Stakeholders Interests in Strategic Decisions - Case Study Example

Shareholders and Stakeholders Interests in Strategic Decisions Name Institution Professor Course Date . Introduction The stakeholder theory surfaced as a contribution towards an improved comprehension of organisational management through focusing on the individuals or groups that affect or are affected by a firm’s actions. The shareholder theory, on the other hand, states that organisational management has a duty to balance the financial interests of shareholders against the interests of other stakeholders. However, the economic crisis faced by some firms triggers a debate whether firms should focus on increasing their shareholders value. Drawing on General Motors Europea, this report assesses the extent to which managers of a business should focus on their shareholders’ needs and ignore their other stakeholders when making strategic decisions. Defining Shareholder and Stakeholder In every organisation, there are shareholders and stakeholders. The two groups of people invest and have interests in a firm. A shareholder is a person who forms part of a firm through stock ownership while stakeholders include employees, suppliers, customers and the government. The stakeholders are interested in the performance of a firm for reasons other than stock performance. According to Liel (2016), stakeholders are groups whose support is instrumental to firm’s existence. Without the support of stakeholders, a business would not survive. A shareholder can be a stakeholder, but stakeholders are not shareholders. Liel (2016) asserts that shareholder value is the sole purpose of a firm. However, the stakeholder theory maintains that the profit-making temperament of a business is disastrous for society. With respect to the shareholder theory, the purpose of a firm is to maximise financial return. On the contrary, the stakeholder theory maintains that firms depend on stakeholders for survival. As a result, the main aim of a firm is to serve wider societal interests beyond creation of economic value for shareholders. While the stakeholder theory demands considerations of the interests of all stakeholders, the shareholder theory maintains that a firm’s managers should focus on maximising financial returns and meeting the needs of shareholders. When Should Firms Focus on Shareholder Value There is some argument concerning the extent to which firms should focus on their shareholder’s needs and ignore their other stakeholders when making strategic decisions. Apparently, a firm’s shareholder value depends on the strategic decisions make by the management including the capacity to generate a healthy return on the invested money and make wise investments. When a firm increases earnings, the firm pays a bigger cash dividend and get sufficient earnings for smooth running of the business. More so, with increased earnings, investors get attracted to invest in the company as they view it as more valuable. Narayanan and Nanda (2013) asserts that shareholder’s are also a firm’s stakeholders. The authors further assert that a firm should not ignore these stakeholders and instead focus exclusively on shareholder wealth. Apparently, maximising shareholder wealth is established in financial and economic theory and management practices. With respect to shareholder perspective of a firm, firms should internalise the social, environmental and human costs of doing business only to the degree needed by law. Secondly, self-interests are the major human motivator thereby requiring people to act in their own self-interest. Thirdly, a firm should be viewed as a contracts nexus with the objectives being getting contracts that have the major impact on a firm’s profitability. In this regard, a firm can focus on shareholders’ interests when it is struggling to remain in the market or when a firm is at the verge of collapsing. A case in point is General Motors. General Motors Europe Strategic Decisions General Motors has been fighting to remain profitable in recent years. The firm has been struggling to turn around its European business. In 2016, the firm announced that it would increase the UK vehicle prices by over two percent in order for it to remain operational and relevant in the automobile industry (Downey, 2017). The plan to raise car prices had implications on its customers who make one of the primary stakeholders of the firm. Besides, in March 2016, The General Motors European planned to sell Vauxhall to Peugeot owner. It is important to note that this decision hold major implications on its stakeholders who predominately include employees. According to Downey (2017), over 35, 000 people in the United Kingdom are employed under the Vauxhall banner. This includes the 4,500 staff in Luton and Ellesmere Port and the twenty-three thousands employees in its retail network. The PSA group become the novel owner of the Vauxhall brands following a takeover of General Motors in UK. According to Walker & Hall (2017), General Motors has lost over 9billion dollars in Europe since 2009. This is a great loss for shareholders and it required the firm’s managers to focus on shareholder’s interests rather than focusing on the stakeholder’s interests. Although scores of stakeholders were negatively affected by the sale of the firm’s brands, the company’s management was justified in this strategic decision. General Motors is an entity whose principal objective is to maximise profits and provide good returns for its shareholders. Maximising profits is a major aspect that defines corporate success. Although modern businesses should be managed in a way that benefits not just the shareholders, but a wide range of elements that includes the stakeholders, when a firm is struggling or at a verge of collapse, managers can ignore the stakeholder’s needs. For instance, there are a number of employees who were affected by General Motors decision to sell Vauxhall. It would have made no sense for the firm to retain the 35,000 employees while it had made huge losses. In such a situation, it means that the company owners were digging deeper in their pockets or taking loans to cater for the firm’s operations. This also implies that the shareholders were getting nothing in return of their capital investments. Given that shareholders are the residual claimants of a firm’s assets, it is only fair that their value be maximised while other stakeholders’ values are optimised. It is, therefore, imperative that a firm’s senior management link every decision to shareholder value measures. Although the corporate value and objectives of General Motors UK is to enhance its corporate social responsibility through effective engagement with partners as well as being a responsible employer while ensuring environmental management, the financial performance of the company in the last few years triggered the management to make strategic decisions that focused on shareholder interests. The company has always upheld good environmental management through its corporate social responsibility program, and has always included its stakeholders in its strategic decisions. Although, the decision by GM to focus on shareholders needs while making the decision to sale its Vauxhall plant was feasible and justifiable, the firm could have also tried to improve its financial status by attending to the desires and needs of its stakeholders. According to Doole and Lowe (2012), marketing is more able to influence strategic decisions and deliver shareholder value at a corporate level. Shareholder value marketing provides a means for managers to demonstrate how marketing strategies augment the value of the firm besides providing a blueprint for incorporating marketing more effectively with other business functions. Initially, General Motors thought of increasing its car prices by 2.5 percent in the European market. This decision should have yielded better results and benefitted both the shareholders and stakeholders had the company engaged in aggressive marketing strategies. The key to establishing shareholder value is through developing relationships with customers and other key stakeholders. The duty of managers is to balance the shareholders’ financial interests and needs against the needs of other stakeholders such as customers and employees even if it lowers shareholder returns. However, in the event that a company is making more losses, shareholders interests should prevail those of the stakeholders. Conclusion The clash between stakeholder and shareholder interests has been at the heart of firms in the contemporary competitive business environment. Drawing on the General Motors’ performance in the European market, it is evident that sometimes-strategic decisions are made to meet the needs and interests of the shareholders at the expense of the stakeholders. Although the sale of Vauxhall meant job loss for thousands of people, the top managers had to settle on selling the firm to save the shareholders from incurring further losses. As a result, when is at the verge of collapse, managers can focus on shareholders needs while ignoring those of the stakeholders. References Doole, I., & Lowe, R.(2012). CIM coursework 08/09 strategic marketing decisions. UK: Routledge. Downey, C.(2017). Fears over UK jobs as General Motors mulls sale of Vauxhall to Peugeot owner. SKYNEWS. Retrieved from http://news.sky.com/story/fears-over-uk-jobs-as- general-motors-mulls-sale-of-vauxhall-to-peugeot-owner-10768029. Liel, B.(2016). Creating shared value as future factor of competition: Analysis and empirical evidence. UK: Springer. Narayanan, M.P & Nanda, V.K.(2004). Finance for strategic decision-making: What non- financial managers need to know. UK: John Wiley & Sons. Walker, C.S., & Hall, T.(2017). Why General Motors lost billions in Europe. BloombergPursuits, Retrieved from https://www.bloomberg.com/news/features/2017-03-06/gm-sale-of-opel-vauxhall-to- peugeot-ends-years-of-losses. Read More