How To Protect Your Business Interests
You often see business stickers or logos that say “customers are number one”. But how does any organization guarantee that promise? This is a complex process because it requires balancing interests in an environment that is constantly changing. The best way to manage this challenge is by having satisfied stakeholders. Organizations must fulfill their stakeholder’s interests to protect profits and avoid disruptions. Stakeholders must work with their representatives to ensure that each party involved in the organizational agreement is made aware of their respective responsibilities and rights.
Stakeholder Types
A stakeholder is an internal or external group that is affected by the activity or performance of an organization. Who are some of the stakeholders in an organization and what are their interests?
Stakeholder Protection
In a corporate organization, a board of directors (BOD) is an executive committee elected to represent the investors and owners. The responsibility of the BOD is to guide policy on business hiring, strategy, finance, and ethics. Therefore the BOD decides on activities that affect all stakeholders. Many of these activities are technical and complicated.
BOD Examples that can Negatively Affect Stakeholders:
- A company that decides to lay off 10% of its staff to pay dividends.
- A company decides to pay executive bonuses when profits are below average.
- An oil refinery decides to buy back shares instead of paying for more energy-efficient generators.
- When a mining company creates a site operation budget without including cleanup costs.
Legal Framework
The most common structure for creating a business is the corporation. This is a separate legal entity from its owners and shareholders. A corporation can enter contracts, loan and borrow money, sue and be sued, hire employees, own assets, and pay taxes. Lawyers are often employed by stakeholders to define and defend their rights within the corporation. Corporate lawyers are involved when the articles of incorporation are defined. Litigation lawyers are employed by stakeholders when a conflict arises between them and the corporation. Corporate lawyers will again act to defend the corporation in a trail or settlement.
Exemplary Case of Bad Representation
Sears began in 1886 as a mail-order catalog. It rose to be one of the largest retail businesses in the world and created thousands of middle-class jobs. Throughout the 20th century, consumers came to love Sears’ affordability and department store shopping. By the middle of the century, Sears had over 350,000 employees in its ranks. In 1973, Sears completed the construction of the Sears Tower in Chicago. It was the tallest building in the world — it would hold this title for more than two decades. In 1986 Sears entered into financial services by launching the Discover card. For the rest of that century, Sears would become an anchor store for shopping malls everywhere in North America.
In the 2000s new competition like Walmart and Amazon challenged Sears. Losing sales they began changing their structure and strategy. It formed the Sears Holdings Corporation with Kmart, acquired Lands’ End for $2 Billion, and sold the Discover Card service — when it accounted for 60% of annual profits. Sears and Kmart became subsidiaries of the newly formed Sears Holdings Corporation, with hedge fund manager Eddie Lampert as its chairman. The company is directed by a board of directors composed of members from the two companies: seven members from Kmart’s board, and three from Sears. The Washington Post, in 2007, described the current Sears as a hedge fund with money being diverted from the maintenance and improvement of stores to non-retail financial investments.
Sears income continued to decline in 2007. The company closed a number of stores between 2011 and 2013. On December 27, 2011, after poor holiday sales, the company announced 100 to 120 Sears and Kmart stores would close. Eddie Lampert focused on cost-savings by stifling investment into stores. While the company had been buying back stock and increasing its presence online. Some of the decisions Lampert made were placing him in a big conflict of interest:
- A real estate investment trust he chairs, Seritage Growth Properties, paid $2.7 billion in 2015 to acquire more than 200 stores and other real estate owned by Sears Holdings.
- Lampert’s hedge fund, ESL Investments, provided loans to Sears Holdings, including one for $500 million announced earlier this year.
- Lampert controlled about 59 percent of shares of Sears Holdings.
In a Washington Post article the law professor, Jared Ellias was quoted as saying “I’ve never seen a company that was financed like this, and I’ve looked at the capital structure of thousands of companies,”.
In 2018, Sears officially filed for Chapter 11 bankruptcy with fewer than 700 stores and 68,000 employees. Lampert stepped down as CEO after the company filed for bankruptcy but stayed on as chairman to oversee the bankruptcy proceedings. Sears also left behind an underfunded pension plan that served thousands of retirees. In April 2019, Sears sued the former CEO and others, including former board members, claiming they had stolen billions of dollars from the retailer.
Conclusion
All business stakeholders need expert representation because executive decisions affect them. This representation needs to participate with the BOD in the decision-making process. To make stakeholder representation accountable they should be transparent and have a legal duty to protect their interests. This makes the expectations of a representative akin to that of a lawyer or physician. In the political arena stakeholders are already doing this using elections, and the Registry of Lobbyists. There are currently no guidelines for stakeholder representation within the BOD. It is the corporate lawyers that help create businesses, and litigators get involved when business goes wrong. Therefore stakeholders should work together with corporate lawyers to change this because trusting that the directors will do the right thing is too costly.
