Mastering the Stakeholder Theory Strategy

The management theory known as Stakeholder Theory is centered around ethical considerations in business operations. First proposed by Ian Mitroff in his 1983 book "Stakeholders of the Organizational Mind," the concept was further developed by R. Edward Freeman in his book "Strategic Management: A Stakeholder Approach," which identifies the various groups that can be considered stakeholders in an organization. In essence, Stakeholder Theory asserts that businesses should strive to create value for all parties with a vested interest in the company, including customers, employees, suppliers, investors, and the wider community. Rather than prioritizing the needs of shareholders alone, Stakeholder Theory emphasizes the interconnectedness of all stakeholders and the importance of serving their collective interests. Given the shortcomings of a purely profit-driven approach, Stakeholder Theory has gained significant traction among management theorists since its emergence in the 1980s.

Who is a stakeholders theory ?

Stakeholders are individuals or groups that can impact a business or be impacted by it. The concept of stakeholder theory explores whether a company has a responsibility to prioritize the needs of these stakeholders over those of its shareholders, and how it can effectively fulfill this responsibility.

Stakeholder theory challenges the notion put forth by Milton Friedman that businesses should solely serve the interests of shareholders. Instead, advocates of this theory argue that managers should factor in the interests of all stakeholders in order to maximize the potential of their organization. This has led to the emergence of studies exploring the interactions between businesses, managers, and stakeholders.

Stakeholders encompass entities beyond just shareholders and can include the media, government, political groups, trade associations, and trade unions. These groups are interconnected with businesses and can both affect and be impacted by them. As such, businesses have a responsibility to consider the interests of all stakeholders, not just the financial interests of shareholders.

Different Stakeholders Theories

A particular interpretation of Stakeholder theory aims to determine who the stakeholders of a company are, known as the normative theory of stakeholder identification. Another aspect, the descriptive theory of stakeholder salience, examines how managers recognize these individuals or groups as stakeholders. By adopting a stakeholder approach, researchers can better understand how a company operates within its broader context and the impact its actions have on stakeholders. Disregarding the interests of stakeholders is both imprudent and morally wrong.

Focusing solely on increasing the wealth of shareholders is considered unethical. However, the question remains whether a company that prioritizes ethics over monetary gain is ultimately more profitable. Is it acceptable to disregard the interests of stakeholders, even if it results in greater profits in the long term? According to stakeholder theory, a corporation is not a standalone entity, but a member of a larger social community. As such, it has obligations to individuals and groups beyond its owners. The corporation affects the lives of people such as customers and, particularly, employees who rely on it for their livelihoods.

The impact of major corporate bodies extends beyond the confines of their own operations, affecting not only their own shareholders but also governmental bodies and citizens alike. As integral components of a capitalist society, businesses must recognize their interconnectedness with the broader social framework. Prioritizing the financial interests of their owners to the detriment of the community would be unethical, as the actions of a business can have far-reaching consequences that adversely affect the well-being of society as a whole.

According to Robert Reich, the belief that corporations exist solely for the benefit of their shareholders is a relatively new concept. In fact, the original belief was that corporations could only serve public interests. Donaldson and Preston's Stakeholder theory includes a descriptive approach that encompasses the management process, managerial approach, and nature of the organization.

The empirical data-driven instrumental approach plays a crucial role in identifying the relationship between stakeholder management and the achievement of corporate objectives. However, at the heart of this approach lies the normative approach, which sets moral standards for the corporation's operations, as per Donaldson and Preston.

Six Principles of Stakeholders Theory And Strategy

Freeman outlined six principles that should govern the relationship between the stakeholders and the corporation.

to the governance structure should be made to ensure fairness and transparency for all parties involved.

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Externalities refer to the negative effects that a corporation's actions can have on those who do not directly benefit from them. According to the principle of externalities, anyone who bears the costs of a corporation's actions should have the right to become a stakeholder, as per stakeholder theory. This means that anyone who is impacted by a business becomes a stakeholder.

The principle of contract costs states that each party involved in a contract should bear costs that are either equal or proportional to their level of advantage in the firm. However, not all of these costs are financial in nature, which can make them difficult to quantify accurately.

Fragment 13: The principle of limited immortality emphasizes the importance of a firm's longevity to benefit both its owners and stakeholders. A short-term existence would create a disadvantage for some stakeholders and contradict the stakeholder theory. Therefore, it is crucial for the organization to be managed in a way that ensures its survival and maintains its existence for a prolonged period of time. However, it is important to note that while a firm can have a long-lasting existence, it cannot be truly immortal, hence the term "limited" immortality.

Implementation and Pitfalls of the Stakeholders Theory

Stakeholder theory emphasizes the importance of corporations considering the interests of all stakeholders, not just shareholders or select few. This approach requires a broader perspective that takes into account the impacts and concerns of all parties involved. By prioritizing the well-being of all stakeholders, companies can create a more sustainable and equitable business model that benefits both the organization and society as a whole.

a) Stakeholder’s analysis

While Stakeholder theory may not prioritize the fiduciary relationship between stockholder and organization, it does recognize the importance of considering the interests of all parties involved in a corporation. However, there are certain flaws and limitations in this approach, particularly when it comes to balancing conflicting stakeholder interests and making decisions that are fair and just for all involved. These challenges have been outlined by Kenneth Goodpaster in his analysis of Stakeholder theory.

Considering the impact on stakeholders who are affected by a decision is only the first step. However, if the analysis is solely for academic purposes and lacks genuine concern for the stakeholders and their well-being, it becomes futile. Stakeholder theory aims to emphasize the responsibility of corporations towards their stakeholders. However, conducting an analysis and presenting data on stakeholders without taking any action to prioritize their interests falls short of fulfilling this responsibility.

b) Stakeholder’s synthesis

Stakeholder theory must move beyond theory and into practical application. It not only addresses the ethical obligations of corporations towards stakeholders, but also requires action to fulfill those obligations. Stakeholder theory analysis should involve the corporation actively fulfilling its duty towards its stakeholders.

When a business organization genuinely considers the interests of its stakeholders, it engages in a process of collecting data on how a particular decision will affect them and then takes action accordingly. The opinions of these stakeholders are given due recognition and acted upon by the firm. Under this umbrella, there are two sub-categories to consider: strategic stakeholder synthesis and multi-fiduciary stakeholder theory synthesis. The former involves identifying and involving the stakeholders who hold the most significant influence in the corporation's decision-making process. However, their involvement is limited to the extent that it affects the shareholders, and the interests of the stakeholders themselves are secondary.

The current corporate hierarchy prioritizes the interests of shareholders above all else. While some stakeholders are included in the decision-making process, others are excluded, creating a biased system. The Multi-Fiduciary Stakeholder theory Synthesis proposes that all stakeholders should be considered as fiduciaries in the firm, entrusted with power and property for the benefit of one another. This differs from the traditional stockholder model, as stakeholders do not invest money in the organization and should not be discounted in the decision-making process.

Treating stakeholders as fiduciaries is crucial for fulfilling ethical concerns, according to Goodpaster and the Stakeholder theory. However, there are some reservations about treating non-investor stakeholders in the same manner as investors. Ideally, firms should aim to fulfill moral obligations towards all stakeholders while still recognizing the importance of the fiduciary relationship between stockholder and firm.

In the context of stakeholder theory, the corporate entity is seen as a complex ecosystem with various interconnected elements. According to Freeman, stakeholders are crucial to the survival of the organization. If a company fails to meet the needs and expectations of its stakeholders over time, it is unlikely to thrive. Particularly in the current global economy, stakeholder theory has become increasingly relevant.

To successfully navigate this landscape, a company must prioritize the needs of its employees, customers, suppliers, and competitors, among others. This means providing fair wages and working conditions for employees, while ensuring that suppliers are paid fairly and adhere to ethical guidelines in their own operations.

It is imperative for the corporation to address the government's concerns, be transparent with the media within reason, and prioritize the needs of the local community. This includes compensating for any damages caused to the environment or community. Additionally, customers should receive high-quality goods and services that pose no harm.