Shareholding Versus Stakeholding: a critical review of corporate governance

• Date: 01 July 2004
• Author: Steve Letza,James Kirkbride,Xiuping Sun
• Published date: 01 July 2004
• DOI: http://doi.org/10.1111/j.1467-8683.2004.00367.x

242 CORPORATE GOVERNANCE

Introduction

Much of the current debate on corporate

governance has centred on practical

issues, including corporate fraud, the abuse of

managerial power and social irresponsibil-

ity. In essence, the debate is about how to

solve these perceived problems in corporate

practice. For many commentators corporate

governance is about building effective

mechanisms and measures, either in order to

satisfy current social expectations or to satisfy

the narrower expectations of shareholders. In

the UK, several inf‌luential proposals have

been produced in recent years in an attempt

to settle the practical issues (Cadbury Com-

mittee, 1992; Greenbury Committee, 1995;

Hampel Committee, 1998; Turnbull Commit-

tee, 1999; Higgs 2003). In conjunction with the

practical debate sits a debate on the theoreti-

cal framework and the quest for the optimal

or superior theoretical model of corporate

governance. The debate has touched many

deep-seated, fundamental questions, for

example what is the purpose of the corpora-

tion? In whose interest is the corporation is

run? Who should control the corporation?

How should they control it? In general, cor-

porate governance is about the understanding

and institutional arrangements for relation-

ships among various economic actors and cor-

porate participants who may have direct or

indirect interests in a corporation, such as

shareholders, directors/managers, employees,

creditors, suppliers, customers, local commu-

nities, government, and the general public (see

Figure 1). Different perspectives in theory

result in different diagnoses of and solutions

to the problems of corporate governance

practice.

Some current perspectives on corporate

governance have been categorised into two

contrasting paradigms: shareholding and stake-

holding (see, for example, O’Sullivan, 2000;

© Blackwell Publishing Ltd 2004. 9600 Garsington Road, Oxford,

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Volume 12 Number 3 July 2004

Shareholding Versus Stakeholding:

a critical review of corporate

governance

Steve Letza*, Xiuping Sun and James Kirkbride

The current debate and theorising on corporate governance has been polarised between a

shareholder perspective and a stakeholder perspective. While advocates and supporters of

each camp attempt to justify the superiority, rationality and universality of each model in

theory, they rarely pay attention to the age-old conceptions, assumptions and presuppositions

underpinning their perspectives which are less credible and valid in matching the continu-

ally changing practice of corporate governance. This paper serves as a survey and critical

review of major current theories on corporate governance. In so doing, it reveals the inade-

quacy of conventional approaches employed in corporate governance theorising. It calls for a

new mode of thinking in analysing corporate governance and concludes by outlining a new

direction of research in this f‌ield.

Keywords: Shareholding, stakeholding, corporate governance, modes of thought, dichotomy,

critical review

*Address for correspondence:

The Centre for Director

Education, Leeds Metropoli-

tan University, Bronte Hall,

Beckett Park, Leeds LS6

3QS. E-mail: srletza@lmu.ac.uk

SHAREHOLDING VERSUS STAKEHOLDING 243

Kakabadse and Kakabadse, 2001; Friedman

and Miles, 2002). Such a division hinges on

the purpose of the corporation and its asso-

ciated structure of governance arrangements

understood and justif‌ied in theory. On the one

side is the traditional shareholding perspec-

tive, which regards the corporation as a legal

instrument for shareholders to maximise their

own interests – investment returns. A three-

tier hierarchal governance structure, i.e. the

shareholder general meeting, the board of

directors and executive managers, is given in

company law in an attempt to secure share-

holders’ interest (it is often called the mecha-

nism of “checks and balances”). On the other

side is the stakeholding perspective newly

emerged in the later 20th century, which posi-

tions itself on the contrary to the traditional

wisdom and views the corporation as a locus

in relation to wider external stakeholders’

interests rather than merely shareholders’

wealth. Employees, creditors, suppliers, cus-

tomers and the local community are major

stakeholders often mentioned and empha-

sised within a broad def‌inition of stake-

holding (e.g. Freeman, 1984). Stakeholders’

participation in corporate decision-makings,

long-term contractual associations between

the f‌irm and stakeholders, trust relationships

and business ethics are the main proposals for

stakeholding management.

Current analyses on corporate governance

draw more attention to evaluating and

judging the superiority of either the share-

holder model or stakeholder model and often

take part in one-sided arguments, sometimes

with a slight modif‌ication such as an enlight-

ened shareholder model (see Gamble and

Kelly, 2001) and an enlightened stakeholder

model (Jensen, 2001). The analyses seldom

step outside the narrow conf‌ines of their

respective interests to investigate the theoreti-

cal genealogy, ideology, presuppositions and

value systems behind and underpinning the

perspectives or paradigms. This conventional

approach constrains their views and raises

serious questions as to the theoretical validity

and credibility of these models. To understand

the current f‌ierce debate on corporate gover-

nance, it is important to stand back from the

one-sided arguments with their taken-for-

granted ideas. Ref‌lexive thinking is needed

through critical examination of the major the-

orems, assumptions and origins of both per-

spectives. This paper serves as a survey and

critical review of both the shareholder and

stakeholder perspectives on corporate gover-

nance. A major f‌inding in this paper is that

although the current prevailing analyses may

have some merits and insights at a particular

point in time, they are, however, over-

abstracted and over-static in modelling and

theorising corporate governance. They build

their “rational” arguments and “ideal” models

on traditional assumptions and theories that

were generated and/or constructed in cen-

turies-old societal contexts, far removed from

the current modern business environment

where, for example, the boundary of the f‌irm

has become blurred in terms of global markets

and where physical assets are far less impor-

tant than human resources, knowledge and

information. They ignore the continuous

change of natural and social realities and dis-

tance themselves from the dynamics of corpo-

rate governance in practice. The economic

approach mostly employed in their analyses

tends to be culture-free, historically separated

and contextually unrelated. We note that very

recent studies have seriously questioned the

traditional theory of the f‌irm and called for a

new direction in building a new theory of the

f‌irm that ref‌lects the modern day business

environment (e.g., Zingales, 2000; Rajan and

Zingales, 2000). Other studies in law, sociol-

ogy, politics and culture in relation to corpo-

rate power and control may also offer some

insights into rethinking corporate governance

and overcome part of the shortcomings of

current models. It is the conventional modes

of thought and associated approaches such as

dualism/dichotomy, idealism/perfectionism,

universality and permanency that endorse

and justify the polarised shareholding and

stakeholding models.

This paper is structured as follows. In the

next section current major theoretical models

in corporate governance are summarised

based on the mainstream typology. These

models are presented as examples to indicate

© Blackwell Publishing Ltd 2004 Volume 12 Number 3 July 2004

Government

Shareholders

Creditors

Directors

Managers

Suppliers

Customers

Community

Employees

General Public

Figure 1: Relationships in corporate governance