Stakeholder Theory

Stakeholder theory expands the group of constituents to cover “any group or individual who can affect or is affected by the achievement of the organisation’s objectives”.99 This applies to any kind of stockholder, including creditors, managers, employees, customers, suppliers, business partners, local communities and the general public as well as any types of relationships that require to be appreciated by managers. According to stakeholder theory, those parties deserve to obtain benefits and they can also affect the decision-making of the firm in both processes and outcomes.100 They all represent a part of a firm’s capital, infrastructure and human capital commitments as well as provide a different level of services to it. In exchange, they also expect to gain appropriate benefits and avoid risks from their firms.101 Therefore, stakeholder theory assumes two levels of a board’s duties: a contractual duty to the shareholders’ interests and at the same time a moral duty to take other stakeholders into consideration.102

Despite the fact that shareholders have an asset specificity, this alone does not qualify them to acquire special consideration over all other stakeholders who may be more involved and affected by the firm's risks. Nevertheless, shareholders are more capable of withdrawing themselves from the company via the stock market.103 Therefore, the stakeholder approach depends on the idea that seeking to satisfy all groups who have a stake or a legitimate claim in the business relies on reformulating implementations and

98 _{Fontrodona, J., and Sison, A. (2006). The Nature of the Firm, Agency Theory and Shareholder Theory:}

A Critique from Philosophical Anthropology. Journal of Business Ethics, 66(1), at 40-41.

99 _{Abdullah, H., and Valentine, B. (2009). Fundamental and Ethics Theories of Corporate Governance.}

Euro Journals Publishing, Middle Eastern Finance and Economics, Issue 4, at 91, available at http://www.eurojournals.com/MEFE.htm, accessed on 12/3/2015.

100 _Ibid.

101 _{Hill, C., and Jones, T. (1992). Stakeholder- Agency Theory. Journal of Management Studies, 29(2),}

at 133.

102 _{Freeman, E., and McVea, J. (2001). A Stakeholder Approach to Strategic Management. Darden}

Business School Working Paper, No. 01-02, at 19, Can be downloaded from the Social Science Research Network Electronic Paper Collection at: http://papers.ssrn.com/paper.taf?abstract_id=263511, accessed on 12/3/2015.

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processes to be able to run and integrate stakeholders’ relationships and interests for the long-term success of the company, as well as to ensure that management, the business environment, relationships and the shared interests are active and promoted.104 On the other hand, dealing with a variety of unmeasurable interests at different levels of stakeholder groups may give managers a chance to exploit this complicated climate to be unaccountable for their actions.105 There is also the possibility in some environments to favour particular stakeholder groups at the expense of others.106 However, in today’s fast changing business environment it is difficult to cover the myriad of groups who have a stake or interest in a firm. Therefore, attention should be drawn to the key stakeholder's interests and to creating integrated and coherent relationships as well as the key purpose of the firm.107

Freeman and McVea argue that the stakeholder theory can offer a comprehensive framework to improve and combine the many other theories, such as agency theory, human relationships, transaction costs, contract theory, and even ethics and the environment into a coherent whole.108 However, they also highlight some characteristics and issues that need to be developed in the stakeholder approach. These are summarised below:109

1- The stakeholder approach provides a flexible framework that is able to deal with environmental shifts to manage strategically the mutual influence between the firm and the environment.

2- The survival of the firm is the greatest priority of the stakeholder approach. Hence, the firm should try to achieve its key objectives and understand stakeholder relationships in this context. This does not mean focusing on maximising a single

104 _{Ibid, at 10.}

105 _{Mallin, C. (2013). Corporate Governance (4th ed.). Oxford: Oxford University Press, at 20.} 106 _{Freeman, E., and McVea, J. (2001). A Stakeholder Approach to Strategic Management. Darden}

Business School Working Paper, No. 01-02, at 11, Can be downloaded from the Social Science Research Network Electronic Paper Collection at: http://papers.ssrn.com/paper.taf?abstract_id=263511, accessed on 12/3/2015.

107 _{Ibid, at 11.} 108 _{Ibid, at 19.} 109 _{Ibid, at 11-13.}

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objective but instead governing, balancing and integrating relationships and multiple objectives.

3- Unlike other theories that adopt the individualism approach in the protection of interests, there is a critical role for values in the stakeholder theory in the areas of business ethics and business and society. It supposes that ensuring long-term success requires stakeholders to share a set of core values whatever their differences. This is particularly in the case of boundaries blurred between firms, industries and public and private lives.

However, there are a series of shortcomings surrounding stakeholder theory which revolve around two major points.First, the term stakeholder is relatively vague and the definition of its object remains controversial. Furthermore, its objective to create value for all stakeholders with multiple targets is impossible to achieve. Similarly, it is unable to tackle the shortcomings of capitalist theories. This undefined management objective leads to confusion, conflict, inefficiencies and even a weakening of the corporation.110 Second, stakeholder theory is merely an ideological product based upon socialisation and moral behaviour. It does not have a sufficient scientific thoroughness to deal with the financial and economic objectives of companies. Moreover, it does not provide a clear description of a company’s behaviours and its links with internal and external actors as well as how to tackle the challenges and the internal and external variables and how to manage conflicting interests.111