Shareholders -- Suppliers or Owners?

An interesting set of questions is raised in SRI Notes about the effect of defining a company's shareholders differenly than the traditional hypothesis that they are a company's "owners" and, therefore, entitled to its earnings (usually in the form of a dividend) after expenses and profitable re-investment. The hypothesis is used by those opposed to investment in responsible corporate conduct or philanthopy to argue that a company's earnings rightfully belong to its shareholders and that it is irresponsible of management to "spend" on financial and strategy intangibles like corporate responsibility programs and community investments.   

In SRI notes, Lloyd Kurst from the University of California at Berkely's Haas School of Business writes that "Miller & Modigliani's famous theorem opened the doors to a broader view of capital - a view in which shareholders are not owners but suppliers of a commodity known as equity capital."

As suppliers of equity capital shareholders are entitled to reasonable compensation for their investment (the product they 'supply'). But they do not de facto have unrestricted access to all of a company's earnings available for distribution. This means that non-financial stakeholders such as employees and communities which give companies the right to use their resources may have at least some claim on distributable earnings.

Frankly, it puts on another level the discussion in corporate theory of the legitimacy of investment in social intangibles. It raises questions -- even doubts -- about Nestle CEO Peter Brabeck-LetMathe's assertion that in corporate philanthropy "We need to be very careful, because it is not our money we're handing out, but the money of our shareholders."

Comments

[Michael Wagner]

Excellent post and resources.

Have you read Charles Handy's article from Harvard Business Review entitled, What is Business For?

I think you find it compliments your thoughts here.

Again, thanks for enlarging an important conversation.

Keep creating,
Mike

[Boyd Neil]

Thanks for the referral to the Handy article which I have not read. I am going to get it today.

[Larry Parnell]

This is a very interesting adn timely discussion as many companies are currently wrestling with this issue as year-end approaches and budgets/plans/strategies are set for next year - including the dollar amounts and uses for contributions and community support. While the concept of sharing the wealth is an admirable one - many companies would react negatively to any senses of entitlement on the part of employees (they get paychecks/benefits) or communities (we pay taxes/spend money in the community. I suggest that we as communicators ought to tread lightly in advocating this position. Perhaps it is a matter of semantics - distributing earnings to non-financial stakeholders is a slippery slope (to whom? where? how much? how often?)but re-investing corporate capital in the community and in the quality of life for employees is easily defended.

The reputational and operational benefits of contributing to the community and supporting sustainability etc are clear - and there is considerable research to show that socially responsible companies tend to do better over the long term in price appreciation and liquidity. So, perhaps it is a matter of doing the right thing by all stakeholders (financial and non-financial) and then communicating it to the market in an appropriate and timely fashion.

[Account Deleted]

No, shareholders do not own the corporation. Rather, they own (or in some cases, temporarily hold) a type of security commonly called stock. Both corporate law and economic reasoning support the limited nature of this ownership, and also undermine the claim that directors should always strive to maximize shareholder value.
business valuation
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