Shareholders or Stakeholders
To whom should the Board pay more attention?
By Ramon R. Del Rosario Jr.

To whom should the Board pay more attention: shareholders or stakeholders? My quick response is that it really need not be a choice between one or the other.

In a poor country like the Philippines, where much of the nation’s wealth is in the hands of the private sector, and where government’s resources and capabilities are extremely limited, it is readily apparent that the needs of the impoverished sectors of our society would be addressed more effectively if the private sector played an active role in the effort. One could readily argue, therefore, that private corporations have a responsibility to society at large, and not just to its shareholders. Indeed, many would argue that a corporation’s quest for profits must be balanced by its obligation to ensure the welfare of its other stakeholders, particularly its employees and their families. These are well-meaning pronouncements with which I do not disagree. But I do believe that it is important to put these thoughts, noble as they are, in the right perspective.

The stark reality is that corporations must first learn to survive before they can aspire to do anything else. They must first learn to do well, before they can aspire to do good. The ongoing and inevitable onslaught of globalization, together with the Asian crisis of 1997, have served as a double-barreled reminder for those corporations that had begun to take their long-term survival for granted, that they had better shape up and relearn how to compete if they are to survive in a world without borders. Many of us have had to make very difficult decisions in order to assure our long-term survival.

The Philippine cement industry provides some useful lessons. In the heady days of the early to mid-1990’s, many of us in the industry had no doubt that the upward trajectory of our economies would persist indefinitely. So, we embarked on ambitious expansion programs, in some cases expanding our capacities by 100% to 200% in one fell swoop. And because we were convinced our economies were invulnerable, we had no fear of financing these expansions with foreign currency loans. Well, July 1997 came, and, as they say, the rest is history. Our currencies collapsed, interest rates zoomed sky high, our economies for the most part contracted, and our property sectors totally disintegrated. We suddenly found ourselves struggling to survive.

When our own cement companies were thriving, we had very active corporate social responsibility projects, featuring livelihood and community relations projects around our plant sites. In most cases, the focus was on projects designed to provide livelihood opportunities for the dependents of our plant workers to augment their family income. So successful were these projects that they merited at one time an Anvil Award, the local equivalent of an Oscar for Corporate Social Responsibility projects. We also supported a group that gave grants for projects involving environmental protection, education, and culture and the arts. Of course, when the crunch came, most of these activities had to be significantly reduced or were dropped altogether.

Our struggle for survival opened the doors to a number of options. What was clear was that many of us did not have the luxury of too much time. Most unfortunately, the bulk of the expansion projects had just been completed in July 1997, so when the crisis came, we were confronted with debts that had ballooned in peso terms and a cement market that had all but disappeared.

Fortunately, this was also the time when the major international players in the cement industry—Holcim – formerly Holderbank – of Switzerland, Lafarge of France, Blue Circle of the UK, and Cemex of Mexico—were engaged in a furious battle for worldwide supremacy, and their battle translated into a voracious appetite to acquire cement plants all over the world. Their buying expeditions reached the Philippines at just the time we were looking for white knights, or any solution that would help us to survive.

In eighteen short months, the Philippine cement industry was transformed from one composed of more than a dozen different local players, to one almost completely dominated by the international majors. Overcoming emotional attachments to firms built through decades and generations, most chose to sell out completely. We chose to retain 50% of the business. Significant consolidation took place. Management in most instances transferred to the new majority foreign owners. Facilities were upgraded, operations were streamlined, best practices from around the world were adopted.

Did the shareholders do well? By and large, they did quite well. So too did most other stakeholders—suppliers, customers, dealers, certainly creditors for the simple reason that they were now dealing with much stronger companies. But one group of stakeholders did not do uniformly well, for a good number of employees lost their jobs. Consolidation of the industry into fewer companies made it easier to shut down entire plants to cope with excess supply. Streamlining, organizational rationalization, and the entry of expatriate personnel at some senior levels, inevitably led to the displacement of employees, including some who had spent their entire working lives in the industry.

A case where the interests of one significant group of stakeholders was sacrificed for the good of the shareholders and other stakeholders? Yes, clearly that was the case. For the struggle for survival often means making difficult choices for the greater good. To be fair, it should be pointed out that the plight of the displaced employees was somewhat addressed through generous redundancy and retirement packages, as well as counseling on alternative new careers or business opportunities.

The point I wish to highlight is that the solution was found and successfully implemented because it was pursued relentlessly with single-minded determination. There was no room for hesitation, no room for doubt. In the case of the Philippine cement companies, time was of the essence, options were extremely limited, and survival was at stake. Hindsight now allows us to confirm that the decisions made were indeed the best that could have been achieved under the circumstances, even if in the process some employees eventually lost their jobs. For if such a solution had not been found, perhaps the entire industry would have suffered even worse consequences, and more stakeholders would have suffered.

Beyond survival, companies are now faced with the challenge of operating in an environment where global competitiveness is imperative. What this means is that managers must fully exploit all sources of competitive advantage and squeeze these for everything they can derive if they are to bring to the marketplace goods and services that can compete successfully in quality and price against all other products brought to that market. In a growing number of situations, companies are competing not just against other domestic producers but against producers from all over the world, some of whom have very distinct advantages of cost or resource endowments. This stresses the need for today’s managers to be fully focused and unhampered in their efforts to make their firms competitive and sufficiently profitable to allow them to sustain themselves and grow. Managers must face each day as if their very survival was at stake. To add to their burdens those of society at large may be an unrealistic imposition.

The thesis is simple. This is a tough world, and it is getting even tougher. Corporations will have to muster all their resources, all their talents and all their energies in a single-minded drive to be competitive and profitable. Only a few will survive and prosper.

In such an environment of intense competition, corporate management, from the Board to operating management, has no choice but to be totally focused on the pursuit of their fundamental objectives—to be competitive, to generate reasonable profit, and to create shareholder value. In today’s intensely competitive world, I submit that corporate management cannot afford to be distracted from their fundamental mission of creating as successful an enterprise as they can.

How then do we reconcile this relentless pursuit of profit with the corporations’ responsibilities towards their broader stakeholders and towards society at large?

The first prescription is basic: Pursue profit relentlessly but do so while adhering to the dictates of law, morality, and sound ethics. I submit that the needs of their broader stakeholders are addressed when corporations seek profit in a responsible manner that manifests good corporate citizenship. For responsible behavior means that employees, suppliers, dealers, and customers are dealt with fairly and equitably.

The second conclusion goes back to our earlier maxim that declared that a corporation must first do well before it can aim to do good. This point is self-evident. Only through profit can a corporation generate the resources with which to pursue socially relevant projects that help address the pressing needs of society. And what would motivate corporations to use their resources for the good of society, one may ask. Enlightened self-interest would be my reply. Corporations need a hospitable environment in which to nurture themselves and prosper. To the extent that they can contribute towards greater stability and harmony in society, they would be helping create such a hospitable environment for themselves.

This model works best when corporations are left to themselves to determine how they will do their “good work.” In this country, this approach has led to the proliferation of corporate foundations, many of which have chosen specific fields or niches in which to concentrate their efforts. One corporation focuses on the education of children, another on recognizing outstanding teachers. Still another on encouraging young artists. A good number focuses on environmental concerns. And a number of corporations have also banded together under the umbrella of Philippine Business for Social Progress, committing to spend one percent of their annual net income for socially relevant projects. And in the U.S. of course, we are well aware of outstanding philanthropic organizations created out of vast corporate wealth, most notably the Bill Gates Foundation.

Finally, let me conclude by saying that corporations do have a responsibility beyond generating profits—to their wider stakeholders, to society at large. This is a serious responsibility that should not be taken lightly—and because so much of a nation’s resources are in their hands, how they respond to this responsibility impacts greatly on society. But they must first be successful and profitable enterprises before they can play a meaningful role in addressing society’s needs. To do good, a corporation must first do well.