The importance of stake holders over shareholders
Shareholders are one group that belongs to the stakeholders of a company. Shareholders are one of the most important elements of the ‘set of stake holder’ which comprises of the persons and entity having direct or indirect interest in the activities of a company as well as a direct or indirect influence in the functioning of the company. Before discussing the importance of stakeholders over the shareholders from the accounting view point, let us take a brief look at the different types of stake holders and there interest in the company as well as their power to influence the affairs of the company.
Banks & Other lenders: The interest of this group is the interest earned from the advance made to corporate entities in the form of term loan as well as working capital loan. They can influence the capital structure of the company as well as the working capital condition of the company significantly.
Directors & Managers: The main interest of this group is salary, stock options, the status of the position as well as the power to influence the strategy of the company. The group has a significant influence on deciding the strategic direction of the company in every functions of the company.
Employees: The group has the interest in their salary standard, as well as other employee benefits that are offered by the company. The employees being the main elements, to implement the strategic decisions of the company at every functional department, wield a significant influence on the performance as well as existence of the company. The more the efficient this group is, the better will be the performance of the value adding activities of the company at every front of the business.
Suppliers: Suppliers are interested in making profit by supplying materials and are also interested in enjoying sustainable long term relationship with the company. They can influence the working capital requirement of the company and is an important one to provide short term source of capital. They can also influence the production schedule of the company.
Customers: The quality of the product, value to their money, after sales service and the availability of the products and services are what the customers want from the company. Customers are said to be the king of the company and the main source of revenue.
Shareholders are said to be the owner of the company and have the voting rights in the Annual General Meeting of the company. They are entitled to appoint the Directors as well as the auditors of the company. They are the owners of the residual profit of the company. Interest of the shareholders is dividend and increment in the market price of the shares held by them. In fact it is said that the aim of the financial management is to increase the wealth of the shareholders. The return to the risk taken by the shareholders, in contributing the share capital to the company, is dependent on the dividend plus the capital gain they made on the basis of the market price of the shares.
From the accounting point of view, shareholders are very important as they are the promoters of the company and they are the main source of capital to the company. From the view point of shareholders, the economic profit, dividend as well as return to the investment made by the shareholders are regarded as the most important target for a company. If the EPS and the dividend of the company is not stable and if the company fails to generate sufficient economic profit over the years, the confidence of the shareholders as well as the price of the shares are affected adversely, which makes it difficult for the company to raise further capital from the market to finance its further investment projects thereby casting a negative impact on the growth prospect of the company.
However, even if a company sets the mission of maximising the wealth of the shareholders, then also the interest and the influence of the other stakeholders are very important.
If the suppliers are not paid in due time then, they will deny supplying the vital raw materials or input services to the company, thereby adversely affecting the production process. The halted production process will affect the availability of the products and the services offered by the company to the customers and consequently will affect the brand equity and market growth of the company adversely. The increase in the cost of the supplies and the decrease in the credit period offered by them will directly affect the cost of production as well as working capital requirement negatively.
The bankers and other lenders are the provider of borrowed capital structure and if the company uses the borrowed capital judiciously it can increase the EPS (by trading on equity) and consequently the wealth of the shareholders. In this era, no big corporation is there, which does not have borrowed capital in its capital structure. But if the company fails to honour the interest and the loan repayment commitment to the lenders, then the source of borrowed capital will gradually dry up thereby threatening the growth prospect of the company and ultimately declining the share price in the market. Moreover, the cost of the borrowed capital will also increase owing to the failure to honour the commitments of repayment and interest payment in due time.
It is said that a corporation is as good as its employees. The efficiency of the employees has a direct bearing on every possible business affairs of the company, as well as on its reputation to the outside world. The efficiency of the employees can reduce the cost of the production significantly thereby boosting the profit of the organisation. Most of the overhead costs are directly related to the efficiency of the employees. The more the efficiency, the less is the overhead cost for a company. The efficiency of the marketing team is one big factor, besides the quality of the product or service of the company, to increase the market size, revenue and the brand equity of the company.
Customers are said to be the king in a capitalist economy and for today’s business world this is true for most of the organisation. If the expectations of the customers are not fulfilled then it will have a direct effect on two aspects of the company viz. the reputation of the company and the sales revenue of the company. The cost of sales increases significantly if the customers are not satisfied with the quality and after sales service of the company.
Government and other statutory authorities are also very important stakeholders to influence the performance of the company as well as the market price of the shares of the company. The corporate taxes are always a headache of any company as it reduces the disposable profit in the hands of the company significantly. Various legal and statutory requirements also have direct bearing on the overall cost structure of the company. However, if the company does not conform to various statutory regulations and requirements, then the failure may even force the company into liquidation or at least will raise the cost of operating the company significantly in the form of penalties.
The last one is the overall community and environment within which the company operates. These two stakeholders may not be directly related to the company from the accounting point of view, but they influence the economic performance of the company indirectly and in a significant manner. Company is, now a day, regarded as a social entity. Like every social elements it has responsibilities to the society within which it operates. In many countries like India it has been made mandatory for the companies to spend a definite percentage (for example in India it is 2 percent of the average of the net profits made by the company in the last three years) to fulfil its corporate social responsibilities subject to some conditions. The government in every country has now made it mandatory for the companies to stick to the pollution control norms, as suggested by the government, strictly. In fact if a company fails to conform to those regulations, then the operation of the company is suspended by the government and may even force the company to close the operation which is detrimental to the environment. Satisfying legal requirements of the pollution control departments require the company to bear significant cost which increases the cost of operation for the company.
Few decades ago, it was believed that economic profit and wealth of the shareholders are the most important objectives of the company and naturally the company was meant to increase the accounting profitability even at the cost of the society. But gradually the concept of the business world has changed and the importance of the other stakeholders and the interests of them have become important because over the years it has been proved, through various corporate frauds and disasters, that shareholders are nothing but a part of the stakeholders of the company. In fact even from the accounting point of view, it is the other stakeholders, that basically affect the accounting transaction of the companies mostly and if the interest of the other stakeholders are addressed properly, then only the accounting interest of the shareholder could be addressed properly.