The paper “ Stakeholders Interests in Strategic Decisions” is an impressive variant of the case study on management. The stakeholder theory surfaced as a contribution to an improved comprehension of organizational management by 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 organizational 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 on whether firms should focus on increasing their shareholder's 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 StakeholderIn every organization, 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 a 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 business is disastrous for society. With respect to the shareholder theory, the purpose of a firm is to maximize 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 the 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 maximizing financial returns and meeting the needs of shareholders. When Should Firms Focus on Shareholder ValueThere 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 made 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 gets sufficient earnings for the 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) assert that shareholders 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, maximizing shareholder wealth is established in financial and economic theory and management practices. With respect to the shareholder perspective of a firm, firms should internalize 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 contract nexus with the objectives being getting contracts that have a 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 on the verge of collapsing. A case in point is General Motors. General Motors Europe Strategic DecisionsGeneral 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, General Motors Europe planned to sell Vauxhall to Peugeot owner. It is important to note that this decision holds 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 thousand employees in its retail network.
The PSA group become the novel owner of the Vauxhall brands following a takeover of General Motors in the 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 maximize profits and provide good returns for its shareholders.
Maximizing profits is a major aspect that defines corporate success. Although modern businesses should be managed in a way that benefits not just the shareholders, a wide range of elements that includes the stakeholders, when a firm is struggling or on the 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 into their pockets or taking loans to cater to the firm’ s operations. This also implies that the shareholders were getting nothing in return for their capital investments. Given that shareholders are the residual claimants of a firm’ s assets, it is only fair that their value is maximized while other stakeholders’ values are optimized.
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 are 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 sell 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 in those of the stakeholders. ConclusionThe 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 on the verge of collapse, managers can focus on shareholders' needs while ignoring those of the stakeholders.
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.