Mostly firms think that maximisation of Shareholder value is a suitable goal to achieve in a capitalist society but it is not true. Directors must act in the interest of all stakeholders not just shareholders. As a result, this give rise to ethical dilemma for directors. According to McPhail and Walters (2009), there are many different type of ethical theories that can be used to solve this ethical dilemma. Ethical theory serves as the foundation for ethical solutions to the different situations people encounter in life. From all the available theories, Deontology and Utilitarianism are the most useful and common approaches.
Deontology:
This theory states that people should obey to their obligations and duties when considering an ethical dilemma. A person will follow his/her obligations to another individual or society because upholding one’s duty is what is considered ethically correct. Alternatively, the weaknesses of this theory is that there is no logical basis for deciding an individual’s duties and it is not concerned with the welfare of others.
Utilitarianism:
This ethical theory is founded on the ability to foresee the consequences of an action. To a utilitarian, the choice that generates the greatest benefit to the most people is the choice that is ethically correct. However, comparing material gains such as money against intangible gains such as happiness is impossible since their qualities differ to such a large extent.
Basically, a utilitarian approach to morality implies that no moral act or rule is fundamentally right or wrong. To be more precise, the rightness or wrongness of an act or rule is solely a matter of the overall non-moral goods (e.g., pleasure, happiness or satisfaction of individual desire) produced in the consequences of doing that act or following that rule. Overall, morality is a matter of the non-moral goods produced that results from moral actions and rules.
This theory covers all of the good and bad consequences produced by the act, whether arising during its performance or after the act has been performed. According to mill, act should be classified as morally right or wrong only if the consequences are of such significance that a person would wish to see the agent obliged, not merely persuaded, to act in the preferred manner. Moreover, Utilitarians assume that it is possible to compare the basic values produced by two alternative actions and to estimate which would have better consequences.
Deontology vs Utilitarianism:
There is no doubt that Utilitarianism is better than Deontological to solve Maximize Shareholder Value dilemma. Macdonald and Beck-Dudley (1994) suggests that deontological evaluates an act by a characteristic that cannot be gathered from its consequences while Utilitarians morally assess individual actions by their consequences, the best being those produce the greatest proportion of good over bad.
It is clear that Deontology will consider Maximise Shareholder Value ethically correct. Directors are appointed to work for shareholders’ best interest. As their obligations and duties towards shareholders, they will only think to maximise shareholders’ wealth which is ethically correct on the basis of Deontology perspective. Rose (2007) suggests that Directors recognize the ethical and social implications of their decisions, but they consider that current law requires them to follow legal courses of action that maximize shareholder value. In addition, Directors have duties to shareholders consistently give up social responsibility for increasing shareholder value, even when their personal morals and ethical standards suggest alternative course of actions. However, Utilitarianism is about consequences of an action. By using this theory, Directors will consider both shareholders and stakeholders value while making a decision. The decision will base on the consequences of each action, unlike, Deontology.
Objective of the Business should be Maximise Shareholder Value or Not:
Shareholders are the investors who contribute capital for the business. They do not directly manage the company, they are the holding company ownership. So they believe that maximising shareholder value is the main objective of their enterprises. On the other hand, other companies are not interested much in shareholders. According to them, a company needs to consider more important objectives as because a sustainable enterprise does business for business and for itself.
Corporate charters, stock exchange listing requirements and regulations all require that managers and directors pursue the goal of maximising shareholder value, often at the expense of other stakeholders. The main aim of running the business is to increase shareholders value. Other activities that are not directly related to generating shareholder wealth will count as both a waste of shareholders’ money and immoral because they amount to embezzlement from owners.
According to Utilitarian Approach, if Directors give more priority to maximise shareholders value, Shareholders would be happy as their wealth is increasing and company is acting in their best interest. The maximisation of shareholder value done within the moral, ethical and legal boundaries of the society is ethically correct. In addition, directors will have personal benefits from this such as bonus, promotions and company’s shares as a reward. But, this would result inequality and injustice for other stakeholders. Like shareholders, all other stakeholders also invest something in the running of a firm. Giving priority to just one stakeholder is totally unfair for all other stakeholders.
On the other hand, if directors give priority to all the stakeholders rather than just maximising shareholders value, this will generate greatest benefit to the most people which would be ethically correct. The increasing business value and the satisfaction of the stakeholders will maximise the shareholder wealth. This will result ethical as it does more good for a greater number of people than it harms. It will help firm to get well reputation, better quality of products/services, trustworthy suppliers, well-mannered employees, helpful communities and supportive financiers.
General Purpose Financial Reporting:
The objective of financial statements is to provide financial information about the reporting company that is useful to present and potential entity investors, lenders and other creditors in making decisions in their capacity as capital providers.
If a company aims only to maximise their shareholders value, then the directors of that company will prepare financial statements by including information that is only relevant for shareholders. They won’t care about other readers of statements such as lenders, banks, government etc.
In contrast, if a company prepares their financial statements according to needs of all stakeholders including shareholders, then every reader would be interested to connect with that company. This will give rise to the idea of Democracy and equality between shareholders and other stakeholders.
Sustainable Development:
The main idea of Sustainable development is to meet the present-day needs, without negotiating the ability of future generations to meet their own needs. Its focus not just limited to the environment, instead, is far broader. It is about ensuring a strong and healthy society. This means meeting the diverse needs of all people in existing and future communities, encouraging personal welfare and creating equal opportunities. Jones (2010) support the idea that sustainable development can be the first step towards any radical reorientation of the human relationship with the environment. Giddings, Hopwood and O’Brien (2002) suggests that sustainability is usually presented as the interaction between environment, society and economy, which are regarded of as separate although connected entities. Sustainable development is presented as aiming to bring the three together in a balanced way, resolving the conflicts.
The current accounting standards principles and maximise shareholders value doesn’t align with the objectives of sustainable development. The research done by Gray (2006) indicates that in current conventional accounting, the very purpose of financial reporting is to show how much more the rich people will receive as a result of economic activity while ignoring how that surplus has been appropriated or calculated. In the current world environment, Sustainable development is a challenging concept as it opposes the basic economic model of the world that runs through conventional accounting (Gray, 2003). Traditional Accounting is not suitable for environmental accounting and reporting as it is not originated to and, as a result, does not capture human beings’ impact upon the natural environment. Burritt and Schaltegger article (2010) suggests that conventional accounting continues to neglect corporate sustainability issues and leads to distorted information being provided to managers as a basis for their decision making.
In contrast, development towards sustainability accounting can lead to corrections to the conventional accounting systems. According to Cook (2009), Environmental accounting has not traditionally been included in the responsibility of accounting standard setters; although, accounting for CO2 emissions, is now on the agenda of the International Accounting Standard Board. Organisations can be seen as being accountable to their shareholders for their stewardship of natural assets. More widely, they can be seen as accountable for natural assets which they own and for any actions which affect upon the environment. Other stakeholder groups and interests, including environmental interests, remain unsatisfied.
In the case of sustainable development, either the environment or the economy is given priority. It is not possible to keep a balance between the environment and the economy at the same time. One from the two always will be high favourable than the other for the sustainable development of a firm.
The reality of present organisation is that economy dominates environment and society. Companies are free to choose the set of national or international non-financial disclosure guidelines that best suit their business. In addition, presenting non-financial information to the public is totally voluntary not mandatory. At the moment, there is no generally accepted comprehensive international standard for the disclosure of non-financial information. The guidelines for sustainability reporting settled by the Global Reporting Initiative seem to be the most widely adopted non-financial reporting framework.
Furthermore, if companies keep doing business with the objective of maximising shareholder value, there is no chance of sustainable development. According to Gray (2010), maximising shareholder value using sustainability reporting is not possible. Gray (2006) suggests that the only way in which can continue to pursue shareholder value is if continue to destroy the planet or if redefine shareholder value to include something other than the making of even more money for people who already have too much. A shareholder value that contained compassion, respect, trust, life etc. might be the only one that makes any long term sense at all. Additionally, Technical solutions in the economy, such as changing interest rate, benefits or taxation are seen as ways to move the economy toward sustainable development. Except from that, there is no way maximising shareholder value will align with the objective of sustainable development.
The approach of corporate social responsibility can help firms taking the social and environmental impact of their activity into attention in order to adopt the best possible practices. In this manner, firms will contribute to improve society and protect the environment. The Corporate Social Responsibility approach combines economic logic with social responsibility and environmental responsibility. Corporate Social Responsibility can mean promoting development of economic, environmental reliability and social fairness as part of the firm’s overall strategy to gain competitive advantages. If firms adopt the approach of corporate social responsibility then they can keep a balance between dimensions of society, environment and economy.
To sum up, it can be concluded that organisations will not make more socially responsible and more ethical decisions until the business paradigm and associated laws are not changed to reflect the significance of stakeholders other than the shareholders. By taking all the stakeholders’ interest into account, the firm could do better than by simply focusing on shareholder interests. As mentioned above, the current accounting standards principles and maximise shareholder value doesn’t align with the objectives of sustainable development. To meet the objectives of sustainable development, the current accounting standards should set presenting non-financial information is mandatory for all firms. In addition, maximise shareholders value will not let to meet the objective of sustainable development. Therefore, the firms should give less preference to maximise shareholders value to be a sustainable firm in the society.