Chapter 1 Stakeholding and Corporate Governance : Theory and Evidence on Economic Performance

Szwajkowski (2000) suggests that the debate on stakeholder versus shareholder orientation could potentially be entirely defused. He interprets an empirical study that demonstrates strong parallels between stakeholder valuation of firms (measured as overall reputation) and shareholder valuation (stock market returns). High quality companies are less vulnerable to market downturns, as they exhibit a generally low systematic risk during recession, and exhibit higher volatility within the safety of an expanding market. This is not the case for lowest rated companies. Szwajkowski couples this evidence with a conceptual analysis showing that the most famous pronouncements of Adam Smith and Milton Friedman actually argue for, not against, the stakeholder approach. He interprets Smith’s invisible hand to mean that society has an inherent, self-sustaining, process for controlling companies that act solely out of self-interest when such a position is at odds with stakeholder welfare. He argues that Friedman himself qualified the imperative that business should maximise shareholder wealth with the caveat “while conforming to the basic rules of society, both those embodied in the law and those embodied in ethical custom.” This takes management obligations into the dynamic arena of societal demands and moral sentiment.