Sunday, April 25, 2010

Random Thoughts: Shareholders' Value vs. Stakeholders' Value

(By Mr. Ho KwonPing)

N.B. The following text is extracted and reproduced from the Executive Chairman's Statement in Banyan Tree Holdings Limited Sustainability Report 2009. The full Report may be downloaded at the following site:

Because of Banyan Tree’s reputation for Sustainability and Corporate Social Responsibility (CSR), I am often asked if spending money on such things comes at the expense of the shareholders, whose interests should always come first. This line of thinking says that while CSR is a laudable goal, it should not come at the expense of “maximising shareholder value”.

I have always responded that in fact, this mantra of “maximising shareholder value” is the very source for the downfall of American-style capitalism, as we have seen with the virtual collapse of the global financial system starting in late 2007.

And, not until we can redefine capitalism in a very fundamental way, can we restore business – and business leaders – to respectable status in society. Once we redefine what capitalism is about, we will see that far from being an external, “nice to have” feature, CSR is in fact a vital component of a sustainable business. The kind of capitalism practiced on Wall Street (Anglo-American Capitalism) has as its sole objective, the maximising of profits for the owners of capital, the shareholders. Management is incentivised to make as much profit as possible for shareholders, in the shortest time possible. This “short-termism” is basically what led to the debacles on Wall Street: working only to maximise profits for a short period, CEO’s got their bonuses and then got out; investors were happy to put money into private equity funds who did nothing but buy companies, load them with unsustainable debt which generated rapid short term growth, but eventually collapse. We have seen what happens with “maximising shareholder value”.

The concept of stakeholder vs shareholder is vital here. Stakeholders may not own shares in a company, but they have a vital stake in the welfare of the company. Stakeholders include employees, suppliers, and customers, and the community within which the company does its business.

If the community is a vital stakeholder in the company, then obviously CSR is the way to generate value for this group of stakeholders. The vital follow up question then is: by focusing on maximising stakeholder value, must a company inevitably accept lower profits? In other words, are stakeholder value and shareholder value contradictory?

My answer is a clear NO. If you look only for the short term, there is no doubt that maximising shareholder value and stakeholder value are contradictory. But, if you want an enterprise to be sustainable, you can only generate long term profits if you enhance the value of the company for all stakeholders.

For Banyan Tree be sustainably successful, we must create long term value for all stakeholders. At a time when business is so morally bankrupt, CSR is in fact NOT a drain on profits, but probably one of the only ways a company can regain its soul and recreate a sustainable model.

Yours Sincerely,

Ho KwonPing
Executive Chairman

N.B. Although this post seems more grounded in issues surrounding secular events (and, most certainly, a deviation from topics which i normally like to discuss), but I think there is a strong underlying spiritual theme beneath the business talks nonetheless.

There are only just that few entities which I am aware of that embrace social responsibility as part of its corporate governance, let alone publishing annual reports on its work on sustainable development and corporate social responsibility. As the Executive Chairman of Banyan Tree Holdings Limited ("Banyan Tree"), Mr. Ho (with his core management team) has led Banyan Tree from inception as a socially responsible business, which was in turn founded with the core value of driving sustainable development.

Banyan Tree's mission statement is:

"With the call to arms of embracing the environment and empowering the people, we seek to continue being an agent of social and economic development through responsible tourism. Our triple bottom line (economy, society and environment) help direct our sustainable development by inspiring associates, guests, and partners to take a wider consideration encompassing a long term view when making business decisions."

The Executive Chairman's Statement in Banyan Tree Sustainability Report 2009 serves as a timely reminder on what is really most important to us all as fellow members of the human community, of the present and of the future to come. I sincerely hope that we can one day all live up to the ideals which are propounded in this statement by Mr. Ho.

To Mr. Ho:
I subscribe wholly to what you have said. To entities which embrace profit maximisation strategies under the prevailing definition of capitalism, your ideals are surely considered to be unreasonable. But George Bernard Shaw said before, and I quote: "Reasonable people adapt themselves to the world. Unreasonable people attempt to adapt the world to themselves. All progress, therefore, depends on unreasonable people.". And it is my sincere hope that you will persist in being unreasonable, so that our future generations will also have the opportunity to experience Mother Nature as we have today. But most importantly, I hope that they will also know (through your ideals) and embrace the essence of equity when dealing with Mother Nature and their fellow human beings.