Stakeholder theory is the belief that successful firms must evaluate and provide value for a wide range of stakeholders in order to succeed.

Definition and historical context:

This theory was formalized in R. Edward Freeman’s 1984 book, “Stakeholder Management: A Framework for Long-Term Success,” in which he argued that achieving balance and integration between competing interests was an important consideration for successful strategic management (and, therefore, for the long-term success of a firm). Those who are involved in an organization’s success and survival are referred to as stakeholders (Freeman and Reed, 1983).

Customers, owners or investors, employees, trade union members, suppliers, subcontractors, creditors, and other main stakeholders are examples of primary stakeholders. Additionally, there are secondary stakeholders such as the government, the community, society at large, associated professional organizations, and so on. Managers should consider these stakeholders as ends in themselves rather than as means to a purpose, and they should pay attention to their requirements. Although they should consider each other’s needs first, they should make every effort to strike a balance between any opposing interests – that is, they should avoid favoring one over the other to an excessive degree.

Strategic management, organizational change, business ethics, and corporate governance are some of the areas where stakeholder theory has had a significant impact on research (see, for example, Asher, Mahoney, and Mahoney, 2005; Goodijk, 2003; Jones, 1995; Orts and Strudler, 2002). However, in order to completely comprehend the origins of stakeholder theory, we must first take a little journey through the history of corporate governance law in the United States.

Over the course of two centuries, the legal standing of corporations in the United States has undergone numerous changes in interpretation. In the well-known 1886 decision of Santa Clara County v. Southern Pacific Railroad, the Supreme Court of the United States declared companies to be legal persons. More specifically (and as previously stated by the Court), it held that companies are protected by the 14th Amendment, Section One of the United States Constitution (Nace, 2003: 239), which ensures that all people get full and equal protection under the law. A decade before this 1886 decision, companies in the United States were closely controlled entities with constraints on their activities, scope of operations and life spans, as well as their size and other characteristics (Nace, 2003: 46–55).

The Dodge v. Ford 1919 judgment of the United States Supreme Court is almost as well-known as the Santa Clara decision. Shareholder primacy, as defined by Bakan (2004), is that executives have a legal obligation to serve the ‘best interests of shareholders in the company’s decision-making process.

With the notion that shareholders are the legal property owners of businesses, it seems that the concept that executives of corporations must act solely in ways that increase shareholder value has been well established for a long time (Berle and Means, 1932). Business schools in the United States, as well as many business schools in Europe, are dominated by the idea that firms are the most rational tools for managing society’s resources (Coase, 1937; Friedman, 1962), and this is the dominant logic of business schools in the United States and many business schools in Europe.

Wallman (1999) argued for a slightly modified version of the Ford decision, arguing that the Court granted corporations discretion in decision-making with the provision that all decisions must support the corporation’s fundamental purpose, which is investor protection rather than shareholder primacy. In order to increase a corporation’s long-term wealth-generating capacity, rather than only maximizing current shareholder interests, the corporation must be managed (p. 817). In other words, if you maximize the value of your shareholders’ wealth over the long term, you will maximize the value of the company (Sundaram and Inkpen, 2004a: 371).

For his part (Sundaram and Inkpen, 2004b: 351-353), Dodd (1932) maintained that the company should be treated as if it were a person with citizenship responsibilities (Sundaram and Inkpen, 2004b: 351–353). As a matter of fact, in the 1920s and 1930s, Mary Parker Follett was an early and vocal proponent of the idea that management should pay attention to all of the people with whom they have dealings: ‘The manager has to get credit from the bankers, make dividend payments to stockholders, and deal with his competitors.’ To be more specific, the manager has relationships with the following parties: (1) bankers, (2) stockholders, (3) co-managers and directors, (4) wage earners, (5) competitors, (6) persons from whom he purchases, and (7) customers’ (as stated in Melé, 2007: 416–417).

Comments from academics and theorists include:

In a burgeoning and complementary field of research known as corporate social responsibility, the idea is advanced that management, with the correct supervision, may act in a manner that is accountable to communities, society, and the environment, among other things (see Scherer and Palazzo, 2007, for an excellent review). Example: In his book Shareholder Maximization, Hinkley (2002: 19) argues for a code of corporate citizenship that would add additional legal requirements for operating successfully – but not at the expense of “the environment, human rights, public health or safety,” communities in which corporations operate, or the dignity of their employees – to the requirement for shareholder maximization. Certain stockholders believe they have too much power, and they advocate for the emancipation of management ‘by removing stockholder voting for the board of directors and establishing self-perpetuating boards of directors” (Lee, 2005: 76).

A striking development is that stakeholder theory is now widely accepted as a fundamental paradigm for understanding business ethics and corporate social responsibility (Egels-Zandén and Sandberg, 2010). Research was undertaken during the past 25 years, on the other hand, “refer[s] to the same understanding of stakeholder theory or to the same set of fundamental distinctions in this theory, and yet uses[s] this theory in fundamentally different ways,” according to the authors (2010: 36).

The taxonomy of normative, descriptive, and instrumental parts of stakeholder theory developed by Donaldson and Preston (1995) is used in the majority of the study. The normative aspect is concerned with how the world should be, whereas the descriptive aspect is concerned with how the world actually is. The third facet, referred to as instrumental, is the most challenging to manage since it deals with the link between managing stakeholder requirements and interests and attaining traditional corporate goals.

Business ethics and corporate social responsibility research were examined by Egels-Zandén and Sandberg (2010), who used stakeholder theory to guide their analysis. First, they distinguished between studies that directly connect to the Donaldson and Preston (1995) taxonomy in a narrow sense and those that connect to a more general sense of stakeholder theory; second, they distinguished between studies that interpret the instrumental or descriptive aspects as hypotheses and those that interpret them as research areas; and third, they distinguished between studies which understand the Donaldson and Preston concept of stakeholder management as behavior and those which understand the concept as I

In their research, the authors discovered that, whereas the instrumental part of stakeholder theory has grown in a very specific manner, the descriptive aspect has developed in a more general manner. While studies have looked into the financial implications of stakeholder theory and the ways in which firms engage with their numerous stakeholders, they have not looked at the following:

Have been particularly interested in examining either… how firms should relate to their stakeholders in order to maximize financial performance (wide instrumental stakeholder theory), or… the extent to which firms genuinely adopt the normative core of stakeholder theory (narrow descriptive stakeholder theory). (2010), pp. 46–47

According to them, business ethics and corporate social responsibility scholars are more concerned in demonstrating that if the management of a company accepted the normative prescriptions of stakeholder theory, then there would be instrumental benefits to the overall performance of that firm.

Firms should contribute much more to the betterment and welfare of society, argue some researchers (e.g. Freeman, Wicks and Parmar, 2004; Rivoli and Waddock, 2011), who argue that firms should take care of primary and secondary stakeholders in a balanced manner. These researchers are engaged in an ongoing theoretical battle with those who argue that firms should have no mandate other than to provide goods or services to the marketplace, provide employment, pay taxes and provide we the public with a safe environment to live in.

READ MORE:

Stakeholder theory. (2013). In A. L. Cunliffe, & J. T. Luhman, SAGE key concepts: Key concepts in organization theory. Sage UK. Credo Reference: https://go.openathens.net/redirector/adler.edu?