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Stakeholder Theory

o The stakeholder theory is a theory of organizational management and business ethics that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others.Implications of the Theory for Managers

Stakeholder theory explores the view that organizations should focus on a broader set of goals than simply improving shareholder wealth.o The main idea in stakeholder theory is that organizations should focus on meeting a broader set of interests than just amassing shareholder wealth.o Stakeholder theory has been continually fine-tuned and expanded, in such areas as differentiating between primary and secondary stakeholders (Clarkson, 1995), focusing on restricted (narrow) versus unrestricted (broad) stakeholder strategies (Greenwood, 2001), balancing diverse stakeholder orientations (Buono & Nichols, 1985), and assessing corporate performance from the perspective of different stakeholders (Donaldson & Preston, 1995).According to stakeholder theory, involving stakeholders in corporate decisions is considered an ethical requirement and a strategic resource, both of which help provide organizational competitive advantages (Cennamo, Berrone, & Gomez-Mejia, 2009; Plaza-Ubeda, de Burgos-Jimenez, & Carmona-Moreno, 2010).The assumption is that organizations that practice stakeholder management, assuming all other variables are held constant, will be relatively successful in terms of profitability, stability, growth, and so on.

o Content:Ethical reasons for considering stakeholders

o Stakeholders have legitimate interests in the firm

The normative perspective examines why firms should give consideration to their stakeholders.Categories of Stakeholders

Categories of Stakeholders (Sirgy, 2002)

Content:

Internal: Employees, executives, board of directors

External: Shareholders, suppliers, local community

Distal: Rival firms, government agencies, labor unions

Sirgy (2002) developed a list of three categories of stakeholders: internal, external, and distal.Perspectives of Stakeholder Theory

Title: Perspectives of Stakeholder Theory (Donaldson & Preston, 1995)

Content:

Descriptive: Organizations have stakeholders

Instrumental: Stakeholder management leads to success

Normative: Ethical obligation to stakeholders

Stakeholder theory can be categorized from three points of view: descriptive, instrumental, and normative (Donaldson & Preston, 1995).Definition of Stakeholders

Content:

Individuals or groups affected by organizational actions (Freeman, 1984)

Major, legitimate stakeholders vs. distant stakeholder

stakeholders are individuals or groups who can affect, or are affected by, the actions and results of an organization (Freeman, 1984).Kaler (2003) developed a typology of stakeholder theories and concluded that there are only two permissible types:

o (1) theories in which firms have perfect responsibilities toward both shareholders and nonshareholders and (2) theories in which firms have perfect responsibilities toward shareholders, but imperfect ones toward nonshareholders.Stakeholder Theory

o Content:

o Traditional view vs. Stakeholder Theory

o Focus on broader interests beyond shareholders

o The traditional view of organizations is that they primarily care about improving the wealth of their shareholders, those who own shares in the company.Distal stakeholders include rival firms, consumer and advocacy groups, government agencies, voters, and labor unions.Research has shown that a significant number of firms practice shareholder management,

which involves balancing the needs of organizations with the needs of stakeholders (for

example, Clarkson, 1991).Perspectives of Stakeholder Theory

2.Content:

o Link between stakeholder strategies and organizational performance

o Success measured by profitability, stability, growth

The instrumental perspective is that firms that consider their stakeholders' interests will be more successful than those that do not.Some researchers have contended that both financial and social performance should be stressed, but others have focused purely on the importance of primarily meeting the needs of all relevant stakeholders, even if that is at the expense of profits.According to the normative perspective, stakeholders are individuals or groups who have legitimate interests in substantive aspects of the firm (Donaldson & Preston, 1995).Criticisms and Critiques of the Theory

Stakeholder theory continues to gain in popularity among both managers and academics (Agle et al., 2008).Content: Organizations balance needs of shareholders and stakeholders

Examples of stakeholder management practices

The descriptive perspective simply states that organizations have stakeholders.Favoring one party over another simply due to power differentials is a violation of justice and fairness principles (Harrison, Bosse, & Phillips, 2010).o Stakeholder Theory is a view of capitalism that stresses the interconnected relationships between a business and its customers, suppliers, employees, investors, communities and others who have a stake in the organization.For the most part, stakeholder theory has excluded the interests of stakeholders whose interests are far from the firm's operations or corporate objectives (Hillman & Keim, 2001; Walsh, 2005).Freeman (1984) was careful to note that any theory that refocuses decision-making power in such a way was open to abuse by nonshareholders, because power is being redirected from the wealthy shareholders to the usually less wealthy stakeholders.The other two perspectives have been largely neglected by researchers (Egels-Zanden & Sandberg, 2010).Critics also have argued that a glaring shortcoming of the theory is the problem of identifying stakeholders (Freeman, 2004).Managers may be unable to attend to all stakeholder needs, so they often narrow the field of stakeholders on the basis of such attributes as power, legitimacy, and urgency.Critics of the theory have condemned the notion that corporate profits must be sacrificed in order to meet various stakeholder needs.Another area of continuing criticism concems identification of salient stakeholders.1..2.3.5.6.7.8.9.10.11.12.

Stakeholder Theory

• The stakeholder theory is a theory of organizational management and business ethics that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others.

• Stakeholder Theory is a view of capitalism that stresses the interconnected relationships between a business and its customers, suppliers, employees, investors, communities and others who have a stake in the organization. The theory argues that a firm should create value for all stakeholders, not just shareholders.

Stakeholder Theory

• Content:

• Traditional view vs. Stakeholder Theory

• Focus on broader interests beyond shareholders

• The traditional view of organizations is that they primarily care about improving the wealth of their shareholders, those who own shares in the company. In this view, the actions and decisions of the firm are primarily economic and are at the expense of other types of interests, such as society's best interests. Stakeholder theory goes against this traditional view of the corporation (Freeman, 2002).

• The main idea in stakeholder theory is that organizations should focus on meeting a broader set of interests than just amassing shareholder wealth. Instead of focusing only on the firm's financial performance, organizations should also focus on their social performance. They should try to understand, respect, and meet the needs of all of those who have a stake in the actions and outcomes of the organization. According to stakeholder theory, involving stakeholders in corporate decisions is considered an ethical requirement and a strategic resource, both of which help provide organizational competitive advantages (Cennamo, Berrone, & Gomez-Mejia, 2009; Plaza-Ubeda, de Burgos-Jimenez, & Carmona-Moreno, 2010).
Definition of Stakeholders

Content:

Individuals or groups affected by organizational actions (Freeman, 1984)

Major, legitimate stakeholders vs. distant stakeholder

stakeholders are individuals or groups who can affect, or are affected by, the actions and results of an organization (Freeman, 1984). This definition can be interpreted so broadly that anyone or any group can be seen as a company stakeholder. Therefore, stakeholder theory usually narrows the definition of a stakeholder to major, legitimate individuals or groups. For the most part, stakeholder theory has excluded the interests of stakeholders whose interests are far from the firm's operations or corporate objectives (Hillman & Keim, 2001; Walsh, 2005). If an organization were to focus on meeting the interests of those who have extremely different interests, then the organization might not survive economically (Mitchell, Agle, & Wood, 1997).

Categories of Stakeholders

Categories of Stakeholders (Sirgy, 2002)

Content:

Internal: Employees, executives, board of directors

External: Shareholders, suppliers, local community

Distal: Rival firms, government agencies, labor unions

Sirgy (2002) developed a list of three categories of stakeholders: internal, external, and distal. Internal stakeholders include employees, executive staff, firm departments, and the board of directors.

External stakeholders include shareholders, suppliers, creditors, the local community, and the environment. Distal stakeholders include rival firms, consumer and advocacy groups, government agencies, voters, and labor unions.

A central idea of stakeholder theory is that some corporate decision-making power and benefits should be taken away from the shareholders and given to the stakeholders (Stieb, 2008). Freeman (1984) was careful to note that any theory that refocuses decision-making power in such a way was open to abuse by nonshareholders, because power is being redirected from the wealthy shareholders to the usually less wealthy stakeholders. This type of redistribution of wealth could

potentially harm the shareholders who have earned their corporate earnings.

Perspectives of Stakeholder Theory

Title: Perspectives of Stakeholder Theory (Donaldson & Preston, 1995)

Content:

Descriptive: Organizations have stakeholders

Instrumental: Stakeholder management leads to success

Normative: Ethical obligation to stakeholders

Stakeholder theory can be categorized from three points of view: descriptive, instrumental, and normative (Donaldson & Preston, 1995).

1. Content: Organizations balance needs of shareholders and stakeholders

Examples of stakeholder management practices

The descriptive perspective simply states that organizations have stakeholders. The role of organizations is to satisfy a wide range of stakeholders and not just the shareholders.

Research has shown that a significant number of firms practice shareholder management,

which involves balancing the needs of organizations with the needs of stakeholders (for

example, Clarkson, 1991).Perspectives of Stakeholder Theory

2. Content:

• Link between stakeholder strategies and organizational performance

• Success measured by profitability, stability, growth

The instrumental perspective is that firms that consider their stakeholders' interests will be more successful than those that do not. Research in this area has examined the connection between stakeholder strategies and organizational performance. The assumption is that organizations that practice stakeholder management, assuming all other variables are held constant, will be relatively successful in terms of profitability, stability, growth, and so on.

• Content:Ethical reasons for considering stakeholders

• Stakeholders have legitimate interests in the firm

The normative perspective examines why firms should give consideration to their stakeholders. This perspective has been the predominant view, or main core, in stakeholder theory (Donaldson& Preston, 1995). The other two perspectives have been largely neglected by researchers (Egels-Zanden & Sandberg, 2010).

. According to the normative perspective, stakeholders are individuals or groups who have legitimate interests in substantive aspects of the firm (Donaldson & Preston, 1995). Stakeholders are defined by their own interests in the organization, whether or not the organization has any corresponding interest in the stakeholders.

• The interests of the stakeholders are valuable to the organization for their own sake and not because addressing their interests could benefit any other group, such as the shareholders of the firm. Kaler (2003) developed a typology of stakeholder theories and concluded that there are only two permissible types:

• (1) theories in which firms have perfect responsibilities toward both shareholders and nonshareholders and (2) theories in which firms have perfect responsibilities toward shareholders, but imperfect ones toward nonshareholders.

• Stakeholder theory has been continually fine-tuned and expanded, in such areas as differentiating between primary and secondary stakeholders (Clarkson, 1995), focusing on restricted (narrow) versus unrestricted (broad) stakeholder strategies (Greenwood, 2001), balancing diverse stakeholder orientations (Buono & Nichols, 1985), and assessing corporate performance from the perspective of different stakeholders (Donaldson & Preston, 1995).
Criticisms and Critiques of the Theory

Stakeholder theory continues to gain in popularity among both managers and academics (Agle et al., 2008). However, critics of the theory have claimed that it has not been operationalized in such a way that it allows scientific inspection (Key, 1999).

Critics also have argued that a glaring shortcoming of the theory is the problem of identifying stakeholders (Freeman, 2004). The theory is often unable to distinguish between who is and who is not a stakeholder.

Another area of continuing criticism concems identification of salient stakeholders. Managers may be unable to attend to all stakeholder needs, so they often narrow the field of stakeholders on the basis of such attributes as power, legitimacy, and urgency. Clifton and Amran (2011) argue that using power to categorize stakeholders takeholders has significant problems. Favoring one party over another simply due to power differentials is a violation of justice and fairness principles (Harrison, Bosse, & Phillips, 2010).

Critics of the theory have condemned the notion that corporate profits must be sacrificed in order to meet various stakeholder needs. Shareholders invest in a firm because they want it to stay in business and make a profit. Some researchers have contended that both financial and social performance should be stressed, but others have focused purely on the importance of primarily meeting the needs of all relevant stakeholders, even if that is at the expense of profits.

Stakeholder theory posits that the interests of all persons or groups with legitimate interests in an organization should be considered. However, critics argue that there is no prima facie priority of one group's interests and benefits over those of another (for example, Donaldson & Preston, 1995).

Suggestions for Further Research

1. 
   

   Examine the point at which shareholders leave when firms sacrifice too much financially for the sake of stakeholder interests.

   
   


2. 
   

   Explore the process through which firms learn about salient stakeholder interests and how firms prioritize those interests.

   
   


3. 
   

   Create a typology of how organizations create value for stakeholders.

   
   

• 4. Look at how stakeholders assess value created for them by organizations.

5. 
   

   Examine how firms create a single-value objective function through which stakeholder interests are subordinated to the firm's interests.

   
   


6. 
   

   Study how firms simultaneously manage competing stakeholder

   
   

demands from multiple stakeholder sources.

7. 
   

   Examine the full relationships among stakeholder attributes, stakeholder salience, and firm social and financial performance.

   
   


8. 
   

   Explore the dynamics of managerial discretion, orientation, and stakeholder behavior.

   
   


9. 
   

   Look at the variations in behaviors of high- versus lowdiscretion managers in terms of firm social and financial performance.

   
   


10. 
    

    Examine the relationship between what managers do and why they do it, with regard to meeting the needs of

    
    

stakeholders.

11. Look at the extent to which there are conflicts and similarities between stakeholder and shareholder interests.


12. Implications of the Theory for Managers

Stakeholder theory explores the view that organizations should focus on a broader set of goals than simply improving shareholder wealth. The theory posits that organizations have to make money and stay in business, or else they won't be able to help meet anyone's needs. However, an organization should strive to meet the needs of both shareholders and stakeholders, so that both the financial performance and the social performance of the firm are enhanced.

A key implication of the theory for managers is the necessity of identifying your most important and relevant stakeholders. This is easier said than done. You will need to invest time and resources to identify those stakeholders who have the most powerful, legitimate, and urgent influences over your organization.

Once you have identified your stakeholders, then you will need to establish a relationship and dialogue with them so that

you can know and understand their needs and demands in relation to your organization.

You won't be able to address the needs and demands of all your stakeholders. You will have to create a way to prioritize some needs and demands over others. This may also be difficult to do. For example, some shareholders may not be happy about the firm sacrificing earnings for social causes. Finally, only you can decide how much power and authority you want to give to your stakeholders and how much you will allow stakeholders to constrain your management actions.