Balancing the Stakeholders

When companies become so large that it makes a difference whether they survive or fail, especially when it involves Government intervention, the question arise, “of their stakeholders which one or ones do they serve or highly favor?”

 

For the purposes of this post the stakeholders are:

 

• Shareholders (often called owners)
• Customers
• Employees
• Communities (places where the company does it business)

 

These stakeholders have a complicated connection and often symbiotic relationship with each other.  For example, a company usually requires roads, sewers, power, and police to operate its offices and plants.  A company needs employees with skills and experience to perform specialized tasks.  These employees are found in certain communities and, together, the company and employees pay taxes also for the infrastructure benefits.  Customers are of course necessary for any company and without them there is no source of earnings to share with anyone. 

 

And then comes the owners (shareholders in public companies).  They want and deserve a return on their investment in the company.  The problem arises when the company’s actions are disproportional and favor of one stakeholder over the others.  In a recent business book, “Vision, Values, and Results” (Outskirts Press), author John R Lewis discusses this balance and how sustained superior results come from maintaining the proper balance.

 

Think about the major banks and lending institutions, and think about the Big 3.  Do you think they had their stakeholders balanced properly?  Here are some observations.

 

• Most of the major banks and the investment firms (and probably AIG) morphed into companies that highly favored employees (mainly top management) and shareholders and took risks that put their customers (and their customers’ customers) in grave danger.

 

• Paradoxically, the actions of these major banks and lending institutions along with the investment houses, through their aggressive risk taking put the communities in which they operated and the wide range of shareholders in danger of capital loss through their desire to reap short term and disproportionate gains.

 

• A similar favoritism can be seen with the Big 3 where shareholders and employees rewards were satisfied first and then the demands of customers were considered when time permitted.  Automotive executives demanded fat remuneration packages (for the record, pay was huge but still below the league of the bankers and investment execs), and then agreed to relatively speaking just as fat union contracts.  The auto industry was an example of symbiotic life centered on the shareholder and the employees.

 

• Left out (at least under represented) in the Big 3 focus on only two stakeholders were customers and communities.  Automotive facilities are large employers and pay a lot of taxes.  The Big 3 should not be so quick to throw away communities when they close factories as communities were their trash. 

 

• Even more glaring is the Big 3 disregard for their customers and life blood.  The Big 3 offered Americans over priced vehicles that sucked gasoline and advertised that Americans were buying the best.  Too many Americans felt differently. 

 

• If the Big 3 really cared about their customers, they would have confronted the Unions and negotiated a competitive contract, and they would have taken major steps to improve their dealer network so that the dealer put the customer first.

 

Companies the size of major banks and investment firms and the Big 3 are by definition “in it for the long term”.  Shareholder returns should reflect long term steady growth and not speculative activity.  Due to the size of these firms they all possess an ethical responsibility to their communities and their customers to operate their businesses in a prudent and trustworthy manner. 

 

Somehow this balance must be restored or these firms will pass, either now or in the near future, with or without Government assistance.

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