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Accentuating the link between Shareholder

Empowerment and Corporate Governance
Framework in Hospitality Organizations

Varun Saluja (H- 1487)

“Submitted in Fulfillment of the Requirement for B.A. (Hons.) in

Hotel Management”



March 2010 

IHM-Aurangabad Shareholder Empowerment 2010


“Governance and leadership are the yin and the yang of successful organisations. If you
have leadership without governance you risk tyranny, fraud and personal fiefdoms. If you
have governance without leadership you risk atrophy, bureaucracy and indifference.”

- Mark Goyder

The global economic meltdown coupled with massive corporate scandals has highlighted the
prominence of corporate governance in the present day business world and the hospitality
sector like other industries is not immune to this crisis. A report published by HVS Global
Hospitality Services postulated that shareholdings increasingly demand accountability and
transparency in routine operations of the organizations and therefore demand for momentous
transitions in the varied facets of corporate governance.

This research builds up a conceptual framework by reviewing the findings of previous

academic works to identify eccentricities within the lines of the literature. The study further
deploys a combination of an epistemological and dialectical mode of research methodology
by underscoring the shareholder empowerment aspect of corporate governance and its
corresponding impacts on the governance mechanisms of the organization. The arguments
laid down by the proponents of shareholder empowerment are critically pitched against the
director primacy perspectives which helps in clearing the otherwise blurred picture of this

The findings of the research have been deliberately put to test in a triangular set of major
international hospitality conglomerates like Marriott Group, InterContinental Group and
Accor Hospitality which hail from varied geographical locations on the globe. The firms
characterised by different governance structures yield a varied set of shareholder perspectives
thereby supporting the in-depth discussion of the research that nearly envelopes majority of
the shareholder empowerment aspects. The research concludes with summarised
interpretations of the findings and a platform for further research into the same domain.

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I declare that this Dissertation is the result of my own individual efforts and that it confirms
to university, departmental and course regulations regarding cheating and plagiarism. No
material contained within this Dissertation has been used in any other submission, by the
author, for an academic award.

Varun Saluja (H-1487)

Date: 3rd April, 2010

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1.1 Introduction 1

1.2 Statement of Issue 1

1.3 Statement of Aim and Objectives 2

1.3.1 Statement of Aim 2

1.3.2 Statement of Objectives 2

1.4 Scope and Limitations of the Dissertation 2

1.5 Dissertation Structure 3

1.6 Conclusion 4


2.1 Introduction 5

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2.2 Genesis of Corporate Governance 5

2.3 Strategy and Governance 8

2.4 The Shareholder Perspective in Corporate Governance 10

2.4.1 Shareholder Primacy 11

2.4.2 Shareholder Empowerment 14

2.5 Conclusion 19


3.1 Identification of Research Topic 20

3.2 Research Methodology 20

3.3 Accomplishment of Aim and Objectives 21

3.4 Target Audience 22

3.5 Pertinent Sources of Data 23


4.1 Introduction 24

4.2 Gist of Theoretical Framework 24

4.3 Comprehensive Critique 26

4.3.1 A Contrasting Viewpoint 27

4.4 Pronouncement in Context of the Hospitality Industry 31

4.4.1 Shareholder Perspective at Marriott International Inc. 32

4.4.2 Shareholder Perspective at InterContinental Hotel Group 33

4.4.3 Shareholder Perspective at Accor Hospitality 35

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4.4 Summary 36


5.1 Conclusion 37

5.2 Future Directions and Scope for Further Research 38




2.1 The Ethical Stance 8

4.1 Bibliographical Collage 25


U.S.A United Sates of America

U.K. United Kingdom

CEO Chief Executive Officer

CFO Chief Financial Officer

SEC Securities and Exchange Commission

SEBI Securities and Exchange Board of India

DGCL Delaware General Corporation Law

MBCA Model Business Corporation Act

CSR Corporate Social Responsibility

SRI Social Responsible Investments

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I am highly indebted to all those people who have contributed in various ways to the
successful compilation of this dissertation. I would particularly like to take this opportunity to
express my heartiest gratitude for the following people for their valuable guidance –

Mr. Anand Iyengar, my dissertation guide, who always inspired me and provided valuable
inputs at every stage of this dissertation. I am highly grateful to him for instilling confidence
in me to pursue this topic and motivating me in all my endeavours, while at the same time
providing his critical inputs for meticulous assemblage of this document.

Mr. Malay Biswas, for his valuable guidance in the preliminary stage of this dissertation.

Ms. Rupa Fernandez, Ms. Bhagwati Bainsoda and the rest of the IHM-A library team for
their overall support in gathering data from miscellaneous sources.

Lastly, I would like to thank all my colleagues and friends at the Institute of Hotel
Management- Aurangabad and University of Huddersfield for their constant support.

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1.1 Introduction

This section intends to provide an expansive description of the development of the research
issue. It also incorporates a gist of the overall structure of this dissertation and concludes with
the description of scope and limitations of this research.

1.2 Statement of Issue

According to Morck and Yeung (2008), shareholders possess a different position from the
rest of the stakeholders as their claim on the corporation’s wealth is considered residual. This
is due to the fact that a firm is liable to pay its workers, suppliers, creditors and taxes first
leaving the dividend to be paid in the form of the last move. Thus, poor governance or even
the slightest hint of mismanagement may hurt the shareholders on monetary terms as
compared to stakeholders who are insulated from such problems. This calls for shareholders
to be more participatory in the decision making before the worsening of the corporate
governance system of an organisation.

There have been profound changes in the standards and expectations of governance practices
following high scale corporate mishaps. These led to the introduction of the Sarbanes-Oxley
in the United States and a comparable legislation in Canada to take note of the various
investor concerns regarding standardised corporate governance. These rules took shape to
restore the public’s confidence in governance practices. Furthermore, an increasing assertive
culture of shareholder activism has also been prevalent in Canada (Trachuk, 2007). These
two trends have created an environment where activist shareholders have the opportunity and
the inclination to engage on issues of governance and use it as leverage in strategic battles
with corporate boards.

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Corporate Governance is a versatile subject which has drawn the attention of the modern
world flowing conspicuous corporate collapses like that of Enron in the initial period of this
decade ranging to the most recent Satyam scam. It is not only considered a regulatory
framework to overlook the company’s affairs but also has the responsibility of a free flow of
ethical conduct within the firm. Bebchuk (2005) is the primal authority to put forth the idea
of shareholder empowerment in the world of governance. The concept has been welcomed by
many corporate pundits while at the same time has faced considerable criticism from the
managerial proponents. These issues have laid a foundation to carry out a research in order to
establish a linkage between the two fragmented domains of shareholding and corporate

1.3 Statement of Aim and Objectives

1.3.1 Statement of Aim

To review the shareholders’ role in corporate governance practices in the context of

hospitality organizations.

1.3.2 Statement of Objectives

1.) To review the shareholder related governance mechanisms in large hotel corporations
as suggested by McConvill (2007).
2.) To investigate the allocation of power between top management and shareholders as
suggested by Bebchuk (2003) and advocate appropriate participatory rights for
shareholders to utilize their shares as an experiential purchase.

1.4 Scope and Limitations of the Dissertation

The scope of this research is to examine the shareholding facet of corporate governance in the
domain of the hospitality industry. The research will determine the various aspects of
shareholding thereby shedding light on the empowerment perspective in order to check its
impact on the performance and governance of the firm. The research will be carried out on a
global circuit and will incorporate examples of three of the leading hotel chains of the world.

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The research possesses the following limitations:

1.) Due to dearth of previous academic works on the shareholding perspective of

corporate governance, this research is not adequately supported especially in the
context of the hotel industry.
2.) The theoretical framework has been formed with a limited set of resources due to the
inaccessibility problem in the case of a definite set of published academic journals.
3.) The research takes into account the effect of globalization on corporate governance
frameworks of leading hotel companies under the light of high profile takeovers and
mergers and acquisitions. However, the research is still limited to a set of only three
hospitality organizations from diverse geographies.
4.) Lastly, the research is completely conceptual in nature and has not been tested
empirically thereby leaving a further scope for research in the same discipline.

1.5 Dissertation Structure

The dissertation has been bifurcated into five main chapters for a systematic representation of
the research. Chapter one provides an insight into the study with the research issue and lists
the aim and objectives along with the scope and limitations of this research. Chapter two
incorporates a review of the theoretical framework on corporate governance and the
shareholder empowerment aspect. The distinct elements of linkages have been identified in
this section against a strategic perspective.

Chapter three depicts the research methodology followed in carrying out this research and the
way in which the objectives of the research have been accomplished along with a target
audience for the research. The data from annual reports has been analysed to fit in the context
of the research and establish a link between the subject matter and the hospitality sector.
Chapter four deals with the discussion comprising of the identified literature gaps in the
academic construct of this research. The various elements of the literature review have been
critiqued to provide a comprehensive outlook and a contrasting viewpoint of the shareholding
aspect in corporate governance. Chapter five concludes the research and suggests scope for
further research.

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1.6 Conclusion

The shareholder component of corporate governance has seen new light in the recent past. It
has assumed an important statute in the governance mechanisms of the hotel sector in
particular as this industry like many other industries faces a conflict in the interest between its
shareholders and stakeholders. This research endeavours to examine the impact of
empowering shareholders and its corresponding effect on the work climate and operational
performance of the firm.

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2.1 Introduction

Corporate Governance is a critical by-product of the market discipline and hence good
governance is transparent governance. Publications released by firms in the form of corporate
responsibility reports and coverage of social, environmental and governance issues in annual
reports confirm how much firms realize that stakeholder relations management can
substantially contribute to their strategic success.

Corporate Governance has been a multi-faceted subject (Dignam and Lowry, 2006) which
has experienced a renewed interest in the corporate world after the high-profile collapses of
large corporate conglomerates like Enron, WorldCom and Satyam. The link of strategy with
governance practices stems from the opportunities given to the top level executives of the
organisation to influence the future purpose of the organisation (Lynch, 2006). Corporate
Governance is not only viewed as a tool to maintain transparency in the flow of information
but is also responsible for conducting the organization’s affairs with an ethical corporate
conduct. It lays down a framework which details the purpose of the organization thereby
stating that how the organization sets its purposes and priorities and to whom it is there to
serve (Johnson et al. 2005).

2.2 Genesis of Corporate Governance

The etymological origin of corporate governance is Greek and Latin and aims to capture a
creative meaning of collective endeavour that defies the contemporary inclination to place a
passive and regulatory emphasis on the phrase (Clarke, 2007). In this context, one of the most
lucid and applied definition of corporate governance was employed in the Cadbury Report
(1992) stating that ‘Corporate governance is the system by which companies are directed and
controlled’. OECD (2004) elaborated corporate governance as an element in improving
economic efficiency and growth as well as enhancing investor confidence by involving a
stable relationship between a company’s management, its board, its shareholders and other
stakeholders. It also provides the structure through which the objectives of the company are
set and the means of attaining those objectives and monitoring performance are determined.

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An efficient governance system in an organization should offer proper incentives for the
board and the management to accomplish targets and goals that lie in the interest of the
establishment and its shareholders along with proficient performance monitoring. Such an
adequate system helps to provide a degree of confidence and comfort that is necessary for the
proper functioning of a market economy. There has been a wide public concern over various
scams and corporate collapses, issues of executive overpay, abuses of management power
and corporate social irresponsibility (Letza and Sun, 2002) in the last two decades leading to
a series of formal reports and proposals published in the business arena. There have been
many literature works available in the domain of corporate governance with an array of
different perspectives ultimately narrowing down to the supporters and critics of the
shareholder and stakeholder models of corporate governance.

The global economic downturn coupled with massive corporate scams signifies the
importance of corporate governance even in the case of hospitality organizations which are
not immune to the current crisis and meltdown. The research literature on dimensions of
corporate governance is significantly scarce in the domain of the hospitality industry. A
report published by HVS mentions the increase in demand of the shareholders for
accountability and transparency in daily operational activities of the firm thereby calling for
significant alternatives in various areas of governance practices.

Novaes and Zingales (1995) suggested that governance mechanisms should be stronger for
companies with a low leverage and weak for companies with a higher leverage leading to a
study conducted by Andrew et al. (2006) on the average leverage levels of hospitality and
restaurant firms. Organizations posses different characteristics in terms of their supply chain
and cost structure (Jones, 1999) thereby defining the set of the practiced governance reforms.
These can be distinguished as in the case of the hospitality industry wherein Guillen (2008)
bifurcated the hospitality industry into hotels, restaurants and casinos on the basis of their
operational sets. A recent study conducted by Dahlstrom et al. (2009) investigated a new
dimension of governance in the hotel sector of Norway. The study highlighted governance
reforms in the context of inter-firm contracting including independent hotels, voluntary hotel
chains, franchises and vertically integrated hotel chains. It concluded that hotel size,
amenities, market size and distance from corporate headquarters influence governance.
Hospitality organizations are experiencing tremendous amount of pressure to abide by strict
governance principles in order to prove to their investors that the firm’s governance is in the
best interest of its shareholders.
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Guillet and Matilla (2010) conducted a study in the U.S.A hospitality industry which
incorporated a governance index (“G”) developed by Gompers et al. (2003) which possessed
a range of 1-24 from 28 corporate governance provisions wherein every single point added
for a provision would reduce shareholder rights and enhance managerial power. The findings
indicated that firms with higher G index value possessed higher levels of capital expenditure
per assets and weaker shareholder rights due to the high protection levels of hotel executives
from hostile takeovers and limitations on shareholders ability to replace managers.

The study puts forth an argument that the governance systems of hospitality firms may be
dissimilar to other industries due to the following reasons: (i) A characteristic feature of the
hospitality firms is the involvement of real estate ownership as well as management which
gives rise to a potential conflict of interest (Guilding, 2003). (ii) The hospitality industry
features high level of capital intensity and relatively low level of operating inventories
(Andrew et al, 2006) leading to high business risk and financial inflexibility due to limited
alternate use and lower resell value of facilities and equipment pertaining to the hotel sector
(Reich, 1994; as cited in (Guillet and Matilla, 2010), p. 2). (iii) Hospitality business is very
sensitive to fluctuations in the economy and therefore greatly depends on the discretionary
spending and the spending capacity of its customers. This requires faster decision making
skills which are vested in the management as they possess the best insight into such situations
(Clarke, 2007).

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2.3 Strategy and Corporate Governance

The synchronised act of the regulatory environment and corporate governance arrangements
arbitrates an organization’s responsibility towards its shareholders. The ethical stance (Jones,
1999) outlines the minimum obligations that a firm extends toward its shareholder set which
possesses short term and long term interests towards the formulation and evaluation of
company strategies. The prime responsibility of any corporate house is to create value for its
shareholders which incite monetary expectations from the overall stakeholder set of an
organization. A company strategy is strongly influenced by such intermediaries as
institutional shareholders, who for instance are empowered to play pivotal roles in strategic
decisions like mergers or takeovers.

Figure 2.1: The Ethical Stance

Source: Adapted from (Johnson et al, 2005)

The governance chain of an organization can be beneficial in order to gain an understanding

as to how organizational purposes and strategy can be directed by the various components in
the set in correspondence with the principal-agent model. An important consideration of the
governance chain is the director’s accountability to shareholders which should be conjoined
with the relationship to other stakeholders by taking into account their interests as well.

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The accountability aspect bolsters the empowerment issue and aids in creating business
strategies which involve major processes of consultation with the stakeholder groups
(Johnson et al. 2006). As regards to the shareholdings, due to shares being dispersed far and
near, managers tend to act upon the firm’s purposes and strategies with little or no
intervention of shareholders. The latest by-product of such discipline is the shareholder
activism which further slows down the implementation of the proposed strategic changes
along with other negative repercussions.

There has been no scarcity of proposals to enhance corporate governance frameworks

although the approach to structure these reforms has faced heavy criticism across the
corporate world. This calls for a more strategic approach for policy makers so as to have
better structured reforms which are well aligned to the overall goals of the organization. It
also implicates a similar inference for managers and directors of the firm who are required to
be well versed with such reforms so that they operate in the best interests of the ‘principals’.
The shareholder perspective as depicted by various governance models across diverse
geographies gives an insight to different ownership structures with a varied shareholding
component. The complexity of such structures is to be dealt with lucidity in order to develop
better strategies for an organization. The role and power of shareholders also differs owing to
the corresponding variation in shareholder structures around the world. This may also lead to
a strategic change in the mission and vision of the firm. Therefore, the governance
arrangements are required to provide swift and thorough decision making, lucrative
investments and fruitful relationships with the shareholders in order to successfully pursue
company strategies.

Acceptability factor is concerned with the expected performance outcomes of the strategy
(Johnson et al, 2006). The strategy that the company formulates must be crafted in such a
manner that it is directed towards shareholder empowerment because they are the true owners
of the company. The traditional financial accounting measures have been unsuccessful to a
large extent in order to clearly delineate the value proposition of the various strategic options
deployed by an organization. The shareholder value is a critical component in this regard that
led to the coinage of shareholder value analysis (Rappaport (1986) as cited in Johnson et al).
This value component in the shareholder domain calls for estimation of risk from a strategic
perspective (Lynch, 2006). This may pose a difficulty however as the future strategy is not
certain unlike the balance sheet analysis of the past events.

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The empowerment aspect of the shareholders comes into play when firms undergo high
amount of risk and intense diversification. This enables a disgruntled lot of shareholders to
actively participate in strategic restructuring of the organization along with the corporate
level managers (Harrisson and Enz, 2005). Shareholder wealth also represents a key
component that portrays the significance of their role in an organization as it may act as a
mode to apply pressure on the top management and call for the dismissal of senior executives
for poor strategic planning (Lynch, 2006).

2.4 The Shareholder Perspective in Corporate Governance

The turn of the new millennium saw a significant change in the topics related to corporate
governance like executive compensation, managerial ownership, shareholder empowerment
and board independence (Levitt, 2005) while sidelining issues like shareholder rights and
shareholder values which were otherwise prime issues of discussion in the business world
(Caton and Goh, 2008). The advancement of technology in the era of the Industrial
Revolution saw the diffusion of the ownership component of large corporate conglomerates
as no single individual, family or group of managers could provide sufficient capital to
sustain growth (Clarke, 2007). The once dominant and inconsiderate character in corporate
governance, the shareholder, is now facing increased pressure from its rival stakeholders
(creditors and general public) and their agents (the management and directors) who are raring
to increase their respective stakes (Proimos, 2008).

Berle and Means (1932) propagated the implications of ‘separation of ownership and control’
in the context of the shareholder perspective laying a platform for the agency problem which
widened the scope of the managers to exercise their power. The empowerment aspect of
shareholders was an axiomatic element of this study which dictated that as the number of
shareholders increased, their influence upon corporate enterprise diminished as professional
managers took control. The dominant agency theory (Smith, 1937) identified the agency
problem (in the form of managerial negligence and profusion) where the prime aim of the
company’s shareholders, which is to achieve a positive return on their investment, is in
conflict with the interest of the managers which may be the growth and reputation of the
company, the security of their employment, the prominence of their division within the
company or even their own personal financial reward.

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Jensen and Meckling (1976) propagated that the essence of the agency problem is the
separation of finance and management which presumes a fundamental tension between
shareholders and corporate managers. It is a noted fact that though the managers possess the
knowledge and authority of decision making, the shareholders take the financial risk (Roche,
2005) which all the more demands for their robust empowerment. The agency theory
empowers the shareholders to possess the rights to residual claims since they are the risk
bearers (Clarke, 2007) and are categorized as the sole economic actors who make an
investment in an organization without a contractual guarantee of a specific return. The aspect
of shareholder empowerment was also emphasized in the agency theory as in the case of
contingencies, when residual rights have to be allocated between the principal and the agent.
The managers inevitably acquire these rights to utilize the shareholders’ funds as per their
discretion thereby incorporating an element of risk in the form of misallocation of these

Corporate governance is characterised by organizational decision making structures and one

its main purpose is to efficiently bridge the dichotomy between the interests of various sets of
shareholders and stakeholders as a result of the operational activities of the companies (Dodd,
1932). Kaplan and Norton (1992) argued that the balance between different stakeholder
groups is essential to the long-standing viability of the firm as it results in the long term
maximisation of shareholder value The governance reforms can be aligned to a set of
democratic ideas from a philosophical standpoint (Hummels, 1998) and can be efficiently
exercised by protecting a wider set of interests (Carrillo, 2007).

2.4.1 Shareholder Primacy

The challenging business scenario in the global arena has recently witnessed a significant
interest in corporate values particularly focussing on aspects like business ethics (Velasquez,
1998), shareholder value (Jensen, 2000), stakeholder value and (Freeman and McVea, 2001).
The traditional view in this context has always rested on the ethical standards adhered to by
the managers and other employees thus making these corporate values a part of the
organizational decision making programmes. The established practices saw the shareholder
primacy as not only a mandatory rule of the corporate world but also considered as the golden
safeguard to major governance dilemmas (Proimos, 2008).

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The element of primacy was an adjunct of the shareholder theory. It placed the shareholder
interests above all mandates in the management of the firm to an extent where the
management would disregard all other competing considerations. As stated before, the former
monopoly of the shareholder model has been greatly challenged by increased governance
regulations and other stakeholder groups. Dodd (1932) propagated that the shareholder was
elevated to the pinnacle of corporate hierarchy. This was as a resultant of the firm being
considered as a private enterprise under which the business exists for the profit of its owners
i.e. the shareholders who provide the capital for the firm. The shareholders are termed as the
residual claimants who receive the marginal gains and costs thereby possessing the incentive
to maximise the firm’s overall market value.

Coase (1937) propagated the concept of the nature of the firm with a study that highlighted
the significance of authority and direction that define the boundaries of the firm thereby
perceiving the firm behaviour. The firm is viewed as a web of contractual relations focussing
on the aspect of monitoring the team productivity. The widespread fact that the shareholders
of a firm are its ultimate owners views an element of scepticism as all shareholders do not
actively involve themselves in the routine operations of the firm (Alchian and Demsetz,
1972); Bainbridge (2006).

Roe (2001) accounted for shareholder primacy primarily in economic terms by amalgamating
the best interests of the corporation with profit maximization of the shareholders. Therefore,
the shareholder primacy norm is often referred to as “wealth maximization” norm. The view
of the shareholder primacists can be aligned with the findings of Bebchuk (2005) which
validated shareholder participation as a derivative goal.

Strout (2003) portrayed with the help of clear empirical evidence that shareholders in larger
organizations understand the competencies that directors bring to the table. Therefore they
choose not to place themselves in managerial positions in such firms thereby giving way to
the default rule of governance where directors hold responsibility of the management. A
prime reason for this argument is the fact that most shareholders see their purchase of shares
as a purpose of materialistic gain. It is difficult for a typical public firm with innumerable
shareholders to reach a collective consensus as shareholder voting is slow, difficult and
expensive. A supportive contrast with director primacy holds an edge in this regard owing to
their limited number and competent decision making abilities (Strout, 2003).

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According to Thomsen (2004), corporate values are created when companies internalize the
values of their salient stakeholders. The study emphasized on three governance mechanisms
in the form of ownership structure, board composition and stakeholder influence and
implicated that the corporate values of a firm are determined by the corporate governance and
these corporate values and the changes in these values should be delved in the corporate
ownership. This aspect further emphasizes the prominence of the shareholders in the
functioning of an establishment and the need for the companies to thoroughly know their
shareholder groups and align their values to their preferences.

Bhasa (2004) proposed a governance quadrilateral which incorporated the various

governance practices exercised across a diverse set of corporate firms and geographies
around the world. The study outlined the predominant role of the shareholder perspective in
the Anglo-American model i.e. the market centric model based in U.S.A and the U.K.
(characterised by the diffusion of ownership which is separated from control) and the insider-
oriented model i.e. the relationship based model (characterised by pyramidal ownership
structures, liquid capital markets and bank dominated relationships practiced in Germany,
Korea and Japan).

The empowerment of the shareholders in the Anglo-American model is restrained since

independent directors who are nominated by the Chief Executive Officer (CEO) of the
corporation are aligned to his work profile thereby crippling the board of directors who are
elected by the shareholders as they have no say towards the decisions enforced by the
executives of the CEO. This scenario has resulted in misalignment of shareholder interests
and the formation of country specific regulatory bodies like Securities and Exchange
Commission (USA) and the Securities and Exchange Board of India (SEBI) to monitor such
issues with their punishment provisions.

The Relationship based model is incorporated in organizations which are termed as governed
corporations as the shareholders have a say in decision making process (Lehmann and
Weigand, 2000). The shareholders are empowered to monitor managerial functions thereby
subtracting the element of the agency cost. The shareholder group constituting institutional
shareholders become a part of the operational activities and have the power to constantly
interact with the managers by following an approach that is coupled with disciplinary
measures thereby refraining possibilities of information asymmetries.

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The director primacists term the corporation as a fiction which is inept to ownership, thereby
stating the fact that shareholders are not direct owners entitled to participatory rights leading
to the theory of apathy (Bainbridge, 2006). The shareholder primacists and director
primacists are rightly aware of the agency problem due to misalignment of interests that
results in governance issues thereby leading to a set of shareholders who seem to be oblivious
about their role in the operational activities of the firm.

This is majorly the case in larger corporations with a diverse set of shareholders wherein even
if a group of shareholders were to actively exercise their participatory rights, they will
unlikely have an effect of the ultimate decisions made by the organizations (Black, 1990).
Shareholder empowerment while being consistent on the economic perspective is solely
about corporate performance thereby making governance practices more efficient and
bolstering the bottom-line of a corporation (McConvill, 2007).

2.4.2 Shareholder Empowerment

The authority granted to large shareholders is valuable for firms as they are able to monitor
incumbent management by forcing them to implement value-increasing corporate strategies
(Shleifer and Vishny, 1986). As regards to the shareholder liability perspective, corporate
governance becomes a matter of standards of behaviour, probity and accountability (Cadbury
report, 1992). The hike in shareholder activism over the last decade has mainly been due to
demographic changes and relaxation of legal restrictions (Admati and Pfleiderer, 1994). This
has led to open dialogues and conflicts among the shareholder groups and top managements
thereby highlighting issues of shareholder authorities resulting in investor-focussed changes
in operating procedures as well as governance mechanisms (Strickland et. al, 1996).

The financial crisis of 2008 saw major impetus to the recent seen corporate governance
activists to augment the shareholder domain and empower the investor groups to attain high
levels of participatory rights to substantially contribute to the governance mechanisms of the
corporation. The Washington Democrats contemplated the financial crisis as an outcome of
major governance failures (Bainbridge, 2008) thereby shaping new shareholder entitlements.

The primary stock exchanges like the New York Stock Exchange have implemented new
listing standards which comprise of increased compensation plans to be approved by
shareholders (Bainbridge, 2009).

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A similar path has been followed by the Delaware General Corporation Law (DGCL) and the
Model Business Corporation Act (MBCA) which were amended in favour of the shareholder
groups allowing organizations to require a majority shareholder vote to elect directors. In
retrospect of conventional theories, Hill (2000) stated that the shareholder has earned the
titles of owner/principal; beneficiary under a trust; bystander; participant in a political entity;
investor; gatekeeper; or managerial partner. It is under the spectrum of these images that the
level of the participatory rights, their shareholder power and the status of their interests

Ryan and Buchholtz (2001) propagated the aspect of authorizing shareholders in governance
systems since the businesses rely on shareholders to take the element of risk and deploy their
trust in the firm’s management by investing substantial capital in the firm. Thus, it becomes
necessary for executives to align themselves with the thought processes of the investors and
considerably empower them to play an influential role in the organization so as to obtain and
retain their long-standing support. The relationship between managers and shareholders is
one of the highly focussed topics of corporate governance as recent agreements have
emphasized the responsibility of managers towards shareholders not only in terms of wealth
maximisation but also with regards to their moral preferences.

The idea that shareholders alone are the raison d’être of the corporation has dominated
majority of governance discussions across various geographies both inside and outside the
boardroom. Yet the primacy component seems to be at odds with a variety of important
attributes especially in the U.S.A Corporate Law where it does not obligate directors to align
their course of actions with the interest of the shareholders or to maximise share values.
Conversely the directors enjoy a higher degree of liberty from the shareholder command.
This aspect emphasizes the growing disempowerment of the shareholders owing to various
factors and indicating shareholder primacy as normatively incorrect in the rhetoric form
(Blair and Stout, 2001).

According to O’Rourke (2003), the empowerment aspect of shareholders is also governed by

the company specific issues of corporate social responsibility (CSR). CSR in recent times has
determined various decisive parameters for shareholders as they are increasingly going
beyond the decision to invest, not to invest or to divest with regards to this issue. This linkage
of shareholders and CSR is often not looked upon thereby compelling the shareholders to
make an unconstructive utilization of their power in terms of shareholder activism.

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Shareholder empowerment has therefore been looked down due to the shareholders often
termed as “ruthless capitalists” who always seem to be concerned with the profit
maximisation. In this regard the social responsible investments (SRI) on the part of the
shareholders (Amao and Ameshi, 2008) aim at contradicting the conventional representation
of the shareholder perspective in CSR literature.

Bebchuk and Cohen (2003) had put forth that the shareholders have limited involvement in
corporate decision making since the management of a firm is vested formally in its board of
directors which is subject to only specific shareholder rights. The Delaware General
Corporation Law in U.S.A entails corporate statutes to typically empower the shareholders to:

• Nominate and elect the directors

• Adopt, amend and repeal by laws
• Approve fundamental corporate changes such as mergers, sales of firm’s assets and
amendments to the firm’s certification of incorporation
• Request board action through shareholder resolutions included in company’s proxy

In practice however, the above mentioned authorities provide shareholders with little power
in corporate decision making. This perspective can be verified firstly with the fact that the
right of the shareholder groups to nominate and elect the directors is hindered by their
incapability to hold special shareholder meetings. Thus, they need to wait till the annual
meetings to present their votes on the proposals to replace the company board which happens
in delayed course of time to implement any policies. Furthermore, a staggered set of directors
might require more than one annual cycle for the replacement objective (Anabtawi, 2006). A
discordant set of shareholders in order to put forth their own director slate requires incurring
a significant cost (Bebchuk and Kahan, 1990) which is unlikely the case to wage an
expensive proxy contest unless in the case of significant business decisions.

The shareholders’ power to amend bylaws is limited to the extent till they are within the
domains of the state law and corporate charter. This has led to instances with the jurisdiction
abducting the authority of the shareholders to authorize the directors’ business decisions
(Anabtawi, 2006). Moreover in the empowerment context to approve board decisions, it is to
be noted that it is merely a veto power in the execution process as the shareholders cannot
initiate such decisions (Bebchuk, 2005).

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According to Leech (2002), a firm is often confronted with a fundamental uncertainty

regarding its nature and direction, thereby calling for strategic decision making in absence of
full information. In such a scenario, shareholders take full responsibility as their role entails a
lot more than merely crafting mechanisms to inspire managers to enhance the value of the

In the recent times, a lot of ambivalence has emerged concerning the role of shareholders in
high profile corporate collapses giving rise to variable interpretations. One interpretation puts
the board of directors and the gatekeepers in the driver’s seat while the shareholders act as
innocent bystanders or victims (Coffee, 2004) while the other analysis interprets the
shareholders as perceiving their short-term interests like hedge funds (Anabtawi, 2006) and
posing a potential threat to the corporate enterprise. Such a scenario in the global crisis
delved a perception that the major institutional shareholders were deficient monitors of the
governance systems (Plender, 2008).

Bebchuk (2005) stated that the corporate laws of both United States and United Kingdom
coincide with the same basic code which states that the shareholders do not inevitably possess
the authority to instruct the directors in the management of the firm. However, the corporate
codes in the two constituencies significantly vary with regards to shareholder intervention.

The United States (U.S.A) perspective is aligned to the Law of Delaware and the Model
Business Corporation Act (MBCA) which serves as the most important corporate jurisdiction
and a domicile to major public companies (Bebchuk and Cohen, 2003) with the basic
principle that the power to manage a corporation lies with the board of directors exerting their
control over three categories of decisions: (i) Rules-of-the-game decisions (rules by which
corporate actors play) (ii) Game-ending decisions (regarding majority approval for mergers,
consolidations, sales of all assets and dissolutions) (iii) Scaling down decisions (to determine

The United Kingdom (U.K.) perspective follows a different approach and propagates that
changes in the memorandum or articles of association can be made by “special resolution”
that requires a majority of votes cast at a shareholder meeting where the shareholders in the
U.K. have the power to pass these special resolutions to amend the memorandum or articles
of the association at the annual shareholders’ meeting (Pennington, 1995). An eminent
feature of the U.K. code of law is that the shareholders can, at any time, replace all the
directors in the management with a majority of votes at a shareholder meeting.

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According to Hill (2009), the range of relationships between the shareholders and
management of a firm are spread across various time frames and critically dependent on two
distinct parameters- first, the level of shareholder participation in corporate governance and
secondly the status of shareholder interests. The corporate law in US is undergoing a seismic
shift with regards to the shareholder power in corporate governance.

The shareholder empowerment debate (Harvard Law Review, 2006) sparked the shareholder
power as an eminent area under discussion for Corporate Law Reform. According to
Bainbridge (2009), the global financial crisis has further spurred the issue of shareholder
empowerment in the governance domain. The crisis brought forth the risks of the initially
followed unhindered managerial practices and unsubstantial regulatory frameworks (Burgees,
2008a) thereby revealing the fact that the corporate world had “a legitimacy problem”
(Plender, 2008). Such issues triggered the need for shareholders to be granted higher
authorities to check on managerial control particularly in the area of executive compensation
(Burgees, 2008b) and are already on the agenda of U.S.A in the form of reforms and
proposals in sync with the current trend of governance practices on a global scale (Nathan,

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2.5 Conclusion

“Corporate governance is concerned with holding the balance between economic and social
goals and between individual and communal goals. The governance framework is there to
encourage the efficient use of resources and equally to require accountability for the
stewardship of those resources. The aim is to align as nearly as possible the interests of
individuals, corporations and society”

- Sir Adrian Cadbury, U.K., Commission Report: Corporate Governance 1992)

The prominence of corporate governance has seen a hike post the global economic downturn
with the shareholder aspect gaining a substantial ground in the formation and implementation
of corporate strategies. The theoretical framework has incorporated the interdisciplinary
literature on the individual aspects of corporate governance and shareholder empowerment
and has successfully blended them on the basis of a chronological perspective. This approach
helped in identifying specific literature gaps pertaining to the shareholder domain of
corporate governance. It helped in bridging the two aspects in a manner so as to form a
concrete starting point for the critical analysis in the discussion section of this research.

Furthermore, the strategic linkage of corporate governance and shareholder empowerment at

the commencement of the literature review provides a robust backdrop for the initiation of
this research. The value component is the highlight of the strategy section which bifurcates
into shareholder value proposition through regulatory framework and self-imposed value
modes. It adjudges that the shareholder empowerment is well aligned to the self-imposed
mechanism of value distribution.

Due to the scarcity of academic works available on corporate governance in the hospitality
industry, the theoretical construct of this research has endeavoured to provide an insight into
the shareholding perspective of the lodging industry. This has been carried out to accomplish
the first objective of the research by bringing together various conceptual studies in order to
shed light on the plethora of governance mechanisms prevalent across various geographies in
the hotel industry.

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The subsequent section entails a discussion regarding the structure of this dissertation along
with a brief description of the tools deployed for the research methodology.

3.1 Identification of Research Topic

The extant corporate governance frameworks across miscellaneous geographies have been
prominent subjects of discussion in the business world. There are regulatory frameworks that
have been region-specifically devised to promote ethical business practices especially after
the abominable collapses of corporate conglomerates like Enron, WorldCom, and Satyam.
The shareholder aspect in the governance domain has not been explored to its prime potential
which has led to the initiation of shareholder empowerment debates like the one which kick-
started at the Harvard Law Review in 2006. Unlike the stakeholder issue, the shareholder
aspect in corporate governance frameworks has not seen much light in the academic world.
Furthermore, there is a high amount of scarcity of studies on corporate governance in the
lodging industry that focus on the shareholder empowerment and its impact on proficient
governance of organizations. This antecedent was one of the prima facie issues to pursue this
research with a cardinal aim to draw a linkage between the two fragmented concepts
(corporate governance and shareholder empowerment).

3.2 Research Methodology

There are certain elements under the genre of corporate governance which are nebulous in
nature and establish a link with the comprehensive domains of corporate strategy and
corporate finance. In the case of this dissertation, there is substantial literature work available
individually on the two subjects (corporate governance and shareholder empowerment) which
has been allied with other miscellaneous aspects of business operations. Therefore, the two
themes are conjoined with respect to the hospitality industry without validating the
predetermined information against a physical setting. The pervasive data  available under this
concern has been abridged to provide a lucid understanding.

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The research methodology applied in this dissertation is a combination of an epistemological

research (Jones, 2007) and an exploratory dialectical research (Berniker and McNabb, 2006)
which are variants of qualitative research. As in the case of this study, an epistemological
argument is formed through a structured content analysis of the theoretical framework. The
study is dialectical in nature as it aims to draw a consensus through examining and
interrogating competing ideas, perspectives or arguments. It does not incorporate a research
hypothesis and crafts new arguments and ideas that lead to the viewing of uncharted aspects
of corporate governance.

3.3 Accomplishment of Aim and Objectives

The primary aim of this research is to review the shareholders’ role in corporate governance
practices in the context of hospitality organizations. In this regard, there are two key
objectives lined down to be achieved in due to course of this research:

i) To review the shareholder related governance mechanisms in large hotel

corporations as suggested by McConvill (2007).

¾ There is a significant shift since the turn of the new millennium as regards to the
major issues that surround the facilitation of governance mechanisms in the corporate
world. The issues of executive compensation, managerial ownership and board
independence which once clouded the domain of corporate governance have faded to
give way to the shareholder empowerment debate. The propagation of shareholder
related mechanisms dawned from the works of Dodd (1932) who focussed on the
primacy of shareholder slot in the corporate hierarchy followed by Alchian and
Demsetz (1972) who designated shareholders as the owner of the corporation. The
critical analysis of the works of Stout (2003), Thomsen (2004) and Lehmann and
Weigand (2000) further give an insight into the impact that the shareholder has in
framing the governance mechanisms of an organization. Furthermore, the
retrospection of theories proposed by Hill (2000), Ryan and Bucholtz (2001) and
O’Rourke (2003) lay the foundation for an emphasis on shareholder authority which
is a critical component of this dissertation. Furthermore, Dahlstrom et al (2009) and
Guillet and Matilla (2010) support the review by providing a corresponding viewpoint
on corporate governance from the hospitality industry.

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ii) To investigate the allocation of power between top management and shareholders
as suggested by Bebchuk (2003) and advocate appropriate participatory rights for
shareholders to utilize their shares as an experiential purchase.

¾ A commonality of belief exists between both the leading protagonists of the

shareholder empowerment debate (shareholder primacists and director primacists) in
the sense that separation of ownership and control in the modern corporation
inevitably leads to corporate governance problems. The ‘separation of ownership
and control’ postulated by Berle and Means (1932) leading to the agency problem
identified by Smith (1932) lays the foundation for this aspect of the research. This
viewpoint is furthered by the works of Coase (1937), Jensen and Meckling (1976),
Shleifer and Vishny (1986) and Strickland et al (1996) which alleviate the
shareholder perspective during the course of this research. Moreover, the governance
quadrilateral proposed by Bhasa (2004) provides an applicatory stance of the
shareholding component in corporate governance models across different
geographies of the world.

The first assertion of shareholder empowerment was stated in Bebchuk (2005) which
advanced from the findings of Bebchuk and Cohen (2003) emphasizing on the
limited involvement of shareholders in corporate decision making. The varying
degrees of conclusiveness in these works compelled the relevant data to be
investigated against other studies to meet the objective in the discussion. A study by
McConvill (2007) added a new dimension to the shareholder argument by
incorporating psycho-economic codes in order to mitigate the materialistic aspect of
shareholding and providing an experiential gain as a major element of the
participatory rights possessed by the investors.

3.4 Target Audience

Due to the dearth of substantial academic work in the field of corporate governance in the
hospitality domain, this research would make a vital contribution and extend as a study
reference for top level hospitality executives as well as eminent hospitality academicians.
Furthermore, the shareholder aspect is also a contemporary issue of discussion in the
corporate world, thereby setting the stage for additional spectators to explore this segment.

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3.5 Pertinent Sources of Data

The research of this dissertation being dialectic and epistemological in nature demands
pristine preliminary data gathering for the theoretical framework as the incorporated
information would facilitate the observation, discussion and critique of the data. In the case of
this research, the past works of various competent authorities on the facets of corporate
governance have been reviewed. The primal source of information has been the subject books
which have provided a conventional viewpoint on the domain of corporate governance to
build a substructure for this research.

During the course of the research there were specific keywords used like ‘Corporate
Governance’, ‘Role of Shareholder in Corporate Governance’, ‘Shareholder Empowerment’,
‘Role of Shareholders in Hotel Organizations’ in order to filter the appropriate information
from miscellaneous sources on the Internet like Google. Furthermore, extensive information
has been garnered from various peer-reviewed and academic journals published in eminent
data bases as mentioned below:


Corporate Governance Emerald Insight

Journal of Business Ethics Springer

Journal of Political Economy Elsevier

Harvard Law Review Retrieved from Social Science Research Network

Corporate Ownership and Control Business Source Premier

The research has also extracted valuable data from annual reports of leading hospitality
organizations like Marriott International Inc., InterContinental Hotel Group and Accor
Hospitality to assimilate important corporate facts. These facts have been incorporated in the
discussion section as they greatly contribute towards the linkage between hospitality industry
and the two components of the subject matter namely corporate governance and shareholder

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4.1 Introduction

This section provides a coherent benefaction to every component incorporated in the

theoretical framework of this dissertation. The methodology adopted is primarily a review of
the stacked literature available in the domain of corporate governance while the prominence
has been on underscoring the aspect of shareholder empowerment. In this regard, it is
imperative to bridge the fragmented issues that lie within the realms of governance. This
would be accomplished by providing a bibliographical collage of notable research works
cited in the theoretical framework of this dissertation. The analysis of the information will
follow a comprehensive critique which will lay the foundation for a consolidated discussion.
Furthermore, due to the scarcity of literature available on the shareholder facet of corporate
governance in the hospitality industry, the research endeavours to conjoin both the disciplines
in order to gather a refined understanding.

4.2 Gist of Theoretical Framework

The theoretical framework of this dissertation incorporates the aspects and applications of
corporate governance in the form of its economic benefits as well as a stakeholder binding
agent for an organization. The advancement of globalization in the corporate world has
defined multiple aisles of governance practices across many organizations driven by diverse
sets of economic, cultural and social impacts. The functional characteristics of corporate
governance dissipate through the organizational structure of a firm thereby making every
component of the company accountable for its actions. The author has briefly tabulated the
appropriate research works which provide the skeleton to this dissertation and has created a
bibliographical collage in order to provide a brief insight into the aspects that form the basis
for critique. The author has assembled the relevant literature sources in a chronological order
along with their corresponding findings and research methods to actualize the ideas laid down
in the academic construct of this dissertation. The tabulation focuses on the shareholder
perspective which has been explicitly highlighted in the findings in order to identify the
pertaining literature gaps and prolong the respective studies to the next level.

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werment 010

Conceptual sttudy
an and •Prropagates thee aspect of authorizing
a t sharehold
the ders in goveernance systeems as they deploy theirr trust
Bucholtz annd invest sub
bstantial capiital in the firm
m with an eleement of risk

•Em mpirical study

•Concludes thaat shareholdeers abide by the
t default ru ule of corporrate governan
nce and thereefore do not place
Stout thhemselves in the managerrial positionss owing to th
he high comp petency levels of the direcctor set.

•Emmpirical study
bchuk •Puuts forth an argument th
Beb hat shareholdders have limmited involveement in corrporate decission making since
and Cohen thhe managemeent of the firm
m is vested in its board of
o directors who
w attend to o specific shaareholder righ

Conceptual sttudy
•Prroposed a governance quadrilateraal by incorp porating various modells followed across diff fferent
Bhasa geeographies in
n the world.
2004) •Emphasizes th he sharehold ve primarily in the markeet centric and
der perspectiv d relationship
p based modeels.

•Em mpirical study

Advocates at providing
p sh
hareholders with
w the pow wer to initiatee important corporate
c deccisions, especially
bchuk inn the case of US
U where sh
hareholders have
h exerciseed less power in relation to other counntries.

Conceptual sttudy
•Foormulates th
he director primacy theeory in conttrast to the shareholderr empowerm ment proposeed by
Bebchuk (200 05) and proppagates conssiderable disscretion in tthe hands off the board in order to limit
nbridge shhareholder po

Conceptual sttudy
•Ellaborated on
n the tradition
nal standpoinnt of corporaations who co
onsider proteection of shaareholder righ
hts as
Caarrillo thheir sole mottive and conccluded that the
t conflictin ng shareholdder and stakeeholder interrests can be made
2007) coompatible sin
nce both contribute to thee long term efficiency
e and progress of the firm.

Conceptual sttudy
•Iddentifies incrremental pressure exerted
d by rival sttakeholders and
a their ageents on the shareholders,
s , who
Prooimos w once a do
were ominant and
d inconsiderate character of the govern
nance structu
ure of the firm

Conceptual sttudy
•Esstablishes th
he arguementt that range of
o relationsh hips between n shareholderrs and the management
m o the
firrm are spreaad across vaaried time frrames depen ndent on two o parameterss. i) the level of shareh
Hilll (2009) paarticipation in the corporrate governannce ii) the staatus of the sh
hareholder in

   Figure 4.1: Bibliographical Colllage

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4.3 Comprehensive Critique

A great deal can be ascertained from the way corporate houses exercise the ‘best governance’
practices within their respective associations as the leveraging of governance reforms is
imperative for positive firm performance. The efficiency of governance practices results in
surplus rewards from various investor groups as quoted in a case by Raja Arshad, Executive
Chairman of PricewaterhouseCoopers, that the institutional investors are willing to pay a
premium of up to 30-50 percent for companies that exercise governance best practice (Lal,
2004). In the context of the hospitality industry, a minor relationship was established by
revisiting the link between corporate governance and financial performance of a firm
(Kefgen, 2004) by analysing the company’s stock appreciation, growth in earnings,
depreciation etc. to pre-established governance index.

The image of the shareholders has been reassessed in the current business world in view of
international corporate outrages and the onset of global economic meltdown. The resultant
quandary concerning the act of the shareholder lies at heart of the much talked about
‘shareholder empowerment debate’ (Harvard Law Review, 2006). While a few
correspondents view enhanced shareholder responsibility as a positive governance facet, the
others consider it as a dormant divergence from the concretely established US Corporate
principles. The advancement of shareholder empowerment reform proposals by Bebchuk
(2005) was based on the shareholder efficiency norm in lieu of the shareholder democracy
rationale. The perceived efficiency of the shareholders was meant to significantly reduce the
external intrusion by regulatory authorities who viewed shareholder participation as a threat
to managerial decision making.

The apportioning of corporate decision making authority involves the director primacists and
shareholder primacists. The shareholding perspective is leveraged by the agency theory
which focuses on long term maximization of the value of their shares like the directors, but
with a bone of contention on the alignment of the interests. The director primacy argument on
the other hand supports the view that ‘board of directors is viewed as a mechanism that solves
the issue of organizational design which arises when one views the firm as a nexus of
contracts among various factors of production, each with differing interests and information’
(Bainbridge, 2006). As regards to the decision making aspect, proponents of the shareholder
domain emphasize on the element of empowerment which in their viewpoint would result in
the elimination of the agency problem and escalation of shareholder value.

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There are three assumptions that have been observed in the framework of empowerment:
i) the legitimate role of the corporation is to serve shareholders rather than stakeholders in
general ii) the issue of hiking shareholder power would allow them to overcome collective
action problems in order to utilize their power efficiently iii) the shareholders would deploy
their supplemented power to discipline managers. It can be therefore asserted that if any of
these assumptions is not satisfied, then shifting the governance rule from boards to
shareholders may be a fallacious act.

4.3.1 A Contrasting Viewpoint

An axis of division among shareholder groups is the time horizon over which they expect to
hold their shares. A sense of heterogeneity exists among shareholders for this reason which
leads to differences in the propensity over corporate decision making. As a result, the
managers run into a conflict on whether to take decisions for long-term or immediate profits.
The shareholders possessing a shorter timeframe would support the hike in current share
prices on the expense of long-term value while long-run investors would be ready to forgo
instant profits for future increments. The issue of shareholder diversification is parallel to the
externalities and the spill-over effects generated by the firm as in the case of corporate
takeovers. While takeovers generally produce gains for the target company, they also often
have a negative impact on the bidder’s shares (Black, 1989). The universal shareholders (who
own stocks in both the firms) should therefore assess the net effect of the transaction on their
portfolio and accordingly take a call as the diversification defends them from firm-specific
risks and exposes them to spill-over effects.

The issues lined above are in conjunction with the findings of Anabtawi (2006) which
highlighted the longstanding primacy debate by suggesting an extended rationale in the sense
that the primary decision-making authority should be conferred upon the board of directors.
The widespread divergent interest of the shareholder community gives it a bait to chase its
private goals at the expense of the cumulative shareholder value. The study furthermore
aligned to this discussion in the sense that the linkage between shareholder empowerment and
corporate governance is nebulous when contrasted viz-a-viz the arguments presented by the
proponents of shareholder empowerment, in particular Bebchuk (2005).

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A plethora of critical commentaries available in this aspect label shareholder empowerment

as a ‘traditionalist view’ of the corporation law which prefers a governance mechanism that is
symbolized by strong managerial authority and limited shareholder rights. In a way, there are
alloyed viewpoints on increasing shareholder power although interestingly the antagonists of
the empowerment debate hold a similar view regarding the place of shareholder participation.
Both parties see the participation as an instrumental component of governance which is
optional to achieve the ‘nirvana’ or adequate levels of corporate performance. Furthermore,
instead of deeming shareholder participation to possess democratic values, it is more or less
seen to be as a derivative goal (McConvill, 2007). The empowerment aspect in this regard is
a tool used to nourish the overall firm efficacy. A magnified analysis infers that even the
most ardent defenders of the empowerment perspective do not view it as a self-contained goal
but only as a mean to nullify pertinent complications in the governance setup of

There is a critical reason for this commonality towards the participation aspect in the form of
a materialistic aspect attached to shareholding. If the organizations perform efficiently with
the directors and executives running the show in terms of the operations and strategy with
limited allocation to the shareholder groups, the status quo is often protected leading to
‘rational’ shareholder apathy. The director primacy theory terms the corporation as a ‘fiction’
and therefore shareholders are not the direct owners of the firm and hence should be
abstained of excess participatory rights. This discussion extracts a piece of various studies
available on ‘psycho-economics’ and is not in the favour of facilitating shareholder
monarchy. Since the shareholder groups abide by the default governance rule (prime
responsibility with the directors), a majority of them consider their purchase to be
“materialistic”. Therefore, the shareholder community should be accustomed to enough
participatory rights so that they can deploy their shares for an “experiential” gain. Such a
scenario demands active shareholder participation. Although, this aspect seems to be
philosophical in nature, it is well aligned with the argument of direct primacy regarding the
rare occurrence of such a case though it still draws considerable attention. This is primarily
due to its adherence to the traditional and economic perspective of shareholding.

The acquisition of shares may be an economic decision at first, but it paves a path apart from
overall firm performance. A psycho-economic perspective further bolsters this argument as
components like “life satisfaction”, “improved happiness” and “prominent role in the work
environment” step up the prospects of shareholding as a rational choice.
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Frey and Stutzer (1999) postulated a positive correlation between active shareholder
participation and shareholder happiness thereby supporting the above argument. If the
governance configuration of an organization aids shareholder empowerment with
shareholders being given a sense of an active involvement, the shareholding aspect could turn
out to be an active source for facilitating a sense of indulgence and hiking the psychological
capital for the future of a firm.

The empowerment aspect can be actualized through a change of corporate culture and
development of norms which are in favour of the target of expediting the utility of shares as a
convincingly ‘experiential’ purchase rather than application of law reforms. This lays a
foundation for the incorporation of the empowerment aspect in a firm without affecting the
monetary outcomes. It is however a possibility that an increment in shareholder power might
not improve the corporate performance of an organization, but this does not entitle the firm to
cling onto the status quo. Such an empowerment would provide a lucrative experiential
purchase, thereby leading to a contented pack of shareholders. The participation element
however will not be alluring to all shareholders due to the time or inclination to get involved
(McConvill, 2007). This should not prevent the residue to actively participate in the
corporation. It is further argued that the shareholders should be habituated with real
participatory rights only till the extent that they do not interfere in the routine operations of
the firm.

The aspect of shareholder empowerment finds place in the originating governance models
highlighted in the literature framework in the form of the U.S.A based market centric model
(Anglo American) and the relationship based (Insider oriented) model prevalent in Germany.
The empowerment aspect of the shareholders in the two regions is critiqued on the
differentiation between the U.K. and US Corporate laws in relation to the ability of
shareholders to alter the constitution. For example, the U.S.A rules relating to charter
alteration and shareholder voting reflect a governance model in which directors enact the role
of the gatekeepers and shareholders play the part of the supplicants. This relationship is
incongruous to U.K. corporate laws which until recently did not recognize the advisory
resolutions by the shareholders (Hill, 2009). This paradigmatic difference between U.S.A and
U.K. directly influences power allocation between shareholders and the board of directors
and dawns from prominent chronicled differences in the evolvement of business firms in
these administrations.

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The global financial crisis added flesh to the empowerment debate with the passing of
Shareholder Bill of Rights introduced by U.S.A Democrat Senators in May, 2009. The bill
aimed at increasing shareholder power as an anti-toxin to excessive risk taking and executive
compensation. This resulted in immediate criticism of the shareholder empowerment which
has initiated over the past two decades by anti-managerialists and economic scholars. In their
view of the U.S.A perspective, shareholder disempowerment is not an issue of agony but a
positive attribute to regulatory framework. The various ripostes in this context as stated in the
literature review like Bainbridge (2006), Stout (2007) and Lipton and Savitt (2007) fall
within this critical rubric. There exists another detracting viewpoint with respect to the
empowerment aspect from an efficiency perspective. It investigates the value element of the
empowerment attribute of corporate governance and questions the low occurrence of this
phenomenon in the marketplace.

Another line of criticism portrays the idea of shareholder empowerment as more pernicious
than the disempowerment aspect. This is because it tends to subvert the most eminent feature
of corporations in the form of board power by mistreating the director nomination process in
conjunction with their personal interests. This argument aligns with variants proposed by
Anabtawi (2006) as the fragmented shareholders possess variable interests and are likely to
abuse participatory rights by preferring their personal interests to those of the generic set.
This issue calls for protection of the company from the predatory acts of the shareholder
groups as stated by Stout (2006).

An additional critical viewpoint lies in the futility perspective of the fragmented shareholder
domain. The changes proposed by shareholders would be comprehensively less effective due
to the collective action problems and issues of shareholder apathy. Thus the benefit of the
increment in shareholder power would be availed by the detractors as portrayed by Lipton
and Savitt (2006) in the form of union and public employee funds. The shareholder
empowerment proposal has been denounced for the fact that it looks at a short-term
profitability aspect rather than the long-term sustainability. This issue is more prevalent in the
case of institutional investors as their short term goals are aligned with the same problem.
Furthermore, critics claim that the empowerment proposals rest on the blemished
presumption of safeguarding shareholder interests over other stakeholders. This articulation
conflicts with the framework of Bebchuk (2006) which disavowed the notion and promoted
its empowerment reform proposals on parameters like corporate democracy and shareholder
ownership rights.
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The post-Enron reform proposals like the Sarbanes-Oxley Act for the U.S.A throw light on
the shareholder empowerment discussion. They inquire the fact as to why shareholder groups
in U.S.A experience lesser participatory rights than the other law jurisdictions across different
geographies. A critical evaluation in this context highlights the paradigmatic shift in modern
corporate law from ‘protecting the company shareholders’ to ‘protecting the company from
shareholders’. The two perspectives define the empowerment pattern across prime
geographies as stated by Hill (2009) in the sense that the former provides the foundation for
reforms in U.K. and Australia while the latter underlines the empowerment aspect in the
U.S.A. Intriguingly, the recent economic meltdown pushed the law authorities to frame
strategies aimed at promotion of shareholder rights rather than their protection.

4.4 Pronouncement in Context of the Hospitality Industry

There is a proclaimed fact that corporate governance practices vary across different
geographies as elements like financial system, corporate ownership structure, culture and the
economic scenarios create a distinguishing perspective. Davis et al (2008) postulate that it is
more likely a convergence of the above parameters at their margins rather than an absolute
transformation from the dominant Anglo-Saxon corporate governance model majorly
exercised in the United States. Sun et al (2008) further propagate a pluralistic advent which
states that corporate governance frameworks across various organizations are reliant on both
internal and external environmental dynamics. These dynamics create a periphery for the
traditional dualistic approaches like the shareholder versus stakeholder debates as they lack
the fluidity of the subject.

The research has highlighted three acclaimed hospitality multinationals with a view to
incorporate corporate governance practices ranging across different geographical locations.
An outlook of the adherence to specific governance models like Anglo-Saxon or market
centric model and Insider-Oriented or relationship based model has also been presented to
determine the prominence of the shareholder aspect in hotel organizations. It was however
noted that firms originating from Anglo-Saxon countries like U.S.A have been following a
franchising mode of development in foreign countries when compared to Latin-European
nations (Chen and Dimou, 2005). The author employed this finding while selecting these
lodging firms in order to gain a better understanding of the shareholding practices of their
governance structures.

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4.4.1 Shareholder perspective at Marriott International Inc.

Marriott International, Inc. is a leading hospitality conglomerate with 18 brands spanning

multiple segments that offer a unique experience for a diverse consumer set. The company
has established a “Marriott Way symbolised by People, Places, Purpose” which is solely
about serving its associates, the customer and the community. The organization has an
employee centric philosophy and believes in respecting and valuing its employees who in
turn will make its guests happy. More than a philosophy, this move has been looked upon as
a strategy with recognitions from Fortune® magazine which named Marriott International as
one of America’s most admired companies. Marriott has transformed the hospitality business
in a number of ways while constantly delivering top notch service to its guests and high
returns to its shareholders, thereby portraying the unique ability to couple creativity with
discipline that is a trademark of superior performance business in any sector.

Source: Adapted from (Marriott International, Inc. Annual Report, 2008)

The corporate governance principles of the organization detail the role of the board and
management which are characterized by the election process spearheaded by the
shareholders. The board of directors are elected to oversee the management and to enhance
the long term value of the shareholders. The characteristics of the Anglo-American model are
prevalent and evident in the setup where the diffusion of ownership is separated from control.
The board of directors in conjunction with its independent committees evaluates and
challenges Marriott’s strategic plans, approves appointment of corporate officers, approves
senior executive compensation appoints, supervises the company’s independent auditor,
reviews the company’s financial condition, declares dividends and approves significant
investments and divestitures along with other significant matters. The application of these
responsibilities is consistent with the board’s obligations to the company’s shareholders in
order to enhance the interest of Marriott’s stakeholder sets in the form of associates,
customers, suppliers and the miscellaneous communities wherein the organization operates.

The shareholders are acquainted with the information concerning the formation of all the
committees that assist the board in discharging its responsibilities. These facts are published
on the website of the company comprising of the charter and practices of the committees
along with a copy dispatched to the shareholders for better transparency. The director set
incorporates a minimum of two-third of independent directors appointed by the CEO.

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The rest are selected against a set criterion elected by the shareholders who propose the
nominations to the Nomination and Corporate Governance Committee. As stated in the
literature framework the empowerment aspect of the investors is ambiguous since the
independent directors who are nominated by the CEO are alienated to his work profile. This
leads to the incapacitation of the board which is elected by the shareholders as it has no say in
the decision making process of such executives, there leading to a conflict of interests of the

A critical viewpoint in this respect is aligned with the corporate law which has always
performed a balancing act between the management discretion and shareholder power
wherein the onus inclines onto the directors and the managers when compared to the
shareholding groups. This is because between the two entities, the directors have the best
access to information and are best able to serve as monitors of managerial decision making
and increasing the plausibility of a compliance with the regulatory framework of the
organization. The managers on the other hand have leverage over the investor groups in the
sense that they are equipped with the day to day information and institutional perspective of
the firm which helps them to anticipate the points of conflict and in formulation of a
responsive strategy.

4.4.2 Shareholder perspective in InterContinental Hotel Group

The InterContinental Hotels is the world’s largest hotel operator in terms of the number of
rooms and has a core purpose of creating “Great Hotels Guests Love”. The company has a
portfolio of seven leading hotel brands and manages the world’s largest loyalty programme,
Priority Club Rewards. The employee centric philosophy of the organization keeps its people
at the heart of its business and counts them as the ones who make a difference, who care,
listen, learn and work thereby ensuring that the customers receive the most outstanding
service and memorable experiences. The group has its headquarters in Denham, U.K. and
operates in four major regions: The Americas, Europe, The Middle East and Africa and The
Asia Pacific.

Source: Adapted from (IHG Annual Report and Financial Statements, 2009)

The Board of InterContinental Hotels is complied with the principles of corporate governance
as listed in the Combined Code (The Combined Code on Corporate Governance, 2008).

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It details issues like board composition and development, remuneration, accountability and
audit and relations with shareholders. The governance framework falls within the rubric of
the Anglo-Saxon model to facilitate efficient, effective and entrepreneurial management that
can deliver shareholder value over the longer term. The transparency of these principles is
dictated in the annual report of the company where it details the application of these
principles to the shareholders. It is to be noted that the shares of the InterContinental Group
are also listed on New York Stock Exchange (NYSE) and therefore the company is liable to
comply with the rules of NYSE, U.S.A securities laws and trules of the Securities and
Exchange Commission (SEC).

The annual report of the company in compliance with the Combined Code builds on the lines
of Anglo-Saxon model by distinctly exhibiting the separation of ownership and control. The
board and committee structure is eminently bifurcated to particularize the job descriptions of
the senior management and their respective accountability to the investors. The shareholders
hold the board accountable for the strategic direction, development, performance and control
of the group. According to the Combined Code, the chairman of the group is accountable to
the shareholders for overseeing the corporate governance matters and ensuring they are
addressed well on time for better communication. The board meets the shareholder set
formally twice a year with elaborate presentations from the CEO and CFO of the periodical
results. IHG periodically meets its institutional shareholders throughout the year which
provides an opportunity to discuss, using publicly available information, the progress of the
business, its performance, plans and objectives. The group establishes an informative
interface with its private shareholders through web portals for the purpose of transparency.

A remarkable governance practice of the InterContinental Group that has been observed with
relation to the shareholders is the Shareholder Centre. It is a specially designated articulation
of the investor relations of the company which enables the shareholders to access their
company portfolios online via the Shareview service of its web portal. This service aims at
better facilitation and communication of the company related information to its shareholders
as it provides services like dispatching of shareholder information via email, access of
shareholding details and most importantly the online casting of vote for the IHG General
Meetings. Such initiatives further empower the shareholders to actively participate in the
routine activities of the organization. This approach deployed by the organization is
conducive to Gen-Y as stated by Eisner (2005) which asserts that this generation is
technically literate, continually wired and plugged in.
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4.4.3 Shareholder Perspective in Accor Hospitality

Accor Hospitality is a global player and the European leader in hospitality operations and
worldwide leader in services to corporate clients and public institutions operating in more
than 100 countries with an expertise of 40 years. It is a French organization and runs a
portfolio of twelve brands to cater to different customer needs extending across varied market
segments. The governance structure of the company is composed of the board of directors
which formulates the company strategy, overlooks its implementation and examines issues
concerning the efficient running of the business. Accor complies with the governance
principles as stated in the Afep-Medef Corporate Governance Code for listed companies
issued in 2008. The shareholder authority ensures the transparency of financial and strategic
information about the company that is provided to the financial markets.

Source: Adapted from (Accor Annual Report, 2008)

The organization being a French entity was following the Relationship based model that is
characterised by institutional shareholding. The aspect of shareholder empowerment is a
major highlight in the corporate governance framework of this organization as there was a
radical evolvement in the shareholder structure of this firm. In 2006, the firm underwent a
metamorphosis in its corporate governance setup when the shareholders approved the
introduction of a Board of Directors as an amalgamated set of the Supervisory Board and
Management Board which were functioning independently since 1997.

The French investment firm Eurazeo and American Real estate investment firm Colony
Capital increased their stake to 30% in 2007 with the backing of a consolidated shareholder
approval of the Accor group. This led to the overall enhancing of the efficiency and
responsiveness of the firm with a transformed governance structure in 2009 that involved a
reduction in the number of seats on the board and amalgamation of the designations of the
Chairman and the Chief Executive Officer. Recently the Board of Directors put forth
potential benefits of a demerger of the group’s hotel and prepaid services to the shareholders
which would lead to an increment in the firm’s growth rate. In February, 2010 the Board
formulated the demerger process which is at the stake of an approval by shareholding groups
of the company at the Extraordinary Shareholders’ Meeting scheduled for June, 2010.

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4.4 Summary

The bibliographical collage stretched across a timeline of the twenty-first century portrays the
shareholder perspective of corporate governance in various aspects. The augmented analysis
of the collage provides a nit-picking as well as an affirmative edge to the discussion thereby
throwing light on the articulation of the shareholder component of the corporate governance
framework in context of the hospitality industry. The prominence of the stakeholder is a
discernible aspect in any organization and particularly in the lodging industry where the
fragments of the stakeholder community namely employees, suppliers, creditors and most
importantly the customers form a momentous segment in streamlining the firm’s operations
with efficacy.

The shareholder angle has however not gained much ministration in the hotel sector and
therefore the findings of this dissertation are aided by a comprehensively critiqued discussion
which exposes a considerable gravity on this concept. This chapter greatly emphasizes on the
prospective attributes of shareholding and their corresponding significant impacts delineated
in exemplars of governance structures of acclaimed hotel organizations like Marriott,
InterContinental and Accor. Furthermore, the shareholder empowerment phenomenon attains
a bulge by the end of this discussion with the help of the strategic perspective affixed to it
which rivets it as a crucial component in the corporate governance configuration of an

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This section concludes the findings of the theoretical framework reviewed for this
dissertation in conjunction with the ensuing discussion to assist the literature. It conveys a
bottom-line to the research by combining the structural and critical inference of the literature
review and the discussion respectively. This paves a path for the scope of future research on
the shareholder aspect of Corporate Governance.

5.1 Conclusion

There is a common belief in corporate governance advocates that enhanced shareholder

power is a promising cure for governance ills. The rationale is straightforward in the sense
that the frequently prevalent principle/agent conflict does not implicate that the managers of
an organization consistently pursue value-maximization governance provisions. The residue
stakeholders or the director primacy proponents on the other hand assume the flipside and
propagate that such authorization of power would be ineffectual to the investors.

The literature review of the research attempts to congregate various fragmentary issues
related to the vast domain of corporate governance with the shareholding component. The
strategic literature initiating the academic construct creates a background for corporate
governance mechanisms listed throughout the theory framework and consequentially paves a
path for a multilayered discussion. The comprehensive critique comprises of various ripostes
and affirmative arguments with in-depth findings thereby exploring the shareholder
empowerment aspect from all viewpoints.

The research interpretations have been significantly aligned to the hospitality juncture by
underscoring the investor aspect in consideration of two primary governance models
exemplified in a diverse geographical set. Therefore, this research attempts to identify and
frame the solidity of the shareholding aspect and intends to establish a lucrative link with
corporate governance frameworks primarily in the rubric of the lodging industry.

Considering the important benefits that can be derived from augmenting the opportunity set
for the shareholders in an organization, the supplementation should however be brought to a
close to where it may start to intervene in the day-to-day managerial activities.

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This may lead to a potential undermining of the managerial authority. Therefore, the amount
of power authorized to the shareholders will ultimately depend on the culture shaping inside
the corporation and the extent to which shareholders in that corporation are amenable and
adept to associate.

5.2 Future Directions and Scope for Further Research

The current scenario in the hospitality industry is beset by a diverse set of stakeholders who
demand value propositions at different stages. The shareholding component in this context
does not see much light primarily due to the conflict in interests with other stakeholders.
Thus, after a detailed evaluation of the literature framework and corresponding discussion
elements, a deduction can be made to direct further research studies in the shareholding
element of corporate governance. This research work stands out in the sense that it is one of
the only few studies which examine the shareholder aspect of governance mechanism in the
hotel industry and therefore creates a starting point for hospitality academicians to pursue
further studies in the same discipline.

In conjunction with the interpretations, it can be put forth that if shareholder primacy is an
important benefaction to corporate governance as investigated in this research, the high
contrast in shareholder power with respect to critical governance reforms should result in
positively evident governance practices. This opens a pathway for research particularly in the
case of the hotel industry where governance related studies are scarce to find.

Lastly, corresponding to one of the limitations of the research, an empirical study concerning
a similar set of objectives as this research, can also be conducted in a hospitality based
environment to examine a tangible result for the linkage between corporate governance and
shareholder empowerment.

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