Enhancing Shareholder Value

  1. Introduction

“NAPF believes it is inconceivable that, in the long run, a company can enhance shareholder value unless it takes good care to retain and develop its customer relationships; unless it provides encouragement to its employees; unless it develops effective relationships with its suppliers…..; unless it pays proper attention to preserving its ‘licence to operate’ from the community” National Association of Pension Funds, Guidance on Good Corporate Governance (1996)

The statement can be broken up into five segments, each with an important concept. The following are the five segments:

  • enhancement of shareholder value in the long run;
  • retain and develop customer relationships;
  • provides encouragement to employees;
  • develops effective relationships with suppliers;
  • preserving ‘licence to operate’ from the community.

The five segments will be discussed separately in section 2 & 3 of this report and the entire statement as a whole in section 4. Finally, it will be summed up in the Conclusion section.

  • “Enhancement of Shareholder Value in the long run”

The NAPF Statement starts by bringing up Shareholder Value. The NAPF Statement suggests that the Shareholders Value can only be enhanced by fulfilling those requirements of other stakeholders. In other words, satisfying Shareholders are being placed as a higher tiered objective than that of other stakeholders groups.

The importance of enhancing Shareholder Value in the long run is also recognised in reports from other organizations and committee.

In fact, the Hampel Report (1998) has a similar statement only with slightly differing words. It is stated in the Hampel Report that the objectives of companies is the “preservation and the greatest enhancement over time of their Shareholder’s investment”[1].

The Organisation for Economic Co-operation and Development report[2] recognises that long term enhancement of Shareholder Value should be the central mission of all companies. Nevertheless, Companies operates in larger society and different societal pressures may have impact on the Company. As such, Companies needs to address such societal pressures.

While the NAPF Statement merely mentioned “in the long run” instead of stressing upon it, it does clearly suggest 2 things that the statement is intending to say: (1) Company’s should look at long term enhancement of Shareholder Value; and (2) the focus of the company when addressing Stakeholders interest will be different between a long term enhancement and a short term enhancement of the Shareholder Value. The Royal Society of Arts in the UK described in their Tomorrow’s Company Report (2005)[3] that business should have a long term view when it comes to increasing Shareholder Values, instead of a short term focus which many businesses are perceived to have. This is in line with the NAPF Statement.

While Shareholders are considered one of the many stakeholder groups, the NAPF Statement has treated Shareholders as a distinct and superlative group. This is a similar approach as many other text including Mallin’s[4]. Mallin gave 2 reasons for doing so. Firstly, Shareholders are the ones that invested moneys in the company and they are the recipients of dividends. Secondly, Shareholders’ rights are often protected by legal jurisdictions, whereas other stakeholders’ are often not[5].

The Companies Act (2006) dictates that Directors need to promote success of the Company for the benefits of the Members[6] (referring to Shareholders). This is done while having regards to other stakeholders such as Employees, Customers, Suppliers, Community and the Environment[7].

Similar opinions are also in the Final Report of the Company Law Review for the Company Law Reform Bill[8].

By wording it in such a way, the Company Act (2006) has suggested that:

  • the satisfaction of other stakeholders is secondary to the main objective of providing value to Shareholders; and
    • Directors need to ensure that the other Stakeholders are taken care of in order to achieve success of the Company which in turn is for the benefit of the Shareholders.

Similarly, the Hempel Report (1998) emphasized that the Directors of Companies are “responsible for relationships with Stakeholders but are accountable to Shareholders”[9].

The NAPF Statement is aligned with the above.

  • Other Stakeholders in NAPF Statement

The NAPF Statement mentioned the Customers, Employees, Suppliers and the Community.

The CLR “foster effective relationships with employees, customers and suppliers, and in the community”[10].

At this point, it is also worth to note that the words “effective relationship” used in the CLR is a well-accepted choice of words when discussing other Stakeholders. Other than the CLR, the Hermes Principles (2002) also uses the two words when discussing Companies need to deal with Stakeholders[11].

Another source that acknowledges the importance of Employees, Customer and Suppliers is the Royal Society of Arts in the UK. In their Tomorrow’s Company Report (2005), the Royal Society of Arts explained in its “inclusive approach” that there is an interdependent relationship between a company’s Employees, Shareholders, Customers and Suppliers[12].

Other stakeholders recognised by others but excluded from the NAPF Statement include Government, Interest Groups and Creditors[13]. These will be discussed in more details at section 4.2 below.

  •  “Takes good care to retain and develop Customer Relationships”

Customer would normally want to buy from the same source again and again[14]. A Company’s Customer will be familiar with the product supplied by the Company and the said Customer. Furthermore, when the Company’s product is required to manufacture another product of the Customer, the Customer will be reliant on the Company’s continuous supplier of products in order for them to run the Customer’s own business. As such, if the Company do not do when, the Customer will be impacted. Similarly, if the Company do not help their Customers achieve success, the Customer will buy less or not at all from the Company. As the Customers need the Company to keep supplying the product, the Customer has a stake in performance of the Company. Developing and maintaining a good relationship with the Customers will provide long term business to the Company and Shareholders value.

All corporations are more aware of the need to be Socially, Environmentally and Ethically responsible in their corporate behaviours[15]. This applies to Customers as well. As such, Customers would want the Companies that they are buying from fulfil such Social, Environment and Ethic responsibility.

While I agree with highlighting the importance of Customers’ interest in the NAPF statement, I cannot fully agree with the way it is worded. I would suggest that the phrase be re-worded as “Develop and Retain effective relationship with Customer”. Firstly, this wording is aligned to wording relating to Suppliers. Secondly, as explained in the above paragraphs of this section 3.1, it takes more than just having a relationship with Customer for there to be value to the Company. Rather, they need to have a relationship that ensures both the Company and its Customers will thrive from, i.e. an effective relationship.

  • “Provides encouragement to Employees”

Company provide livelihood and pension to sustain them in their retirement.

Employees need the Company to do well in order to keep themselves employed and keep their source of income, including any form of pension to cover their retirement. This is the most fundamental reason that Employees are Stakeholders.

In return, Employee will perform the task required of them so that the company can function and business can go on. This, in itself, is value for Shareholders.

Sometimes, Directors of Companies will state in their annual report positive initiatives which the company has done for their employees. Personnel development programmes, equal opportunity and employee shares schemes are initiatives are commonly adopted by companies. This is a good way to demonstrate that they have taken care if interest of the company’s employees as required in the Companies Act (2006)[16].

It is worth noting that, if Companies opt to provide Employee Share Scheme, which more and more companies opt to do in recent times, the dynamics of the Employee’s interest may change. Employee shares scheme that gives the Employees full shareholder’s rights will cause the Employees to have the same interests as Shareholders described in section 2 above. This is especially so for long term employees that accumulate significant number of shares over the years.

When an Employee’s interest is not taken care of, they and their families may further impact the community (another Stakeholder to be discussed below). For example, if an Employee is not sufficiently paid, he and his family will not be able to spend money and contribute to the economy. Furthermore, if they cannot sustain their own living, they become a burden to the society and may cause harm to the community.

However, I do not agree with the phrase “provides encouragement” used in the NAPF Statement. This is too vague and has too diverse of an interpretation. Clearly, providing a word of encouragement when the Employee is feeling down is not what the type of encouragement the NAPF Statement meant. It is unclear whether the NAPF Statement is trying to say that company need to provide encouragement for the Employee to work harder and contribute to the company.

The CLR uses the phase “foster effective relationship… with the Employees”[17].

Mallin mentioned the phase “looking after the employees’ interest”[18] in her text.

I personally would describe the need as “to maintain a functioning Employee workforce”.

  • “Develops effective relationships with Suppliers”

According to Mallin, there are two main reasons that a Supplier of the Company would want the Company to do well[19]. One, the Supplier needs the Company to have the means to pay the Suppliers in a timely manner. Two, the Supplier need the long term existence of the Company so that the Suppliers can continue selling their products to the Company. These can be fulfilled if the Company is doing well. As such, Suppliers have a stake in the performance of the Company.

By fulfilling the 2 reasons in the preceding paragraph, the Company will encourage the Supplier to be more willing to supplier to the Company again in the future and possibly at a better deal. This in itself is beneficial to the Company and provides Shareholders Value.

Furthermore, if the Company do not help their Suppliers to do well (for example, not paying the Suppliers on time), the Company may cause the Supplier to go into financial difficulties and causes the Supplier to be wound up. The wound up Supplier and the Supplier’s Employee will have negative impact on the local Community. Which may in turn have a negative impact on the Company should they be operating in the same local Community. How a local Community can impact the Company is also mentioned in the NAPF Statement and will be discussed in the following section.

  • “Preserving licence to operate from the Community”

According to Mallin[20], local Communities have interests in the Companies that run their business and operations in the region. The most notable reason is that the Companies will employ the people in the community. As such, the local community will want the Companies to sustain their business and keep the people employed. If the Companies do not do well enough to keep the people employed, the retrenched unemployed people will either become a burden to the society or start moving away to seek employment in other areas. In turn, that will have further impact on the community. Local schools may start to see fewer students and local houses may be vacated.

While the Companies may bring the benefits of employment to the Community, they may also cause damage to the Community. Pollution and violation of the Community’s rights are often caused by companies that grow too big too quickly and remain unchecked.

As explained in the 2 preceding paragraphs, it is in the Community’s interest that the Companies thrive in the community but do so in an Ethical and Socially Responsible manner.

In return, the Company will also stand to gain by having a well taken cared Community to operate in. In addition to that, Googins’ (1997)[21] suggested that there is ample evidence that strong relations with Community will have other paybacks to the Company. According to Googins (1997), Shell Chemical Company, Merck & Company and Ameritech Ohio were three companies who were able to either avoid hefty lawsuit or easily acquire permits from local Community to positive relationships build with the Community beforehand.

  • NAPF Statement Analysed

The NAPF statement states that is in inconceivable that company can enhance shareholders value unless it has taken care of its Employees, Suppliers and Community. Clearly, the NAPF Statement is acknowledging that there are stakeholders to a company, other than its shareholders, that need to be considered by the Company in order to achieve success.

  • Shareholders Value against Stakeholders interests

Stakeholders’ rights, other than Shareholder’s, are indeed important in order to achieve success for the Company. In OECD’s Principal of Corporate Governance[22], the importance of the rights of Stakeholders is also being recognised. It goes so far as to recommend that stakeholders’ participation should be included in all Companies performance enhancement plans.

The Royal Society of Arts described it as interdependence between the employees, investors, customers and supplier when it comes to increasing Shareholder value[23].

The OECD report and Royal Society of Arts’ report explained above, not only highlight the importance of Stakeholders (such as Employees, Customers and Suppliers), it suggest that these Stakeholders’ interest should be included in the Company’s plans and strategies for enhancing Shareholder value.

This hugely supports NAPF statement saying that it is inconceivable that a company can enhance Shareholder value unless it takes care of Stakeholders’ interest.

  • Additional Stakeholders to be considered

The NAPF Statement is explaining the importance of Stakeholders to a Company. While there is no official definition or list of “Stakeholders”[24], as mentioned at section 3 above, there are other Stakeholders which are not mentioned in the NAPF Statement. Some examples are Creditors, Interest Groups and Governments.

Creditors including banks and other financial institutes are external parties that provide funds for Companies to operate[25]. Such funds are expected to be repaid by the Companies to their creditors. As such, they will need the Company, whom the funds were loan to, to do well so as to repay the debt. When Company violates its covenants with its Creditors, the Creditors have the rights to revoke further credit lines in future and demand immediate repayment of current outstanding loans. In most cases, this will not only hinder the Companies operations, it may even lead to financial difficulties for the Company. In most countries, Creditors’ rights are protected by Law, availing them various rights of redress against the Companies. Developing a good relationship with Creditors will not only prevent such legal recourse against the Company, but also encourage creditor to lend more funds to the Company in the future and/or lend at a better interest rate[26].

Interest groups, such as Environmental groups and Minority Rights groups, require Companies to act appropriately and responsibly, so that the interest these groups are protecting can be protected. At times, interest groups may garner so much expertise and influence that they can make or break a company. Furthermore, upholding these interests will benefit the society and the company itself[27].

Government has an interest in Companies registered and operating within their jurisdictions. Mallin suggested some reasons[28]. Governments need Companies to adhere to Laws, Rules, Regulations and Codes. The Governments also studies Companies to understand corporate trends, employment levels and demand & supplies of various goods and services. Finally, Governments need Companies to perform well to support the country’s economy growth and contribute corporate tax. A company who does not fulfil Government’s requirements normally faces restrictions and difficulties impose on their business.

As explained above, Creditors, Interest groups and Governments are important Stakeholders to Companies. These parties should have been included in the NAPF Statement.

  • Conclusion

The fundamental message in the NAPF Statement holds true and is mostly agree. But it can be improved further by using better words and including more Stakeholders.

As supported by numerous other sources, the NAPF Statement is mostly agreed by others that the interest of other Stakeholders’ is critical when it comes to the company’s enhancement of Shareholder Value. It is also mostly agreed that while interests of the Stakeholders can are critical, the top priority of the company is still its Shareholders and increasing Shareholders Value.

However, in my opinion, the words used in the NAPF Statement to describe each Stakeholder’s requirement should be clearer and more appropriate than those NAPF has used. Many other sources, as explained in the rest of this report, worded it much better than the NAPF Statement.

Also, I find that by only raising Employees, Customers, Suppliers and Community in the NAPF Statement, it felt incomplete. While these 4 stakeholders is aligned with the Companies Act (2006)[29], the most “official” documents mentioned in this report, the Companies Act which is flows down from the CLR[30], is more than 10 years old. Many other Stakeholders are being recognised as critical to a company’s success in more recent years.

  • [1] The Committee on Corporate Governance, Final Report (January 1998) Pg. 11
  • [2] OECD (1999), Development Co-operation Report 1998: Efforts and Policies of the Members of the Development Assistance Committee, OECD Publishing, Paris, https://doi.org/10.1787/dcr-1998-en.
  • [3] The Royal Society of Arts, Tomorrow’s Company Report (2005, London)
  • [4] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 73
  • [5] ibid
  • [6] The Companies Act (2006), Part 10, Chapter 2, Section 172(1)
  • [7] ibid
  • [8] Company Law Reform Bill, Regulatory Impact Assessment, (June 2006) Annex Pg. 14
  • [9] The Committee on Corporate Governance, Final Report (January 1998) Pg. 11
  • [10] Company Law Reform Bill (n 4)
  • [11] Hermes Pension Management Ltd, The Hermes Principles (2002) Pg. 6
  • [12] The Royal Society of Arts, Tomorrow’s Company Report (2005, London)
  • [13] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 74
  • [14] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 76
  • [15] ibid
  • [16] The Companies Act (2006), Part 10, Chapter 2, Section 172(1)(b)
  • [17] Company Law Reform Bill, Regulatory Impact Assessment, (June 2006) Annex Pg. 14
  • [18] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 75
  • [19] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 76
  • [20] ibid
  • [21] Bradley K. Googins, “Why Community Relations is a Strategic Imperative”, Strategy+Business Third Quarter 1997/Issue 8 (Booz & Company, 1 July 1997)
  • [22] OECD Principles of Corporate Governance (revised in 2004)
  • [23] The Royal Society of Arts, Tomorrow’s Company Report (2005, London)
  • [24] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 73
  • [25] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 75
  • [26] ibid
  • [27] Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015) Pg. 77
  • [28] ibid
  • [29] The Companies Act (2006), Part 10, Chapter 2, Section 172(1)(b)
  • [30] Company Law Reform Bill, Regulatory Impact Assessment, (June 2006) Annex Pg. 14


Company Law Reform Bill, Regulatory Impact Assessment, June 2006
The Companies Act (2006)

Secondary Sources
Bradley K. Googins, “Why Community Relations is a Strategic Imperative”, Strategy+Business Third Quarter 1997/Issue 8 (Booz & Company, 1 July 1997), https://www.strategy-business.com/article/17964?gko=3673b
Christine Mallin, Corporate Governance (5th Ed., Oxford University Press 2015)
Hermes Pension Management Ltd, The Hermes Principles (2002)
OECD (1999), Development Co-operation Report 1998: Efforts and Policies of the Members of the Development Assistance Committee, OECD Publishing, Paris, https://doi.org/10.1787/dcr-1998-en.
The Committee on Corporate Governance, Final Report (January 1998)
The Royal Society of Arts, Tomorrow’s Company Report (2005, London)