and reliable direction… to do the right things and to do the things right.” Yet in practice, the central problem is the question of greed and power. In the 1990 s we went from “greed is good” being said as a joke, to people thinking that “greed is good” as a fundamental fact .” For instance, the CEO / management moral conflict is between personal rewards & company results.
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Their compensation package is in most firms tied to short-term results (no matter how reached).
This creates pressure to use aggressive accounting in order to meet the investors’ focus on earnings growth. Meeting these targets increases share price and consequently management gets the reward at the end of year. According to A. Zaleznik the board of directors is no better either. The members of the board feel that if they question or stop the actions of successful CEO, they will either lose their job or the CEO.
So, in order to avoid uncertainty there is a desire to maintain stability at any costs. Yet, as we will see later on from our case studies and analysis of S&P data this is the wrong way, which does not stop the cycle of greed. Thus, the hypothesis that only responsible corporate actions toward stakeholders will be rewarded with higher stock value in the short as well as long term.
