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Abstract (extended)

Since the beginning of the 21th century, a few serious financial scandals and many cases of
corporate mismanagement have driven scholars and politicians to devote increasing attention to
corporate governance, in a close relation with business ethics issues. In academic literature, as
well as in public policy debates, corporate governance is nowadays acknowledged as a critical
factor in economic development and financial markets stability.
Actually, the recent phenomena represent the peak of a long-lasting widespread crisis of
corporate governance. In the last decades, we observed a general disbelieving for those forms of
corporate organization that played a fundamental role in the economic development of the
leading industrialized countries: the public company in the US and in the UK, the bank or stateowned corporations in continental Europe, the keiretsu in Japan. In the Anglo-Saxon countries,
public companies management, in order to comply with short sighted and diversified investors,
tends to focus on short-term earnings, disregarding those long-term investments badly needed to
enhance firm performance vis--vis competitors rooted in different systems. On the other side,
economic systems based on closely held companies and financial intermediaries as primary
financing source, are increasingly failing in providing an adequate equity base to finance
successful competitive strategies in global industries.
In both cases, the evolution in the nature of the firm is among the major causes for the crisis of
established corporate governance models. The traditional manufacturing companies - vertically
integrated and capital intensive which emerged at the beginning of the last century and had
since then prevailed have been challenged by new organizational structures, based on
intangible assets and networks, more appropriate to a dynamically changing environment, where
competition is driven by the availability of distinctive competencies, based on firm-specific

Arturo Capasso Universit degli Studi del Sannio Tel. +39-0824-305766 Fax +39-0824305777

Arturo Capasso - Stakeholders Theory and Corporate Governance

This paper, building on the resource based view of the firm, but also on stakeholder approach to
strategic management, explores how the growing importance of intangible assets is reshaping, in
many industries, the basic conditions of corporate governance. The aim is twofold: i) to explain
logically why intangible assets modifies the allocation of residual claims,

as company

performance can substantially affect the wealth of other stakeholders ii) to determine which
constituencies should be considered as relevant stakeholders and contribute, to some extent, to
the corporate governance.
Company law says that shareholders own the assets and the free cash flows, but this only works
on the basis of a primitive view of the nature of ownership and employment. The crucial
intangible assets could be, in many cases, out of the direct control of either shareholders or
management. They are, in fact, shared in common between the firm and some of its stakeholders,
like employees, customers, suppliers. In order to build and enhance its intangible endowment a
firm has to establish and consolidate a trustworthy fiduciary relationship between the firm and
these stakeholders. The costs to establish and consolidate these relationships can be considered
as subordinated claims on firms cash flow to remunerate the stakeholders for the irreversible
investments and commitments that are the main drivers of intangibles assets. Therefore,
stakeholder can be considered as virtual shareholders, participating to an extensive definition of
equity value that could be defined stakeholder equity or systemic value. In this perspective,
stakeholder theory can be extended in order to set the acknowledgment of relevant stakeholder
claims within the framework of value maximization, although the value to maximize is not that
pertaining only to shareholders but the value of the business system as a whole.
With no ambition to give a formally rigorous contribution to the lively debate on the relation
between business and ethics, the proposed model might enable to overcome those approaches
regarding ethics either as an additional constraint for company decision making or, at most, as a
sort of generic investment in establishing a nice-company image, to be valued in terms of
expected returns.

Arturo Capasso - Stakeholders Theory and Corporate Governance




Since the beginning of the 21st century, corporate scandals and mismanagement cases have driven
academic scholars to devote increasing attention to corporate governance, which is now acknowledged
as a critical factor in economic development and financial markets stability1. This phenomenon is the
emerging peak of a longstanding widespread crisis of traditional corporate governance models. In the
last decades, as a matter of fact, we observed a general disbelieving for those corporate governance
systems that played a fundamental role in the economic development of the leading industrialized
countries: the public company in the US and in the UK, the bank or state-owned corporations in
continental Europe, the keiretsu in Japan.
The hypothesis discussed in this paper is that the crisis of traditional corporate structures, in the main
industrialized countries, together with either local or contingent reasons, may have its common root in
the growing relevance that intangible assets in the composition of firm's assets.
Even if the relevance of intangibles is no actual news, as firm success has always been due to its
distinctive business idea, there are some innovative aspects it is worth stressing:
i) due to progressive fading of the residual barriers, competition is more intense in many industries,
consequently the creation of competitive advantage depends on the availability of firm specific
ii) as a consequence of innovation in company and inter-company organization (lean organization, total
quality, networks, industrial districts) relevant knowledge is no longer under the direct control either
of the entrepreneurs or top management, as it is also spread at less prominent levels in the company
hierarchy and, outside, by customers and suppliers who become an integral part of an enhanced
business system (Jensen, 1993; Jensen and Meckling, 1992);
iii) growing international market integration and a more intense competitive dynamics remarkably rise, in
the main industries, the critical mass of intangible investments required to compete on wider and

Arturo Capasso - Stakeholders Theory and Corporate Governance

wider markets; therefore, in many firms the relative weight of intangible assets has reached levels by
far higher than in the past.
This paper aims to integrate the resource-based view (Barney, 1991) with the stakeholder theory
(Freeman, 1984; Donaldson and Preston, 1995), looking at the most important intangible assets as
entrenched in some of the firms stakeholders. This lens might be useful for examining the relevance that,
in several cases, stakeholders should have in corporate governance. Furthermore, it provides a
theoretical basis to investigate some noteworthy issues in the field of business ethics.
The paper is organized as follows. After a brief description of the historical development of different
corporate governance systems, in the next three sections we first discuss the role of intangible assets as
a source of sustainable advantage in the economic value creation process; we then describe the impact
of intangible assets on the corporate financial structure and the allocation of residual claims and finally
we develop the idea of systemic value of the firm as the combination of shareholders value and
stakeholders value. A section on the studys conclusive remarks and implications for future research

1. Historical background
In the last decades of the 20th century, the economical and political collapse of central planned
economies, concluding the long-standing diatribe between public or private ownership of the production
means, has diverted the attention of management scholars, politicians and other interested observers on
the meaningful differences existing within capitalistic world, among the various capitalist models2.
The differences date back to the period when technological innovation, progress in transportation and
communications, international trade growth, brought about, in the main industries, a remarkable increase
of the firm minimum efficient size, conditioning the development of a modern industrial system to the
availability of financial resources and managerial capabilities exceeding the endowment of the original
entrepreneurs. In order to regulate the acquisition and the use of these resources, it was necessary to set
up suitable legal, organizational and financial instruments, which caused the getting over of a perfect
identity between the firm and the entrepreneur, with significant implications for corporate governance
(Berle and Means, 1932; Chandler, 1962, 1977).

Arturo Capasso - Stakeholders Theory and Corporate Governance

In each country, historical, economical, and political factors have got industrial development to follow
distinctive routes that have not only characterized the ownership and organizational structures of the
firms, but the evolution of the institutional and economic environment as well (Shleifer and Vishny, 1996;
Pagano and Volpin, 2000). Nonetheless, even if the peculiarities of different countries have outlived the
markets integration process, in the last decades, a widespread discontent for the traditional models of
corporate governance has emerged together with a great interest in the experiences of other countries
(Roe, 1993; Kester, 1992).
In the US, such a phenomenon fully showed during the eighties, in a long season of hostile takeovers,
leverage buyouts, proxy fights (Jarrel et al., 1988; Jensen, 1988). In Europe - with the notable
exception of the UK - the takeover-mania has undoubtedly been less pervasive, but interest in the
debate on corporate governance has livened up as a consequence of a general reconsideration of the
State intervention in the economy. Privatizations have indeed characterized the economic policies of the
leading European countries, even if outlined programs have not always been carried out, everywhere,
with comparable resoluteness and results. Furthermore, even in Germany and Japan the typical
governance models - grounded either on banks controlling interests or on intricate cross-shareholding
webs - have proved largely inadequate, seriously deteriorating the myth of the general dedication of all
firm's participants to the commonweal (Watanabe and Yamamoto, 1993; Tricker, 1994, Yafeh, 2000).
At the beginning of the 21th century, we assist to a general disbelieving of those forms of business
organization that played a fundamental role in the economic development of the leading industrialized
countries: the public company in the US and in the UK, the bank or state-owned corporations in
continental Europe, the keiretsu in Japan.
The crisis of traditional models clearly demonstrates how corporate governance is the thorny question in
the evolution of the capitalistic society: on the one hand the international integration process urges to
accelerate a series of important changes, affecting firm ownership and organizational structures, on the
other hand existing situations are so deeply rooted in the culture and institutional environment of each
country that getting over them requires a long difficult process. Therefore, the growing interest in the
topic of corporate governance is not simply academic, but gives evidence for the search of an
explanatory theory in order to develop appropriate solutions to relevant practical problems.

Arturo Capasso - Stakeholders Theory and Corporate Governance

2. Economic value creation and intangibles assets

In business literature there is a widespread consensus in recognizing the economic value creation as the
main objective of the firm, independently of its ownership and organizational structures. Maximizing the
economic value created by the business system as a whole - seen as the capitalization of the expected
return above that required to keep the resources involved available to the firm in the long run - is
unanimously considered a neutral goal, all main stakeholders could share. In order to create and
maximize economic value firms have to develop and safeguard rent positions cutting off competition or,
according to the strategic management terminology, a sustainable competitive advantage (Porter, 1985).
According to the resource based view (RBV) of the firm, in dynamic and efficient markets, a realistically
sustainable competitive advantage must inevitably be rooted in some unique or idiosyncratic resource
controlled by the firm (Barney, 1991). This resource should be necessarily out of the market or, in
other terms, not autonomously negotiable. For if the source of a competitive advantage - whether or not
it consists of human, physical, locational, organizational or legal capital - could be expanded in its supply
by competitors, the returns for the firm would be brought down to normal level by competitive pressure
(Teece, 1988).
This consideration leads to adjust the definition of intangible asset, restricting it to the sole resource that
cannot be object of autonomous transactions, so excluding all those assets that, even if by nature
intangible, can be, all the same, autonomously traded (i.e.: a patent or a trademark). According to such
a definition, all intangible assets can be traced to the fundamental categories of knowledge and trust and
the firm can be well defined - paraphrasing Sraffa - as a system to produce knowledge by means of
knowledge (Penrose, 1959; Winter, 1987; Grant, 1996, 2002). Knowledge-based assets are
promising as a source of sustainable advantage because firm-specificity, social complexity and causal
ambiguity make them hard for rivals to imitate.
The accrued intangible assets on one side contribute to increase the perceived value of good and service
provided, on the other side can be either increased and renewed by means of the learning process or
lost when the firm develop entropic processes spoiling its wealth of knowledge and trust. The
knowledge embodied in the organizational systems and procedures and the trust placed by the markets
in the firm constitute the intangible assets - in the strict sense - apt to ensure a sustainable competitive
advantage to the firm.

Arturo Capasso - Stakeholders Theory and Corporate Governance

The hypothesis discussed in this paper is that the crisis of traditional institutional structures in the main
industrialized countries, together with either local or contingent reasons, may have its common root in
the growing relevance intangibles have taken in the composition of firm's assets.
To be unambiguous, the relevance of intangibles is no actual news, as firm success has always been due
to its distinctive business idea just the same way it has depended on the efficiency of such material
activities as raw material acquisition, manufacturing, sale and distribution. Anyhow, there are some
innovative aspects it is worth stressing:
i) owing to progressive fading of the residual barriers to competition, in more and more industries, the
possibility of creating economic value is qualified by the availability of firm specific assets, eluding
the laws of supply and demand since they are not autonomously negotiable;
ii) as a consequence of innovation in company and intercompany organization (lean organization, total
quality, networks, industrial districts) relevant knowledge is no longer under the direct control either
of the entrepreneurs or top management, as it is also spread at less prominent levels in the company
hierarchy and, outside, by customers and suppliers who become an integral part of an enhanced
business system (Jensen, 1993; Jensen and Meckling, 1992).
iii) growing market integration and a more intense competitive dynamics remarkably rise, in the main
industries, the critical mass of intangible investments required to compete on wider and wider
markets; therefore, in many firms, the relative weight of intangible assets has reached levels by far
higher than in the past.
3. Intangible assets and corporate financial structure
The growing proportion of intangible components on firm total value radically affects corporate
ownership and governance not only because of the absolute dimensions of the required investments, but
also because of global risk increase due to the specific irreversible characteristics of intangible assets.
In the economic systems based on financial intermediation, where closely held companies prevail, the
rise in the volume of intangible investments required to compete effectively, can make the controlling
shareholders unable to adequately finance firm development. Especially in those industries where
competitive conditions demand conspicuous investments in intangible assets, the survival of companies
with a limited equity-base or even controlled by single entrepreneurial families, has become more and

Arturo Capasso - Stakeholders Theory and Corporate Governance

more difficult. In the few cases it happens, the controlling shareholders, even when they can rely on
remarkable wealth accrued during many generations, cannot benefit of an effective portfolio
diversification. They are, therefore, considerably risk adverse, hindering intangible assets development,
thence the crisis in governance structures where a single controlling shareholder maintains a leading role
(Capasso, 1995).
On the other hand, those systems based on the security market - though fitter to bear substantial equityfinanced investments - experienced the well-known problems due to the public company as a prevailing
business organization model. Actually, an increasing presence of intangible assets adds further
impediments to public company efficiency because:
i) intangible assets enhance the information asymmetries, that are to a certain extent, irreducible
because their removal could make the firm suffer greater damage due to the disclosure of
confidential facts (Diamond, 1985; Myers and Majluf, 1984);
ii) asymmetric information create a gap between the intrinsic economic value and the market value of
companies, so producing adverse selection phenomena in the capital market (Brennan, 1990;
Capasso 1995);
iii) lack of active shareholders may cause deviant behaviours as executives could use their discretionary
powers in order to maximize their personal utility and manage the company according to their
peculiar risk-adversion, that is usually higher than the average risk-adversion of a well diversified
shareholder (Amihud and Lev, 1981);
iv) some investments in intangible assets are particularly apt either to operate accounting make-ups or
to hide managerial perquisites and unscrupulous behaviours of controlling shareholders; examples
can be provided by the capitalization of useless R&D costs or by those expenses justified by the
rather vague definition of company image.
Furthermore, either in the intermediary-based systems or in the market-based ones, since many
intangible assets cannot be integrated in an autonomously tradable proprietary asset, they cannot be
considered under the direct control of the company, as they are embodied in other stakeholders:
managers, employees, customers, suppliers.
This is probably the crucial remark: the inseparable connection between such relevant assets as
knowledge and trust and some of the main stakeholders could actually subordinate the firm competitive

Arturo Capasso - Stakeholders Theory and Corporate Governance

effectiveness to the permanence of these stakeholders within the existing business combination. This is
particularly observable in all the companies whose critical factors for success are represented by the
professional capabilities of the staff, but also in those firms owing their competitive advantage to their
belonging either to an industrial district or to a network of interdependent firms.
As a rule, when the critical factors for success in a particular industry are embedded in the main
stakeholders, the company's possibility of safeguarding its intangible asset-base depends on its capacity
in fulfilling the legitimate claims of those stakeholders who are part of its competitive strength.
Stakeholder claims can be, according to the circumstances: wage incentives, occupational security and
good working environment; reliable products, after sale assistance, stable relationships; or more in
general the respect of those implicit contracts and moral obligations that are a consequence of bounded
rationality and contractual incompleteness (Shleifer and Summers, 1988). The higher costs borne to
satisfy such claims are the costs to produce, maintain and strengthen knowledge and trust (Kreps,
1984). They allow the main stakeholders to extract a quasi-rent, rewarding them with returns higher
than the current market value of the resources provided or with products or services more valuable than
the price charged. Obviously, this does not mean that the stakeholders contribution to the value created
is lower than the return they get; it only means that in some circumstances stakeholders get a share of
the economic value created by the business system, which can no longer be regarded as shareholders
exclusive belonging (Myers, 1990; Charreaux and Desbrires, 2001).
Summing up, the presence of intangible assets modifies the allocation of residual claims as company
performance can substantially affect the wealth of those stakeholders embodying some of the critical
factors for company success; at the same time, intangible assets qualitatively modify the company
financial needs, as intangible assets' higher riskness and their reduced cautional value demand a larger
equity-base (Williamson, 1988).
In order to analyze the interrelation between the two problems and find out possible viable solutions, it
might prove interesting to suggest a systemic approach the company financial structure. From that,
analysis there could emerge reflections on the relation between the formal and substantial aspects of
corporate governance as well as important insights for what concerns the evolution of ownership
structures and governance models.

Arturo Capasso - Stakeholders Theory and Corporate Governance

4. Systemic value and corporate governance

A systemic reconsideration of company financial structure requires an in-depth analysis of the
relationship between investments and financing decisions, thoroughly investigating the company financial
structure as the premise for the allotment of ownership claims on its future cash flow3.
Several interpretations can be given of this statement. From a simplified perspective, it is easily
understandable that the value of the company investments belongs to shareholders and debtholders in
proportions reflecting the respective contributions and the contractual arrangements. Anyway if we
move our attention on the dynamic nature of value, regarding it as the total amount of future unlevered
discounted cash-flows, we can observe that the debt-equity ratio set the share of operating cash flows
to be assigned to debtholders and the residual amount available for managers. Managers, in their turn
will use it - according to circumstances and in different proportions - either to remunerate shareholders
or to plow back into the business. In other words, the presence of a managerial discretionary power on
the use of free cash flows brings in a further group of agents competing for the allotment of the company
economic value (Jensen, 1986).
The growing importance given by the evolution of competitive dynamics to intangible assets complicates
the problem even more. If the economic cycle of the company is based on accrued intangible assets,
that are continuously utilized to produce new intangibles, attainable results will no longer be so
appropriable and transferable as either monetary or monetary-measurable quantities are and their
allotment will not be so easy.
Business economists have traditionally focused their attention on the company value from the
shareholder point of view (Rappaport, 1986), and even the most popular profitability indicators - such
as net income, operating margin, ROE or ROI - measure the company performance in terms of increase
in shareholder equity or in total value for both shareholders and debtholders (Donaldson, 1984).
Truly it is not possible to claim that these approaches belong to an obsolete stage of the industrial
development; there are indeed a lot of companies where - either because of the simplicity of the
production process or because of the strong overlapping among different stakeholder categories - such
parameters as net income, ROI or shareholder wealth, are still the fundamental landmarks for business
management. Anyway, we cannot ignore that for many companies, intangible assets are, to a larger and
larger extent, critical factors for success, and even in many industries usually regarded as traditional,


Arturo Capasso - Stakeholders Theory and Corporate Governance

hardware components are quickly losing moment with respect to the soft ones, if not in terms of
absolute economic consistency, at least as source of competitive differential4.
The analysis of those phenomena, in order to assess their impact on the evolution of ownership
structures and corporate governance, requires an approach bringing the value of a business system as a
whole within the traditional framework of the company balance sheet. In particular, this can be achieved
by outlining a systemic balance sheet, comparing the value of all the assets included in the business
system with its financial structure, considered in its twofold function of financing source definition and
allocation of claims on expected future cash flows.
The systemic balance sheet has no direct connection with the firm's book, where we find mainly tangible
assets and, only on certain terms, the intangible ones. It is just a way of expressing the identity between
the market value of assets and liabilities. More precisely the asset side displays the market value of all
the resources contributing to the company development, including those intangible assets who are not
directly controlled by the company, such as capabilities and trust it shares with managers, employees,
customers, and suppliers. From this perspective, intangible assets can be divided into three main
categories: firm-based, organization-based and people-based (Exhibit 1).
Firm-based intangible assets are not particularly interesting for the present analysis: a company can use
them at its convenience, as well as transfer them, either temporarily or forever, via autonomous
transactions. The same for people-based intangible assets: since they are not firm specific, they have
autonomous market value. In order to use them a company must remunerate their respective owners on
the basis of what they could have earned if using the same resources in an alternative way (Hall, 1994).
Our interest, therefore, focuses on organization-based intangible assets (shared by the firm's internal
organization and its stakeholders); they are, indeed, the only ones that really fit in the restricted definition
of intangible assets, as stated above. Among them we can distinguish (even if the distinction is not
always clear) relational assets deriving from the relationship existing between the company and its
shareholders and those assets that, even if not autonomously negotiable, can be regarded as parts of the
corporate wealth in so far as they are parts of the company organizational and procedural structure and
do not depend, in some cases, on people working in it. In the logic of valuation, such assets are the
goodwill in the strict sense: it cannot be assessed apart, but must be added to the equity value. As a
matter of fact a differential due to assets that cannot be autonomously assessed but that give an


Arturo Capasso - Stakeholders Theory and Corporate Governance

important contribution to value creation has always been observed by business economists (Guatri,
1994); anyway valuation models put into practice have only and always considered that part of the
economic value increase pertaining to shareholders or, at the most, to shareholders and creditors
(Copeland et al., 1994).
If on the contrary we want to determine the value of a business system, we must figure out the present
value of future systemic cash-flows, including the above-market returns transferred to the main
stakeholders (quasi-rent5).
The net present value of the so calculated cash-flows can be divided as follows:
i) the market value of each single company-based asset;
ii) the goodwill in strict sense, as the market value of the firm-based intangible assets (pertaining to
equity-holders and debtholders);
iii) the systemic goodwill as the present value of the expected future cash-flows produced by
organization-based intangible assets (pertaining to all the stakeholders on the basis of formal or
implicit contracting).
The liabilities side will show the total amount of debt and equity, at their current market values, duly
quantified on the basis of debtholders and shareholders expected cash-flows. In particular, for listed
companies, equity can be subdivided in two parts: the former representing the market value of company
share as calculated according to all publicly available information, the latter corresponding either to the
higher or to the lower value inferred on the basis of information available only to insiders (management
or controlling shareholders). The likely unbalance between assets and liabilities represents the systemic
equity that corresponds to the present value of the quasi-rents that will be distributed to the
stakeholders with whom the firm shares the critical intangible assets. Under this perspective, the
systemic equity include the capitalization of those advantages obtained by major shareholders,
executives or employees such as: managerial perquisites, fringe benefits, above-market wages,
overstaffing, but also those benefits provided to customers and suppliers in terms of reduced transaction
costs, as a consequence of a reliable and trustworthy cooperation.
The capitalization of the stakeholders claims on a certain amount of the economic value created by the
business system can be assimilated into an additional equity posting (systemic equity), with a lower
seniority with respect to debt but in any case contributing to the financing of the firm systemic value.


Arturo Capasso - Stakeholders Theory and Corporate Governance

Such an explanation can find an underlying rationale in the relevant idiosyncratic investments, made by
the main stakeholders in order to enforce their relations with the company. As the value of these
investments would vanish in case the company run into bankruptcy, stakeholders, just like shareholders,
can be considered residual claimants too6.
Moreover the contract incompleteness which can be credited to the intangible contents of exchanged
products and services, has induced to try out new institutional settings in risk and return sharing among
different stakeholders. So contractual or organizational formulas recently carried out can be seen as an
attempt to give some stakeholders an ideal share in the company equity. Such an attribution, even if it
cannot be consider as the allocation of actual ownership claims on company future cash-flows,
represents the substantial (but not legal) premise in order to establish some particular stakeholder
Obviously a company in default towards its stakeholders does not run into legal consequences, as it
happens in case of default towards debtholders, but it will probably suffer the loss of that part of
company's wealth embodied in the relation between the company and those stakeholders whose claims
have not been met. It is now possible to imagine the systemic balance sheet as it appears in Exhibit 2.
Under this point of view, the stakeholders can be described as a virtual shareholder, contributing the
most part of the systemic equity and getting a share of the economic value created by the company.
Therefore, in analyzing real situations, the first problem consists in identifying those shareholders the firm
main intangibles depend on. For instance, it is believable that in a medium-sized family business,
intangible assets are primarily made up of the fiduciary relationship existing among the partners and of
the entrepreneurial heritage, the founder left to her/his heirs. As far as there are no relevant interests of
other people involved, the passing from a traditional vision to a systemic one could not be so important.
Conversely, there are particularly complicated cases in which listed companies carry on business
strongly depending on the competence of individual professionals7.
This is, for instance, the case of advertising firms, merchant banks, newspapers, where conflicts of
interests might rise between virtual and actual shareholders. The origin of these conflicts is mainly in the
fact that virtual shareholders press for being acknowledged, according to circumstances, adequate
relevance either in the allocation of created value, either in corporate governance. Even the liabilities side


Arturo Capasso - Stakeholders Theory and Corporate Governance

must therefore be analyzed and weighted in order to distribute powers, risks, and returns, among
different stakeholders.
The knotty question consists in ensuring all the shareholders (both actual and virtual) the possibility to
participate or, more plausibly, to control corporate governance. When professional managers are
entrusted with the definition of corporate strategy and policies - and in the major companies no different
solution seem workable - each part must be given, in proportion to contributions provided and risks
borne, the possibility of somehow controlling managerial decisions. This is very important since the
managerial role is actually delicate, as they have to mediate between shareholders and stakeholders. The
obvious risk is that stakeholder theory might be used to cover traditional managerial opportunism, so
largely described in literature (Berle and Means, 1932; Marris 1964; Fama and Jensen, 1983). From
this particular point of view, the suggested methodology can reduce managerial discretion and set a
legitimate limit to stakeholders claims. The acknowledgment of a systemic goodwill as the economic
value created by organization-based intangible assets (due to stakeholders different from shareholders
and creditors) could enable to control that stakeholders' returns exceeding the market value of either the
work done or the resources provided, may take place within the limits of the systemic value that they
originate inside the organization, therefore, without damaging either shareholders' or debtholders'
legitimate claims.

In the last decades, corporate governance has become a highly controversial issue and traditional
governance models are everywhere under a complex transformation process. In those economic
systems traditionally based on financial ni termediation, governments have worked to strengthen the
security markets by promoting the efficiency and the transparency in negotiations. In market-based
systems, institutional investors, already significant shareholders in many important public companies,
have modified their traditional not interfering in corporate governance and have shown a growing
activism as management interlocutors and controllers (Black, 1993; Bhide, 1993; Pound, 1994).
Furthermore, in most countries, leaving aside prevailing financial models, there have been important
initiatives to regulate the composition and the functions of company boards, aiming to increase their


Arturo Capasso - Stakeholders Theory and Corporate Governance

representativeness and strengthen their controlling power on the managerial decisions (Cadbury, 1993;
Lorsch, 1995, Pound, 1995).
As a whole, it seems that different corporate models are converging towards a renewed public company
model, with shareholding divided among active institutional investors and governed by an influential
management-independent board. The convergence may be confirmed at least for companies working in
global industries, since, for those companies, the size of the critical mass of intangible investments
demands such an equity-base hardly sustainable, either by a single entrepreneurial group, or even by a
bunch of allied shareholders. In these companies, the institutional investors' involvement can offer
outstanding contribution to the effectiveness of mechanisms that, by conveying to the investors credible
signals, reduce the gap between stock market evaluation and the company actual economic value.
Moreover, further advantages could derive from a clearer distinction between management and board
functions. Executives should be responsible for the company strategy definition and implementation
whereas directors should set goals and play a role of active well informed supervision on the managerial
In this regard we note a very animated debate about the opportunity of granting the main stakeholders
board representation, according a procedure that is usually followed by many companies and that
somewhere is required by the law, as in the case of the two-tier board system of the main German
The theme is controversial: as a general principle, power and responsibility should be closely correlated
in each company. According to such a principle, corporate governance should be a privilege of those
who bear the economic risk (apparently the shareholders). When examining this interpretation more
deeply, we realize it can be shared only by companies where governance implies no delegation
mechanisms and the production process makes use of easily available generic factors whose acquisition
can be regulated by complete (or quasi-complete) contracts. In those organizations where ownership
dispersion compels shareholders to delegate power and responsibility or where the contracts regulating
the acquisition of production means and the sale of goods and services are, for the most part,
incomplete, the economic risk is not exclusively borne by shareholders but by some stakeholders as
well. The intangible nature of the main inputs and outputs of the economic process contributes to
enhance contractual incompleteness and the number of people whose earnings are, residual (Fama and


Arturo Capasso - Stakeholders Theory and Corporate Governance

Jensen, 1983, Milgrom and Roberts, 1992). The need to reduce transaction and agency costs due to
contractual incompleteness and the presence of intangible assets shared with third parties has made
companies test new organizational solutions, consisting in strengthening relations with customers and
suppliers in inter-company networks and in establishing contractual relations with managers and
employees including the explicit or implicit sharing of risk and returns.
The circumstance for which some intangible assets are not directly available for the company, as they
are shared with other people (managers, employees, customers, suppliers) subordinates their
effectiveness, and even their permanence within the existing economic coordination, to the satisfaction of
those people's claims. The claims are, according to circumstances: wage incentives, occupational
security and good working environment, reliable products, high service level, the respect of tacit
agreements and implicit contracts.
The proposed systemic approach to corporate governance is a working hypothesis, to be integrated
and improved, in order to provide a theoretical framework to evaluate the impact of the growing
importance of intangible assets. Furthermore, the model might allow discriminating the importance of the
different stakeholders and the legitimization of their claims on the economic value created according to
their specific contribution to the corporate systemic equity.
From this perspective, stakeholders can be regarded as virtual shareholders whose legitimate claims
have, with regard to the company systemic equity, a relation similar to the one linking the shareholder
expected returns to equity value. The company that does not meet its stakeholders' claims, could lose all
the capital of competencies and trust that is a basic condition to create economic value. Eventually, it
can be interesting to observe how reshaping the stakeholders theory from the point of view of the
systemic value, can help to define possible development ways to the multifaceted debate on business
First of all recognizing stakeholders the role of virtual shareholders gives the possibility of making clearer
the relations of correlation and opposition among the various interest focusing on the business, handling
them always within an economic logic. In particular defining systemic value creation as the firm capacity
to continue its production of new resources by means of the previously produced resources, gives
managers a goal that is either sharable by the main stakeholders either ethically correct, since it can


Arturo Capasso - Stakeholders Theory and Corporate Governance

secure the firm's survival, optimize the use of scarce resources, and maximize the total value produced
for the benefit of the whole economy.
Moreover, the adopted framework could help to identify a fair criterion to classify the stakeholder
interest (Donaldson and Preston, 1995). To such a purpose assigning virtual shares of the systemic
equity in proportion to the contribution given by different stakeholder groups, or by individual
stakeholders to the firm's global value, could reveal possible imbalance in the division of created
economic value.
All that, makes the directors' task particularly difficult since, even if they could be interested party, they
are called to draw up the main contracts, setting up, this way, mechanism to distribute created systemic
value (Aoki, 1980). In this prospective the problem of boards' formation and empowering must be
differently reviewed, that is renouncing to set prearranged representation rules. It is, instead, necessary
to identify those companies or industries where, for certain categories of stakeholders, it is recognizable
a specific significant contribution to the process creating systemic value, so the presence of own
representatives in the board could be regarded as the formal acknowledgment of a virtual participation
in the company equity.


Arturo Capasso - Stakeholders Theory and Corporate Governance


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Arturo Capasso - Stakeholders Theory and Corporate Governance

Exhibit 1






Industrial designs

embodied in the organization

Systems and procedures
Organizational routines
Corporate culture

Professional skills
Generic capabilities
Standard know-how

shared with stakeholders

Supplier/customer networks
Total quality
Learning capabilities
Innovation capabilities
Product differentation
Customer satisfaction

Arturo Capasso - Stakeholders Theory and Corporate Governance

Exhibit 2


Tangible Assets
* current market value of tangible assets
* current market value of autonomously
negotiable intangibles

* present value of expected future

payments to debtholders

* present value of expected future
payments to shareholders
on the basis of publicly available

* firm-based intangible assets

Control Premium
Systemic Goodwill
* organization-based intangible asset

* increase or decrease of the equity value

on the basis of insider information
* present value of controlling shareholders benefits and perquisites

Systemic Equity
* present value of expected future
quasi-rent of the firm stakeholders






Arturo Capasso - Stakeholders Theory and Corporate Governance


For a recent survey of theorethical contributions in this field see Becht et al.(2002)
Academic scholars and practitioners usually discuss of different capitalist models distinguishing the
Anglo-Saxon model, based on security market and public companies, from models based on closely
held companies, long term shareholders and massive bank financing, like those developed in Germany,
Japan, France and Italy (Roe, 1993; The Economist, 1994).
The concept is well expressed by Jensen and Meckling at the beginning of their well-known
contribution on agency costs. "We do not use the term capital structure because that term usually
denotes the relative quantities of bonds, equity, warrants, trade credit, etc., which represent the
liabilities of a firm. Our theory implies that there is another important dimension to this problem
- namely the relative amounts of ownership claims held by insiders (management) and outsiders
(investors with no direct role in the management of the firm)." (1976, p. 305).
Johnson and Kaplan acknowledge this when they affirm: "A company's economic value is not
merely the sum of the values of its tangible assets, whether measurable at historic cost,
replacement cost, or current market value prices. It also includes the value of intangibles assets:
the stock of innovative products, the knowledge of flexible and high quality production
processes, employee talent, and morals, customer loyalty and product awareness, reliable
suppliers, efficient distribution networks and the like....reported earnings cannot show the
company's decline in value when it depletes its stock of intangible resources." (1987, p. 202).
The concept of quasi-rent, originally introduced by Marshall (1920) is thoroughly explained in all the
main textbooks of industrial economics, in particular see Milgrom and Roberts (1992)
In this perspective it is particularly explanatory to compare the situation of a supplier, who deeply
invested in transaction-specific assets to develop a stable relation with a particular company, with an
investor, who owns a certain amount of company shares, holding them in a well diversified equity
portfolio. Likely, the supplier's net worth will depend on company performance even more than the
investor's one. Furthermore a possible bankruptcy would hurt with major strength the supplier than the
investor who can sell his/her shares in a liquid and efficient market at the very beginning of the crisis
(Bhide, 1993)..
According to a respected economic newspaper "The particular problem is how to handle the stock
market relationship of 'people' business, where not only do all the assets walk out of the front
door every evening saying 'goodnight' to the security man, but often the business has to be
continually recreated because innovation and relationships are more important than franchises
or contracts." (B. Riley "When shareholders own less than they think" Financial Times 19/7/1995).