The Stakeholder Model of Corporate Governance

A model of corporate governance refers to how companies define the purpose of companies in society. The shareholder theory of corporate governance has held over time, but thoughts about this model are beginning to evolve. In some arenas, corporate leaders favor a stakeholder theory of corporate governance. There are differences in how men and women view the stakeholder theory of corporate governance. Board directors and executives also have some differences in how they view the stakeholder theory.

Stakeholder Model of Corporate Governance

The stakeholder theory of corporate governance focuses on the effect of corporate activity on all stakeholders of the corporation, as opposed to focusing on the corporate effect on the shareholders. With the stakeholder theory, there is the expectation that corporations will make efforts to mitigate or reduce conflicts between stakeholders. The theory also incorporates the interests of any third parties that have some level of dependence on the corporation.

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Stakeholders that fall under this theory may be internal stakeholders, such as corporate directors, managers and employees. They may also be external stakeholders like creditors, vendors, auditors, customers, the community and government agencies. While stakeholders are not directly involved in the process, stakeholders have influence over how the company operates. All stakeholders engage with the corporation on some level with an understanding that the corporation will deliver on some level, whether that is a paycheck, dividends, a bonus, additional orders, tax revenue or a job.

Board Directors' View of the Stakeholder Theory of Corporate Governance

Many board directors aren't completely sold on the notion of the stakeholder theory. In August 2019, over 200 chief executives discussed the issue at the Business Roundtable. The discussions produced a shift in how they define the purpose of corporations in society. Executives made a statement that companies shouldn't only advance the interests of the shareholders, but they should consider a broader stakeholder model that includes the interests of the employees, customers, suppliers and the communities in which they work.

Many business leaders from some of the largest corporations in the United States said at the Roundtable that they agreed with the stakeholder model of governance, but board directors were more mixed. Only 58% of board directors felt that companies should consider stakeholders rather than shareholders. Related to the issue of corporations having a social purpose, most board directors agreed with it. They also believe that having a social purpose and company profitability aren't necessarily mutually exclusive. While board directors and executives have somewhat opposing views, males and females aren't so much on the same page either.

Gender Differences in the Stakeholder Theory of Corporate Governance

Women board directors tend to favor the stakeholder model of governance, with 71% on board as compared with only 54% of male directors favoring the stakeholder model.

Men and women in the boardroom differ in their perspectives on how much attention the board should be giving to social issues like environmental and sustainability concerns and corporate social responsibility. About 52% of men think that investors give too much weight to social issues and only 26% of women directors believe that social issues are getting enough attention. If the pressure continues to keep adding women to boards, the impact of this could be that women will encourage boards to dedicate more time on their agendas to social issues.

Other notable statistics showed:

• 56% of men said that shareholders paid too much attention to environmental and sustainability issues, whereas only 29% of women felt the same.
• 94% of women wish that companies would do more to promote gender and racial diversity in the workplace, compared to 81% of males.
• 71% of women said they wanted companies to prioritize a greater group of stakeholders and only 54% of men agreed with that view.
• 62% of women were more likely to value having environmental and sustainability expertise on their boards and only 47% of men concurred with their opinions.
  
  

Women are also more likely to see the financial impact of ESG issues on the company. Females are also more likely to say that ESG-related disclosures should be a priority for management. The results of these polls indicate that these issues are more likely to be taken seriously by management and boards because of the heightened attention given to them by women. The varying perspectives between men and women could mean that boards that have a better balance between men and women may be changing their approach to ESG issues in the boardroom.

Here's a snippet of the gender divide on ESG issues:

• 62% of women said that ESG issues are important to the company's shareholders, compared with only 48% of men.
• 62% of women also said that they felt ESG issues have a financial impact on the company's performance, compared with only 45% of men.
• 46% of women believe that management should disclose a company's efforts on ESG-related issues and only 24% of men felt the same way.

Most companies factor in the role of social issues in developing their corporate strategies, to some extent. Female board directors were more inclined to say that social issues should be considered when developing the corporate strategy. Boards with strong female participation could influence the degree that social movements play into corporate strategies. For example, the 2019 PwC Annual Directors' Survey indicated differences in female and male board directors in the following areas:

• 82% of women directors wanted to prioritize the scarcity of resources, compared with 61% of men.
• 70% of women encouraged their companies to prioritize human rights, compared with 58% of men.
• 68% of women desire to see climate change as part of their corporate strategy, compared with 50% of men.
• 66% of women thought social movements should be incorporated into their overall strategy, and only 38% of men felt the same.
• 57% of women expressed the need for income inequality to be included in the corporate strategy, compared with 38% of men.

It will be interesting to see how the model of corporate governance evolves in the coming years and how it shapes companies and their boards as women begin to become more of a staple in boardrooms and as stakeholders become a more important component in the business world.