STAKEHOLDER THEORY

The theory was given a locus standi by Freeman’s (1984) proposition of a stakeholder model, in reaction to the positions of scholars (e.g. Friedman, 1970) before him who posited that the sole responsibility of the firm is to create wealth for its owners. In that landmark publication Freeman (1984) argued that the idea

100 of organisations carrying out business activities only taking into cognisance the interests of just their shareholders or stockholders without concern for others is an anomaly. As part of his propositions he insisted that the emphasis of firms should be on making efforts to ensure that they try to protect the interests of all their stakeholders, which is everyone that is affected or affects the firm. There has been an appreciation of the ideas put forward by Freeman (1984) in his seminal work on stakeholders, resulting in a renewed interest in the area. Some scholars (Mitchell et al, 1997; Donaldson & Dunfee, 1999; Waddock, 2002; Burchell & Cook, 2004; Maak, 2007; Du, Bhattacharya & Sen, 2010) have agreed with his position on the responsibility of the firm to a broader set of stakeholders other than just shareholders, while others (Brenner & Cochran, 1991; Friedman, 2002; Knox et al, 2005) have opposed the idea.

There have also been others who think that stakeholder theory is a noble concept that should be taken onboard by firms in their operations, but they had some disagreements with Freeman’s propositions. One of such is Key (1999) who criticised the former for proposing a model that lacked depth and efficiency in areas such as explanation of process, linkage of variables, attention to systemic issues, and environmental assessments. In his critique, Stieb (2009) argued that Freeman (1984) was proposing a model prone to abuse, since it was aimed at a careless transfer of decision-making power and wealth from those who were deemed to have to others who don’t have.

Frooman (1999) described the theory as concerning the identification and management of potential conflict arising from divergent interests that could result in a clash of such interests and the difficult situations they generate.

101 Freeman and Phillips (2002) believe that despite the fact that the very nature and definition of the theory is contentious, it is simply one that makes it a primary managerial task to influence, manage or balance all relationships that can influence the achievement of organizational purpose. Post et al (2002) also view the firm as a wealth-creating vehicle for all stakeholders of the firm and not just shareholders in reaction to Friedman’s (2002) view of the primary or original purpose of the firm being shareholders’ wealth creation.

Donaldson and Preston (1995) insist that the theory aims to describe or explain (descriptive) as well as influence (prescriptive) the workings and activities of the firm, hence their presentation of three aspects of the theory as normative, instrumental and descriptive aspects. They represented these aspects with a figure, thus;

Fig. 4.1: Three Aspects of Stakeholder Theory (Donaldson & Preston,

1995)

From the figure above, it can be seen that they presented all three aspects as nested in each other, with the normative aspect as the innermost part of

102 stakeholder theory, followed by the instrumental aspect and the descriptive aspect which happens to be the outermost of the three. The normative aspect is regarded as the core of the three and this is as a result of its role in the making of what constitutes the theory, as it informs the other aspects. This is very intellectual and vague in nature, yet it goes a long way in determining the outlook of the other two aspects of the theory at every point in time. Such determination of the state of the other two aspects is based on the conceptual discussions involved in this aspect that lead to the development of the other two aspects; it is mainly about what ought to be. This is immediately followed by the instrumental aspect, which is deemed more pragmatic and very predictive as it tries to link reality with results that come with certain practices and actions of business. The last or external shell is the descriptive aspect, which happens to be the very basic level of stakeholder theory especially as it is keen on relating what can be seen in reality. In other words, it does more of the informative part of the theory, as it does what could be referred to as the reporting part of the theory by telling us what is actually happening in the area. The authors insisted that these three in concert make up the theory so whatever discussions that take place within the area must fall in at least one of these aspects in order to be considered fit, though it mainly derives most of its make-up from the normative aspect.

In agreement, Jones (1995, p.406) notes that the theory is useful for the prescription, explanation or prediction of the actions and reactions of stakeholders to each other, as well as the results of such. Agle et al (1999) purported that normative discourse is crucial as the further development of the

103 theory as well as the future existence of the firm is highly dependent on the kind of conceptual work carried out in the area. Mitchell et al (1997) posited that this theory is concerned with attempts to systematically present the determination of the stakeholder deserving managerial attention and which does not.

4.2.1 Critique of Stakeholder Theory

The theory has come under some criticism, one of such being that it has not really been a theory of its own in the real sense of the word as it is comprised of a number of other theories in its study and exploration, referring to its multidisciplinary nature. This view was considered by Agle et al (2008) as unnecessary as they insisted that it is no longer an issue of whether stakeholder theory is in existence but that of how the theory will meet the challenges of its success. Donaldson and Preston (1995) hinted at the fear in certain quarters that taking on the new perspective of stakeholder orientation as opposed to the conventional shareholder orientation would make for an increase in the indiscipline exhibited by managers; as they would now have more reasons to abuse their offices with the excuse of serving diverse stakeholder interests. However, they noted that there is already a failure by the traditional perspective to curb the excesses of managers, even with the help of legislations. In his view, Sacconi (2006) views the theory as being unable to prescribe distinct standards against which managers can measure their organisation’s performances to see how they are doing.

In discussing stakeholder theory in the context of this study there are different theories that touch on interactions between different actors and sometimes also touch on the actors themselves that could be applied such as Open Systems,

104 Alliance, Legitimacy, Game, Social Contract and Resource Dependency theories. However, since this study is concerned with relationships between stakeholders and not the stakeholders themselves, Social Contract theory and Resource Dependency theory will be applied.