Sound corporate governance practices are essential for efficient, viable and sustainable growth of companies and institutions, including governments. An interesting definition of corporate governance is that which defines it as “a system of law and sound approaches by which corporations are directed and controlled, focusing on the internal and external corporate structures with the intention of monitoring the actions of Management and Directors and thereby mitigating agency risks which may stem from the misdeeds of these corporate officers”. (Sifuna, Anazett (2012).
In contemporary business corporations and as affirmed by Sarbanes-Oxley Act of 2002 and the Cadbury Report of 1992, there are two main stakeholders to be considered: external and internal stakeholders. While e x t e r n a l s t a k e h o l d e r s c o m p r i s e o f shareholders, debt holders, trade creditors, suppliers, customers and communities affected by the corporation’s activities; internal stakeholders comprise Board of Directors, Executive Management, and other employees. Each group has different interests and objectives which may result in conflicts of interests, a typical one stemming from the agency theory. The essence of corporate governance is the ability of the D i r e c t o r s t o m a n a g e t h e d i v e r s e expectations and interests of the various stakeholders and particularly to ensure that Managers as agents act in the best interest of the owners.
Stakeholder Theories of Corporate Governance
There are three stakeholder theories of Corporate Governance namely – the strong form theory, the minimalist model, and the pragmatic view. The strong form theory canvasses that Management is answeranle to all stakeholders and should try to satisfy them. The minimalist model postulates that Management is legally answerable only to the shareholders as owners and may consider other stakeholders. The pragmatic view holds that Management is not answerable to all stakeholder groups but should take account of them in the interest of commercial practicality.
There has been a shift from the traditional shareholder value-centered view of corporate governance in favour of a structure that seeks to protect the interest of a wider circle of stakeholders i.e. the strong form theory.
Stakeholder Management
Successful companies consider all stakeholders’ interests relative to the type of influence and threat they possess. The primary step in stakeholders’ management is identification. Stakeholders do not have the same influence and are not affected in the same manner and thus should be identified and managed according to the impact, opportunity and threat they pose to corporate returns, reputation and sustainability. It is useful to identify those directly impacted and those indirectly affected to enable the Board of Directors define strategies to deal with each group.
Communication is key in dealing effectively with stakeholders. The goal of stakeholder communications and engagement is to manage expectations and minimize surprises. Red flags to be mindful of in stakeholder management include missed deadlines (regulator), strikes (employees), legal actions (customers, suppliers), bad press etc.
Finally, while it is vital to manage a company efficiently to maximize returns for the shareholders, it is important to ensure that the company is appropriately directed such that the divergent interests of other indispensable stakeholders are balanced by the Board and Management.