Title:
Stakeholder Capitalism, Corporate Governance, and Firm Value

Authors:
Franklin Allen, Elena Carletti , and Robert Marquez

Publisher:
European Finance Association, 2007 Ljubljana Meetings Paper; European Corporate Governance Institute (ECGI), Finance Working Paper No. 190/2007

Date Published:
October 2007

In the United States and the United Kingdom, most investors believe that the main goal of corporate governance should be to maximize value for shareholders. However, in Japan, Germany, and France, people believe that companies have a primary responsibility to “stakeholders,” a general term that encompasses employees, suppliers, communities, and everyone else with a vested interest in the business. This paper creates a model of “stakeholder capitalism” that shows that firms primarily serving stakeholder interests can, perhaps surprisingly, increase their own market value while also making their employees and suppliers better off. Companies using this approach often give employees representation on boards, afford managers more autonomy, and discourage hard bargaining with suppliers. These measures usually increase the value of the firm. The drawback to the stakeholder approach? It drives up prices for consumers. So the British/American shareholder system has at least one advantage: It leads to lower final prices for consumers.

Bottom Line:
The stakeholder system is better for almost everyone — employees, suppliers, and shareholders — but worse for consumers, who get stuck paying higher prices.