Directors, Shareholders and Rewards

Stakeholder theory is widely discussed and applied concept within business ethics as well as the practice of corporate strategic management and public policy. The core principle of shareholder theory suggests that rival considerations in terms of stakeholder relationships are integral elements of operating a business (Moore, 1999). It is argued that trust and cooperation are the most important elements in managing stakeholder relationships. Shareholder theory instead places a legal and implied contracting form in managing the fiduciary duty of directors and the interests of shareholders as central. Stakeholder theory addresses the social role of corporate entities outside of the framework of purely legal contractual relationships (Moore, 1999). This is to say stakeholder theory suggests that the multi fiduciary duties of directors should focus not only on the creation of wealth but also on benefits in terms of social relationships and quality of life.

In applying these principles then higher overall social returns can be achieved through better corporate performance. However neither of the two theories are universally convincing due in part to the complexity of free market environments and business behaviours. While shareholder theory is claimed to be normatively fallacious practical business examples does not seen to demonstrate the efficacy of stakeholder theory either. One point of contention is thus that it is useful to focus on the similarities between the two theories where the development of tinged shareholder theory is concern more with moral duty, virtue and benefiting communities due to corporate activities (Moore, 1999). By exploiting an instrumental approach tinged shareholder theory allows directors with fiduciary duties to balance interests among different groups including shareholders and non-shareholders such as employees, customers and perhaps also competitors.

Hence each theory offers useful elements in examining best practice in corporate governance in portraying the importance of being aware of social roles and responsibilities related to corporations generally and particularly public companies. More importantly the broad generalities of social environments will affect the adoption of theoretical principles to a degree. Examples of this can be seen in the rise of Japanese and South Korean companies during the 1980s following growing national economic performance. The close relationship between members of society and social groups and strong sense of nationality feeding into business activities means therefore there is a strong moral awareness of the social responsibilities of corporations and their relationships with the general public and nations (Flath, 2000) . In this context stakeholder theory is perhaps superior to other theoretical outlooks due to the specific contingencies of social backgrounds and historical influences. This is not to say though that stakeholder theory is always applicable or correct as utility will of course vary within different social environments and contexts of corporate activities.

2. Task Two

The collapse of Maxwell is argued to have been as a result of the lack of proper corporate governance systems which created and were as a result of critical flaws in relationships between directors, shareholders, auditors as well as customers, suppliers and wider society. Maxwell Communication Group as a public company not only accrued large debts but it was believed that over £725 million was stolen from pension funds (Carmichael-Jones, 2005). The control of the company was highly concentrated in one person Robert Maxwell and other non-executive directors failed to govern corporate performance effectively. Additionally due to the inefficient review and investigation conducted by auditors and pension fund regulators the ensuing financial scandal was unsurprising. By law, managers especially CEOs are supposed to be accountable to all the owners including executive and non-executive directors and can be removed by an elected board of directors if they fail to perform effectively for the benefit of the shareholders.

However in the Maxwell case this was not so and the corporate governance system was poorly defined. Last but not least it is vital to mention the failure of government and regulators in supervising and its controlling role in the financial market with the effect being that investor’s confidence was reduced after the scandal. It is also suggested that under the Combined Code in the UK there should be both an internal and external audit function in companies. However audit functions in Maxwell were weak. According to Berle and Means (1932) there is an increasing gap between ownership and the power of managerial professionals yet it seems to be less visible in this case because of the role of Robert Maxwell as the only controller in terms of shareholder responsibility and public accountability.

Berle and Means (1932) argue that there is a distinction between management and ownership where the nexus of contracts allow owners to control the business operation of the company. They move on to suggest that the performance of professional mangers should be evaluated by the board of directors if they fail to perform effectively. In the case of Maxwell the chairman of board and CEO was the same person which meant inefficient nomination processes contributed to a large extent to Maxwell’s failure.

3. Task Three

The former state owned company began a period of privatisation in 1992 and by 2002 stakeholders of Railtrack included a wide range of public shareholders with the board of directors being appointed by the Labour government (James et al, 2005). Under this fragmented system of control and ownership there is a range of interest groups including shareholders who are involved in about 100 individual sub-businesses, the British government including the Conservative government at earlier stages as well as the subsequent Labour government along with public shareholders. Obviously shareholders within each business unit focused on their own stakeholder value which led to short-term strategies of value accumulation being pursued. Managers in individual businesses generally sought to maximize shareholder value by improving short term profits while scarifying quality of customer service in order to reduce costs.

Likewise it is fair to state that the role of government involved in the operation of Railtrack is associated with political economic interests in that rather than pure financial shareholder value there was significant attention paid to community safety and transportation in supporting the government manifestos and public policy commitments. In contrast to the other interest groups the wide range of public shareholders raised the needs for effective rail operations in terms of cost effectiveness and safety. However due to competing interests between shareholders within sub-business units there was a lack of cooperation and co-ordination in seeking to make profits and generating short term benefits in order to maximize shareholder value (James, 2005). In so doing the value of public shareholders was damaged seeing the value of stocks in Railtrack falling well below their original list value.

It is undoubted that a primary goal of directors is to maximise shareholder’s value by generating profits and return on investment. However in the case of Railtrack due to the highly fragmentised ownership system there was no cooperation present which meant different interest groups focused on individual shareholder value and short term profit generating, cutting costs and reduced quality in customer service as well as limited capital investment. As a result longer term growth of shareholder value was restricted with other interest groups failing to achieve long term value such as the government and the public. As such it is necessary for companies to invest more in order to maintain long term organisational growth. Within this increasing shareholders’ wealth might be limited in the short term but from a strategic view long term shareholder value can be improved. In addition cooperation is vital in improving efficiency of the whole rail system rather than internal competition as was/is the case with Railtrack.

4. Task Four

The UK Combined Code suggests that the roles of chairpersons and CEOs be separate and it is unsurprising to find a non-executive chairperson who is responsible for managing the board and an executive chairperson focusing on managing the business in Marconi (Keenan, 2004). A nomination committee was set up in order to evaluate the performance of the board yet it is clear that the non-executive chairman of Marconi had vetted other non-executives via a well organised and rigorous nomination process. The major duties of the non-executive board in Marconi include ensuring credible recommendations on corporate strategies, identifying and controlling the nominating committee in such a way as allowing appropriate strategies to be implemented and delivering business communications to other non-executive directors through meetings with the CEO.

In the case of Marconi it is reasonable to argue that they have good corporate governance systems yet poor strategic management at the business level. For example its strategy of selling proven businesses and acquiring businesses which are not yet leaders in the fields had disastrous results in terms of shareholder returns as well as corporate growth (Keenan, 2004). The capabilities and skills in managing poor acquisitions for non-executive directors and the executive team were widely questioned thus decisions made by non-executive directors did not correspond well to corporate strategies. The goal of a Nomination Committee is to evaluate alternative corporate strategies and quality of CEO performance in order to ensure shareholder returns meaning it is necessary for non-executives to take part in scheduled sessions including measurement of the annual strategic plan and previous records. However in Marconi the non-executive chairperson and directors seem to have had no time to fulfil this role when the company planned radical strategic changes. Considering the 1999 Stock Option Plan and the Long Term Incentive Plan the executive team attempted to maximize the shareholder value by taking Marconi public while the long term plan sought to improve corporate performance not only in the sense of financial results but also through organisational growth.

5. Task Five

French Connection Group Plc is a major fashion retailer based in the UK with a turnover of £267.9 million with total assets of £165.4 million in the 2003/2004 accounting period. There was however a decrease down to turnover of £265.7 million in the 2004/2005 accounting period. It is quoted on the London Stock Exchange and operates under the UK Combined Code (FAME, 2006). Its corporate report shows that profit before tax increased over the last five years with there being a slight decrease in 2004/2005 compared to £38.1m in 2003/2004. It is worthwhile mentioning that net tangible assets increased from £75.7m in 2001/02 to £107.4m 2006. While the gearing ratio reduced dramatically due to good performance and improved ratio of shareholders funds in relation to debt capital can be seen as a result of an increase in shareholder funds to £118.6m but return on Shareholder funds decreased by about 10% over the past five years. By the end of the 2004/2005 period French Connection fell into a low gearing group which is suggested to be more stable than companies in the higher groups. Profit margin was sustained at above 12% and reached 14.22% in the 2003/2004 accounting period (FAME, 2006).

While general performance is favourable financial results have declined slightly in performance in the most recent accounting period. It is useful to examine the company’s structure to identify possible problematic areas. The company only has one non-executive director yet the Code suggests 50% of the board should be non-executive directors. Additionally the chairman of the board and the CEO is the same person which goes against the recommendations of the Combined Code. Although the executive team performed successfully and to some extent maximized value for shareholders due to the lack of an audit committee, remuneration committee and nomination committee the company occupies a risky position for the long term. Because the company does not have an internal audit function they relied on external auditors which may result in the provision of favoured results for the company’s performance during the auditing process. In respect of French Connection Goup’s success it is unnecessary to say poor corporate governance may result in bad business performance and profit generation as well as shareholder returns however its stock market valuation reflected the performance of the company which means also that there is higher risk for the company from potential financial errors and scandals than organisations that have internal audit functions.


  • Berle, A.A. and Means, G.C. (1932) The Modern Corporation and Private Property, New York USA, Brace & World.
  • Carmichael-Jones, C. (2005) Corporate Governance, Oxfordshire UK, Vogon International Ltd.
  • FAME (2006) FAME Database, available from: <>
  • Flath, H. (2000) The Japanese Economy, Oxford University Press, Oxford.
  • James, A. et al (2005) ‘An Analysis of Railtrack, UK through Time and Space’, Corporate Ownership and Control, Vol. 2 Issue 2.
  • Keenan, J (2004) Corporate Governance in UK/USA Boardrooms, Corporate Governance: An International Review, Apr2004, Vol. 12 Issue 2.
  • Moore, G. (1999) Tinged Shareholder Theory: or What’s So Special for Stakeholders, Business Ethics: a European Review, Vol. 8 No. 2.

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