The case of Ben & Jerry’s Homemade, Inc. focuses on how an organization manages to create value. In order to fully understand how Ben ; Jerry’s achieved its corporate value creation, the following explains the key concepts underlying the case. Role of a Company A company can have various roles and objectives depending on the company type; public, private or non-profit. For the purpose of this case, the focus will be on the objectives of a publicly traded company as with Ben & Jerry’s.
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According to the traditional financial management theory, the primary objective of a public company is to maximize shareholder value. Much like other investment options such as bonds, savings accounts, CDs and money market funds, investors purchase stocks to earn the maximum risk-adjusted rate of return on that investment. If and when a company does not meet the expected return for the shareholders, investors will sell their stocks and invest their money elsewhere. But what about other company objectives? Should public companies have responsibilities other than maximizing their shareholders’ returns?
In recent years, there’s been an increased focus on corporate social responsibility, which states that companies have a responsibility to ensure that the interests of all stakeholders are met. The stakeholders in this concept include key members such as shareholders, board of directors, management, employees, regulators, communities, customers, suppliers and creditors. Unlike the profit maximization theory, the concept of corporate social responsibility may sacrifice profit to engage in socially and environmentally responsible activities.
It is a balancing act of all stakeholder interests. Clientele Effect The concept of the clientele effect states that people invest in companies according to the similarities in their preferences and policies. For example, those investors who are environmentally conscious tend to invest in companies that are environmentally responsible such as Ben ; Jerry’s, Patagonia, Odwalla and The Body Shop. Therefore, if these companies changed their policies to cut back in their environmental philanthropies, investors would sell their stocks and refocus their investments toward other green stocks.
Consequently, the companies’ stock prices would decline. Corporate Governance Regardless of the objective, companies must have a process in place to achieve it. Corporate governance is the process or the framework that lays out the roadmap on how a company is managed and directed to achieve its objective. It is also a key factor in defining the relationship between shareholders, the board of directors, management and other stakeholders. The following sections explain the basic building blocks of corporate governance.
Standards for Corporate Governance In order for corporate governance to work effectively, it must be built on a basis of “honesty, trust and integrity, openness, performance orientation, responsibility and accountability, mutual respect, and commitment to the [company]” (wikipedia. com, corporate governance). It is only through the beliefs of these principles that an organization is truly able to create value for all stakeholders. Without the commitment, corporate governance is nothing more than a list of “nice-to-have” statements.
Prevention of Agency Problem For a public company, management is given the decision power by the shareholders to act on the best interest of the shareholders. Consequently, shareholders lose management control of the company, which may result in a possible agency problem as management may act in their own self interest. To address the possible agency problem, corporate governance should address the internal controls necessary to prevent conflicts of interest.
Those controls range from 1) the rights of shareholders, 2) the responsibilities of the board and management, 3) measuring management performance, 4) compensation of management, 5) financial audit process by an independent third party and 6) the obligations to serve the interest of other stakeholders. Three Pillars of Corporate Governance Different from the traditional financial management theory, companies must define corporate governance through three main perspectives; 1) financial, 2) legal and 3) social.
Financial From this view point, companies should address the question of “what can we do to deliver competitive return for our shareholders? ” Corporate governance should ensure that the financial measurement and performance are aligned with the corporate objective. In addition, it should address the internal controls needed to accurately produce the financial results. Legal From a legal perspective, companies should address the question of “what can we do to ensure compliance with the various regulations?
” Corporate governance should address the need for controls and the enforcement of regulation compliance. Social From a social aspect, companies should address the question of “what can we do to be a good corporate citizen? ” Much like people, companies are an integral part of the community in which they reside. Therefore, companies are obligated to do their part as good citizens. The three pillars of corporate governance are consistent with the idea of corporate social responsibility. Companies have to be cognizant of all stakeholders and not just the shareholders.
Corporate governance should be approached holistically. Simply put, it’s not all about profit. It is similar to owning a home; homeowners do not buy only for the investment reasons. While upgrades to the house such as landscaping and remodeling make sense from an appreciation point of view, we often do it because they look nice and make us feel good. Additionally, we invite neighbors for cookouts and dinner parties as good neighbors do. And finally, along with government compliance such as paying taxes, we follow rules set by the homeowner’s association.