Stakeholders´ identification

As has been said in the previous section, Freeman (1994) proposed three principles to guide a reform of the law of corporation: The Stakeholder Enabling Principle, the Principle of Director Responsibility and the Principle of Stakeholder Recourse, as depicted in Table 2-2, to help directors and executives in corporation management.

Table 2-2 Principles to guide a reform of the law of corporation (Freeman, 1994)

Principle Contents

Stakeholder Enabling Principle

“Corporations shall be managed in the interests of their stakeholders, defined as employees, financiers, customers, employees, and communities.”

Principle of Director Responsibility

“Directors of a corporation shall have a duty of care to use reasonable judgment to define and direct the affairs of the corporation in accordance with the Stakeholder Enabling Principle.”

Principle of Stakeholder Recourse

“Stakeholders may bring an action against the directors for failure to perform the required duty of care.”

First of all, there is a need to identify the existing stakeholders of a firm, the nature of their relationship with the firm and their salience towards the firm’s management, and the significant features or lack of them, as a way to explain Freeman’s principle of “Who and What Really Counts”.

Savage, Nix, Whitehead and Blair (1991) argue that the identification of a stakeholder needs the existence of a claim and the ability to influence other stakeholders in a firm who may have some power, with or without a claim; conversely, stakeholders who present claims (which can be legitimate or not) may or may not have power to influence the firm.

Mitchell et al., (1997), cited by several authors, define the possible type of relationship between a stakeholder and a firm. As stated by Parmar et al., (2010:429), Mitchell et al., (1997) defined an approach to analyse stakeholder dynamics (section 2.7.3). Sometimes there is a simple relationship and the stakeholder has a voice; at other times there is a power-dependence line,

where in some cases the stakeholder is dominant and, in other cases, it is the firm who is dominant. In a power/dependence relationship the dominant entity, be it company or stakeholder, holds the power leaving the other entity entirely dependent on the dominant body. There is also the possibility of a mutual power/dependence relationship between the company and the stakeholder. The legitimacy of a relationship is based on the existence of a contract, a claim by the stakeholder where any risk taken on behalf of the gives the stakeholder a moral claim over the firm. Mitchell et al., (1997) also say that those authors who defend a broader stakeholders’ definition are more concerned with their ability to influence the firm.

A theory for stakeholder identification is said to be of great value for determining how power and legitimacy are mutually influenced. Power and legitimacy, combined with urgency, are said to provide the definition of stakeholder types, defining patterns of behaviour between stakeholders and the firm. Some theories explain the role of each of those attributes, which are said to be determinant variables in the definition of relationships between stakeholders and managers. These are summarised in Table 2-3.

Agency theory, resource dependence theory and transaction cost theory define the importance of power and urgency. Two organisational theories, the institutional theory and the population ecology theory, focus on legitimacy and urgency. Organisational theories are said to provide an understanding of the environmental effects on organisations but prove to be of little value in defining the power influence. However, some stakeholders have no power but still have salience to the managers, which, once more, provides a reason for the Freeman principle of “Who and What Really Counts”.

Some authors’ defined stakeholder attributes thus: power, legitimacy and urgency, which are presented in Table 2-4.

Table 2-3 Theories which explain the importance of stakeholders’ attributes and their salience (based on Mitchell et al., 1997)

Important variables for stakeholder / manager relationship’s definition Explanatory

theories Theories basic principles

Power

Agency theory

“The central problem addressed is how principals can control the behaviour of their agents to achieve their interest, rather than the agents’ interest” (Jensen and Meckling, 1976). Managers may encourage or limit powerful stakeholders (Mitchell 1997)

Resource dependence

theory

Those who control the resources needed by the organisation have increased power and this can lead to a lack of equilibrium on the power forces of the several agents (Pfeffer, 1981). Powerful stakeholders are salient to managers (Mitchell, 1997)

Transaction cost theory

Stakeholders outside the firm who participate in it can increase transaction costs in such a way that it is cheaper to take them into the firm to lower those costs. This means that they are important to managers (Jones & Hill, 1988)

Legitimacy

Institutional theory

“Illegitimacy results in isomorphic pressures on organisations that operate outside of accepted norms” (Di Maggio & Powell, 1983)

Population ecology theory

“Lack of legitimacy results in organisational mortality” (Carroll & Hannan, 1989)

Urgency (degree to

which stakeholders claims call for

immediate attention)

Agency theory

Both theories treat urgency in terms of its contribution to cost Transaction cost theory Resource dependence theory

All these theories treat urgency in terms of outside pressures on the firm

Institutional theory Population ecology theory Behavioural theory

Urgency is viewed as a consequence of not attaining aspirations (Cyert & March, 1963)

Table 2-4 Definitions of stakeholders’ attributes

Attribute Definitions

Power

“Power is a relationship among social actors in which one social actor, A, can get another social actor, B, to do something that B would not otherwise have done” (Pfeffer, 1981:3).

“Power is the ability of those who possess power to bring about the outcomes they desire” (Salancik & Pfeffer, 1974:3).

Legitimacy

“Legitimacy is a generalised perception or assumption that the actions of an entity are desirable, proper or appropriate within some socially constructed system of norms, values, beliefs and definitions. (Suchman, 1995:574).

Mitchell et al., (1997), linking power, legitimacy and urgency, say that “an entity may have a legitimate claim on the firm, but unless it has either power to enforce its will in the relationship or a perception that its claim is urgent, it will not achieve salience for the firm’s managers”.

Urgency

“Urgency is the degree to which stakeholders claims call for immediate attention” (Mitchell et al,1997).

Jones (1993) and Mitchell et al., (1997) say that urgency is based in “time sensitivity” and “criticality”. “Time sensitivity” is said to be the degree of unacceptability of delay in attending a claim (not a sufficient condition). “Criticality” is “the importance of the claim on the relationship to the stakeholder”.

Additional features

(Mitchell et al, 1997)

Stakeholder attributes can change. Stakeholder attributes are not objective.

Stakeholders may not be aware of having a certain attribute. Stakeholders may not want to exercise their power.

Managers can have different perceptions of stakeholders’ attributes as stakeholders do about themselves.

Stakeholder attributes may be badly perceived by managers. Managers can balance divergent interests among different stakeholders.

Additional features

(Parmar et al, 2010)

Multiplicity of roles for some stakeholders. Multiplicities of stakeholder roles.