Home > Free Essays > Business > Corporate Governance > Stakeholder and Shareholder Capitalism Models
Cite this

Stakeholder and Shareholder Capitalism Models Essay


Abstract

The American model of shareholder capitalism has been prominent around the world in the last four decades. This model suggests catering to the interests of shareholders and ignoring everything else. While being a profitable model of shareholders, it proved to have significant flaws, which were illustrated during the last two economic crises. German stockholder capitalism model presents itself as an alternative that benefits not only shareholders but also employees and the communities around them.

Introduction

Stakeholder and shareholder capitalism models are two very widespread business strategies popular in different areas around the world. Shareholder capitalism is the predominant model in the USA, while stakeholder capitalism is more common in Europe (Germany, France, Sweden, Denmark) and certain countries in Asia, like Japan (Brandt & Konstantinos, 2016). As the titles suggest, each model focuses on the interest of a certain group within the corporation. In the shareholder capitalism model, shareholder interests are the main concern, while in stakeholder model shareholder interest is on equal ground with concerns and interests of other stakeholders, such as the community, the employees, the suppliers, etc.

Although shareholder capitalism model received a great boost in popularity due to the USA’s victory over communism in the 1980s, and increasing economic output and prosperity, those days are long gone (Pearlstein, 2014). Nowadays, the effectiveness and even morality of the approach is put under question after two spectacular financial crises and numerous scandals revolving around outrageous wages of top-tier company managers, while the rest remain in decline. In this paper, we will outline the functioning and staple traits of both systems, and explore the relationship between the employees and employers in German stakeholder capitalism and in American Shareholder capitalism.

American Shareholder Capitalism

Shareholder capitalism could be best described by professor Milton Friedman, who stated its founding postulate: “The principal objective of a business enterprise is to generate economic returns to its owners. If the CEO and the directors are not focused on shareholder value, it may be less likely the corporation will realize that value” (Coates, 2014, p. 54). Thus, the model is geared at maximizing profit at any cost. Any considerations towards anyone else be that the employees, the community, or even the country, are not regulated by law in any feasible way.

In the American shareholder capitalism model, the corporations are owned by a small group of shareholders. They have the power to elect CEOs, directors, and other high-ranking officials. Although it is not explicitly stated, the primary duties of these high-ranking corporate officials are to ensure that the shareholders receive their profits through any means necessary. Otherwise, they would lose their jobs. All modern American corporate governance is based on the concept of shareholder primacy.

Most American corporations have a one-tier governance structure. This means that the directorial board has complete control over the company’s function, its financial strategy, and the general direction of development. The US Federal Law does not prescribe any obligations of corporate social responsibility, leaving that to the discretion of the company (Brandt & Konstantinos, 2016).

Relationships with banks are also regulated by a dedicated chapter in the US commercial law. According to it, no bank has the authority to directly interfere with corporate governance, no matter how much said corporation owes to the bank. Thus, how the corporation spends money received from loans is totally up to the directorial board (Brandt & Konstantinos, 2016).

In the USA, the shareholder model has discredited itself through numerous scandals associated with the Wall Street Managers. One of the more recent cases happened at Goldman Sachs and Wells Fargo & Co., which caused a public backlash and demand to hold the top managers accountable (Meyerson, 2014). Some other accusations towards the shareholder capitalism model include moving production to third world countries, which causes poverty and unemployment to rise, tax evasion, deceiving customers, and leaving communities hanging (Davis, 2010).

German Stakeholder Capitalism

German stakeholder capitalism has deep roots in the history of German and Prussian states. The concept is based on the principles of co-determination, which suggests that the shareholders, the managers, and the employees will all work together in harmony in order to achieve maximum productivity, due to all three groups having something important at stake (Franklin, Carletti, & Marques, 2014). Although the shareholders are still considered to be the most important group of stakeholders, other groups are represented and are capable of influencing corporate governance. In Germany, all stakeholders are legally outlined and protected by law.

The model suggests a two-tier corporate governance structure, with the directorial board having broad discretion over the company’s overall orientation. However, the two-tier structure suggests that all decisions have to go through more rigorous scrutiny, especially when the interests of other stakeholders are directly involved (Franklin et al., 2014).

Naturally, worker co-determination is very extensive in such a model, with representatives of the employees present on almost every level, sometimes on part with members of the directorial board. Lastly, German corporations work very closely with the banks that loan them money, with the banks demanding total transparency and even direct involvement, as far as expenses are concerned (Brandt & Konstantinos, 2016). Opinions on such practices vary, with some stating that an extra layer of responsibility prevents the corporations from following corrupt practices that became the norm in the American system, while other experts are worrying over the banks holding too much sway in corporate decision-making (Coates, 2014).

Employee Advantages and Disadvantages of Each System

If we compare the shareholder capitalism model with stakeholder capitalism, it will be obvious that the latter has more social securities for the employees. Under the German system, employees have their representatives, which are elected every several years, to represent the interests of the employees as a stakeholder class (Brandt & Konstantinos, 2016). Many researchers in socio-economic fields state that the employees are the most vulnerable stakeholders in any company, as they develop firm-specific skills through years of dedication to the company (Coates, 2014). These representatives have the tools to protect the employees from unjust and unmotivated actions initiated by the directorial board, such as wage cuts, employee cuts, etc. In contrast, the American capitalist model does not allow for any employee representatives in the directorial board, thus meaning that workers have no voice on any corporate matters.

In Germany, all stakeholders, including the employees, are protected by a stakeholder-friendly legal framework that regulates their rights and obligations within the context of running a business. In the American legal system, there is no law that explicitly protects the rights of stakeholders other than shareholders. Thus, the rights and interests of employees do not have the same level of protection (Murray, 2013).

Conclusions

Stakeholder capitalism is considered a more socially oriented model of capitalism, as it takes into account not only the direct profits of its shareholders, but also the employees, the suppliers, and the communities in which the corporations are set. Disenchantment with shareholder capitalism around the world and in the USA is growing, which was demonstrated during the last elections. Shareholder capitalism, which started as an attempt to curb the growing mediocrity of managerial capitalism, grew into a system where the needs of the many are overshadowed by the needs of the few. Shareholder capitalism is noted for its focus on short-term perspective, with no long-term goals in mind. As the results of this literature research have shown, the stakeholder model does a much better job of protecting the interests of the employees.

References

Brandt, F., & Konstantinos, G. (2016). Shareholders vs. Stakeholders capitalism. Comparative Corporate Governance and Financial Regulation, paper 10.

Coates, D. (2014). Models of capitalism: Growth and stagnation in the modern era. Malden, MA: Polity Press.

Davis, G.F. (2010). Is shareholder capitalism a defunct model for financial development? Review of Market Integration, 2(3), 317-331. Web.

Franklin, A., Carletti, E., & Marques, R. (2014). Stakeholder governance, competition, and firm value. Review of Finance, 19(3), 1315-1346. Web.

Meyerson, H. (2014). Shareholder capitalism vs. Stakeholder capitalism. The Washington Post. Web.

Murray, M. (2013). NH Labor News. Web.

Pearlstein, S. (2014). The American Prospect. Web.

This essay on Stakeholder and Shareholder Capitalism Models was written and submitted by your fellow student. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly.
Removal Request
If you are the copyright owner of this paper and no longer wish to have your work published on IvyPanda.
Request the removal

Need a custom Essay sample written from scratch by
professional specifically for you?

Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar
Writer online avatar

301 certified writers online

GET WRITING HELP
Cite This paper

Select a referencing style:

Reference

IvyPanda. (2020, November 12). Stakeholder and Shareholder Capitalism Models. Retrieved from https://ivypanda.com/essays/stakeholder-and-shareholder-capitalism-models/

Work Cited

"Stakeholder and Shareholder Capitalism Models." IvyPanda, 12 Nov. 2020, ivypanda.com/essays/stakeholder-and-shareholder-capitalism-models/.

1. IvyPanda. "Stakeholder and Shareholder Capitalism Models." November 12, 2020. https://ivypanda.com/essays/stakeholder-and-shareholder-capitalism-models/.


Bibliography


IvyPanda. "Stakeholder and Shareholder Capitalism Models." November 12, 2020. https://ivypanda.com/essays/stakeholder-and-shareholder-capitalism-models/.

References

IvyPanda. 2020. "Stakeholder and Shareholder Capitalism Models." November 12, 2020. https://ivypanda.com/essays/stakeholder-and-shareholder-capitalism-models/.

References

IvyPanda. (2020) 'Stakeholder and Shareholder Capitalism Models'. 12 November.

More related papers