The primary financial objective of a company, particularly one listed on a stock exchange, is to create value for its shareholders. This is done by dividend payments and share gains, often referred to as total shareholder return (TSR).
However, shareholders do not just want this value. Modern investors are building pipelines to determine the importance of a company satisfying the needs of other stakeholders. This article discussed why stakeholder pluralism should be the modern financial objective of listed companies.
Who are stakeholders?
These are individuals, a group of individuals, a community, or institutions that have an interest in an entity. The word stake means interest. Individuals and institutions with an interest in a company are referred to as stakeholders.
Shareholders are primary stakeholders. Without them, the business will not be in existence in the first instance. More so, they emphasised the importance of stakeholders in a company. This is why stakeholders have become significant in recent times.
Mandelow's power interest metrics explain why some stakeholders' actions can lead to a company’s liquidation. If this happens, investors will lose their investments. This explains why directors of companies must take stakeholders seriously and prioritise them.
Stakeholder pluralism means that the board of directors should consider all the stakeholders when determining its financial objectives. Corporate strategy should be aimed at satisfying their interests.
The main types of stakeholders and their interests
Shareholders: These are the owners of a business. Their primary interest is to receive a reward for investing in a company. This is known as return on investment (ROI).
Board of directors: The board of directors directs and controls a company. They set up corporate strategy and monitor it to ensure that top management complies and provides results.
Directors' interest is to receive rewards for their performance in the entity. The common reward provided to them is share options.
Employees: These are staff members of a company. They work daily to ensure that a business achieves its overall objectives. Their main reward is salary. Although they may be rewarded through promotions, commission, among others.
Customers: Customers buy the goods or services of a company. Without them, a business would not earn money and make a profit that would be shared with shareholders as dividends.
Customers' primary interest in a business is quality products or services. However, some companies do a party for their loyal customers at the end of year to celebrate their loyalty. This is a common practice in Nigeria.
Trade creditors: They provide the materials that are required by the company to provide goods and services to their customers.
Business organisations do buy items on credit from their suppliers. This results in trade credits. As a result, these suppliers' interest is to ensure that the company can pay back the debt owed.
Debt holders: Banks, individuals, and institutions may provide money in the form of debt capital to a company. Their interest is to ensure that the company can repay the loan along with interest payments.
Community: These are individuals and their leaders in the geographic territory in which the company is located. The company's operation affects the community negatively. Therefore, community leaders may request rewards for the negative impacts caused by the activities of the company.
Government: The Government and their agencies have an interest in a company. The primary government agency with power and influence is the tax authorities.
Failure to file taxes correctly and make payments when due can affect cash flows. Funds that should be used for other business purposes might be used to pay additional taxes and penalties.
In conclusion, stakeholder pluralism should be practised by the companies' board of directors. As you have seen, each stakeholder's interest is important. Corporate financial objectives must focus on stakeholders' pluralism in order of priority rather than shareholders.