Wednesday, 2 January 2019

What is a comparative analysis and what is the difference between the shareholder value theory and the stakeholder theory?

Comparative law means that you look not just at the different laws of the country to see why they are different but also that you look at the characteristics of the countries and see how they are different. So, if you have a different economy or different social attitudes in the country towards something like corporations this could have an impact on the way in which a law or rule that works well in one country does not work as well in another country. Otto-Kahn Freund makes this point and argues that you must therefore consider not only the differences in law but also differences in culture, economy and political attitudes. In my dissertation I conduct a comparative analysis between Iran and the UK in which I too consider such differences between the countries. Important factors here include things like the size of the companies and the economic makeup of both the companies and the directors.

Furthermore, as far as the two primary corporate governance theories are concerned, they have an impact on the manner in which the directors are required to conduct their roles. The shareholder value theory requires directors to act in the interests of the shareholders without considering the interests of any other parties. Therefore the decisions directors make in this role must consider the impact on shareholders regardless of any negative impact that may be had upon the employees or suppliers or any other stakeholders. This approach has been regarded by some as being unsustainable because it causes problems for other stakeholders which can have a negative impact on the company – for example if the employees are unhappy they are unlikely to perform as well. The shareholder theory requires directors to act in the way that is more likely to increase the value of the shareholders’ interest in the company.

The stakeholder value theory on the other hand requires shareholders to consider the interests of other interested parties within a company – these can include the shareholders, employees, creditors, suppliers and many more. The problem with this theory is that sometimes these parties can have conflicting interests and it becomes difficult for directors to balance these interests without causing injustice to one party.

The UK had for a long time adopted the shareholder value theory. However, following the enactment of the Companies Act 2006, directors are now required to make use of the enlightened shareholder value theory which requires directors to consider the interests of other stakeholders in so far as this is beneficial to the shareholders of the company. The problem that was present with the stakeholder value theory remains present in the ESV approach in that the different interests often means that directors are not able to satisfy all parties and there is no guidance as to how to balance conflicting interest.

Furthermore, the ESV approach does not really empower other stakeholders as the only people that can bring an action should a director act contrary to his duties or contrary to the ESV are shareholders and it seems unlikely they will spend their money on an action that brings them no direct benefit.