By Bob Souster

Most businesses now accept that to provide for a financially sustainable future they must move away from the narrow view of stakeholder obligations and towards a more inclusive model. Conventional economics suggests that profit is the return to the entrepreneurial factor of production, and in the past it has been argued by some authorities, notably Milton Friedman, that generating returns to shareholders should be the only purpose of a company. To engage in acts of social responsibility, added Friedman, amounts to a tax on shareholder wealth, as it is the shareholders themselves who should be able to make decisions on whether or not funds are committed to such purposes. If this narrow approach was even ever acceptable, it certainly no longer applies. All business organisations have to manage relationships with a wide range of stakeholders and while shareholders occupy a rightful place in their number, they are no longer the only key players, and not even the most important key players. This article explains why.

The simplest definition of a stakeholder is any party who can affect the organisation and be affected by it. Stakeholders can be individuals, legal entities, or even inanimate; for example, it is now accepted that the physical environment is a stakeholder, though its guardians can only promote its welfare by proxy. Stakeholder relationships may be viewed as sets of rights and obligations, akin to an actual, or sometimes, implied contract. Just as a shareholder has a right to a dividend if declared, the organisation has an obligation to pay it. Likewise, employees have an obligation to provide their labour just as the employer must pay a salary and provide statutory benefits.

The boards of directors of banking organisations must take their stakeholders into consideration when formulating and implementing their strategies and policies. In doing so they face multiple, and often conflicting, demands. If a bank decides to restructure its organisation to achieve greater efficiency, this may please customers, who will receive better service, and also shareholders, who are likely to see increased dividends, provided the decisions and actions are sound. However, some customers may be less impressed if they rely on branches that are to be closed, and employees may be anxious if the decision removes the need for their jobs. Put simply, it is not possible to optimise outcomes for all stakeholders simultaneously, so tough decisions sometimes need to be made on how the interests of stakeholder groups trade-off with one another. Arguably, some of these decisions are taken out of the hands of the board. If one accepts that behaviours can only be considered ethical if they are consistent with the law and regulations, prioritising stakeholders is a matter of following the famous George Orwell view (paraphrased) that ‘all are equal but some are more equal than others’.

Were it ever in doubt that customers are the key players, that doubt no longer exists. The global financial crisis created anxieties that customers had somehow become short-changed by some financial institutions and their interests were subordinated to those of shareholders and executives. This is confirmed by homeowners in the USA buying houses with mortgages they could not afford and banking customers in the UK buying products that offered little or no value to them, in some cases without even knowing they had bought them.

Fortunately, Asian banks avoided these extremes, but to cement the importance of customers in the pantheon of primary stakeholders, it has been made abundantly clear by regulatory bodies, notably Bank Negara Malaysia (BNM), that customer interests should lie at the heart of everything a bank does. This was reinforced in 2019 by the ‘Fair Treatment of Financial Consumers’ initiative by BNM. This sets down the expectations of the regulator with regard to fair customer outcomes. It does not compel banks to operate in an error-free manner, nor does it even insist that the products and services are good, but it does expect customers to be treated fairly. Implicit in this is the requirement to minimise the risks of poor customer outcomes (conduct risk).

Such initiatives cement the place of the customer as king (or queen), something that good banks with sound governance, policies, and practices knew all along. Yet this is not an easy task. If marketing is all about finding out what customers want and providing products and services that meet their needs, the customer base of banks is becoming increasingly diverse. The traditionally favoured utilitarian approach of designing products that meet the needs of most consumers will almost certainly not address the needs of all of them. Demographic changes will also alter the dynamic: for example, increased life expectancy arising from medical advances and lifestyle changes will put more pressure on people to provide for their retirement years, especially if governments are unable to bear this financial burden through social welfare provision.

As implied above, a second key player is undoubtedly the government and public bodies charged with regulatory authority. The post-global financial crisis environment heralded a new era, moving away from so-called ‘light touch’ regulation in favour of more rigorous compliance regimes. These often mean that new rules are created, but it is notable that the rules are augmented by principles, not all of which can be quantified or addressed by a ‘tick box’ approach. A good example of this is the Malaysian Code on Corporate Governance, which includes both rules and principles. It leaves no doubt that business organisations should not only comply with the letter of the law but also its spirit. This is essential if banks are to restore the confidence and trust they once enjoyed and be regarded as good corporate citizens.

The concept of good corporate citizenship leads to an emerging candidate as a third key player among the stakeholders: the physical environment. In his groundbreaking book, Ten Years to Midnight, Blair Sheppard of PwC forcibly argues that the world has a mere 10 years to address the oncoming crisis arising from (inter alia) environmental disasters. Increasingly, the general public is aware of this (though not the mooted timescale), and the general public includes customers, employees, and others, yet this issue has not even been accepted as a genuine problem by some of the more controversial world leaders. It is refreshing to observe that many banks have pre-empted future demands from stakeholders to conserve the environment and this is reflected in their mission, values, and objectives.

Like other major businesses, banks accept that they have an obligation to the physical environment. In pursuit of greater transparency, some are moving towards integrated reporting frameworks and away from mechanistic, mainly finance-based approaches to corporate reporting. The challenge for the future is to not only create financially sustainable business models, not easy in itself in a post-Covid-19 world, but also strategies, policies, and practices that are consistent with socially and environmentally sustainable operations.

Robert (Bob) Souster is a Partner in Spruce Lodge Training, a consultancy firm based in Northampton, England. He lectures on economics, corporate and business law, management, corporate governance and ethics. He is the Module Director for ‘Professionalism, Regulation and Ethics’, a core module of the Chartered Banker MBA programme at Bangor University, Wales.