To protect the interests of other stakeholders 30

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To protect the interests of other stakeholders, 30 states in the United States enacted stakeholder statutes that allowed directors to consider the interests of nonshareholder constituencies in corporate decisions. Thus, the law gave boards latitude in determining what is in the best long-term interests of the corporation and how to take the interests of other stakeholders into account. Nevertheless, the mainstream US corporate law remains committed to the principle of shareholder wealth maximization. Governance Without a Shared Purpose? The lack of a clear, shared consensus about why a company exists, to whom directors are accountable, and what criteria they should use to make decisions in the law as well as in society at large is a significant obstacle to increasing the effectiveness of the corporate governance function. When boards operate with tacit assumptions about their objectives and loyalties, they may hide potential disagreements among their members and sacrifice effectiveness. Such hidden disagreements make it difficult to get consensus on complex issues, such as what qualifications a CEO should have, whether or not to outsource parts of the value chain, or how to evaluate and compensate top management. Lorsch (1989) first identified the confusion among directors about their accountabilities. Based on their beliefs, he categorized directors as belonging to one of three groups: traditionalists, rationalizers, or broad constructionists. Each has a different vision of what the modern corporation's fundamental purpose is and, therefore, to whom and for what a board should be held accountable. Traditionalists see themselves as accountable to shareholders only. For them, there is no need to debate the fundamental purpose of the modern corporation it is and always has been the maximization of shareholder value. They do not believe there is a conflict between putting the shareholder first and responding to the needs of other constituencies, and therefore experience little role ambiguity or conflict. Members of this group find support for their position in a narrow interpretation of current state and federal law. They also tend to view the highly publicized abuses at Enron, WorldCom, Vivendi, and other companies as anomalies made possible by imperfections in the current system, rather than as indicators of more systemic problems. A second, larger group the rationalizers experiences more anxiety about their role as directors. They recognize that, in today's complex, global economy, real tensions can occur between the interests of different constituencies and that not all decisions can be reduced to the simple formula that assumes what is good for the shareholder is good for everyone else. Examples include whether or not to close a domestic plant in favor of manufacturing in a low-cost, foreign location; whether or not to outsource production to lower cost suppliers; or how to respond to pressures for greener operations.

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