The stakeholder theory is a theory concerned with the relationship between a firm and its stakeholders. Since its introduction, the stakeholder approach has become a consistent dimension in corporate life and is henceforth difficult to discount in any corporate model (Andriof and Waddock 2002). Freeman (1984) defines stakeholders as any group or individual who can affect or is affected by the achievement of the firm’s objectives while Donaldson and Preston (1995) define stakeholders as persons or groups with legitimate interests in procedural and/or substantive aspects of corporate activity (Shafiq et al. 2014). Chiu and Wang (2015) view stakeholders as those who have a stake in a firm and have something at risk and they normally include shareholders, creditors, employees, public interest groups, customers, suppliers, governmental agencies and the community. According to Sternberg (1997), due to the increasing internationalisation of modern life,
and the global connections made possible by improved transportation,
telecommunications, and computing power, those affected at least distantly and indirectly by a firm include almost everyone. From the stakeholder theory perspective, a firm must meet the multiple expectations of the different stakeholder groups instead of meeting only the expectations of shareholders as in the traditional shareholder theories because stakeholder theory emphasises firms’ accountability beyond simple economic or financial performance. Stakeholder theory, therefore, offers a platform for identifying key groups to whom a firm should direct its social efforts and represents a foundation for discerning
77
the relationship between various indicators of firm performance (Jones 1995). Logdson and Wood (2000) argue that a major purpose of the stakeholder theory is to help corporate managers understand their stakeholder environments and manage more effectively within the nexus of relationships that exists for their companies. According to Mitchell et al. (1997), the concept of stakeholder theory is intended to broaden management’s vision of its role and responsibilities beyond profit maximisation functions to include interests and claims of non-shareholder groups. Management is expected to be accountable to the firm’s stakeholders by embarking on activities recognised as important by its stakeholders, and by reporting information. Managers should, therefore, balance the interests of all stakeholders, and maximising the welfare of all stakeholders requires that managers balance and integrate multiple stakeholders’ interests with no prima facie priority of one group of stakeholders over another (Freeman et al. 2004). Two main branches of the stakeholder theory are evident in the literature and these are the ethical or normative branch and the managerial or positive branch (Deegan 2014).
In the ethical or normative perspective, corporate managers are required to manage the business for the benefit of all stakeholders irrespective of whether management of stakeholders leads to improved financial performance (Hasnas 1998). Thus, a firm is accountable to all its stakeholders rather than only to more powerful or financial stakeholders. However, unlike the ethical perspective, in the managerial perspective, a firm is expected to be accountable to its economically powerful stakeholders, instead of all its stakeholders. The managerial perspective of the stakeholder theory has similar views on the agency theory, that managers maximise shareholders’ value, but firms’ activities influence on their societies and therefore in maximising shareholders’ value, the needs of the society must also be achieved. Therefore, in today’s business operations, the normative or ethical perspective of the stakeholder theory is practical and relevant to achieving the overall business objectives not only the shareholder wealth maximisation as evident in the managerial perspective.
The stakeholder theory has played a significant role in championing corporate responsibility as it has urged firms to take the demands of stakeholders other than shareholders seriously as part of their financial and social performances (Fassin 2012). Stakeholder governance, with appropriate collaborative communication practices, can generate more creativity impacting on new product development, greater efficiency and effectiveness in personal and corporate goal attainment, higher levels of mutual commitment, and greater product and service customisation (Kooskora 2006). From
78
Kacperczyk (2009), attending to stakeholders’ interests may benefit firms not only in the short term but also in the long run. This could be through an increase in customer base that will improve the firm’s financial performance and that several theoretical reviews contend that firms that satisfy stakeholders’ claims can secure intangible resources that enhance firms’ ability to create value in the end to avoid financial distress. For firms to be successful and avoid financial distress, they need to achieve good social, environmental, and financial performances and to achieve that the different needs of the stakeholder group must be fulfilled. It is therefore not surprising that businesses of today report on their social, environmental as well as their financial performance.
However, the main difficulty with the stakeholder theory is that there is no unified concept defining the stakeholder (Kooskora 2006). This is because stakeholders include all those who can affect or are affected by the firm and that the number of people who benefit from the firm is unlimited, but the stakeholder theory gives no criteria as to how appropriate individuals or groups should be selected (Sternberg 1997). The stakeholder theory asserts that firms run for the benefit of all their stakeholders and that firms are accountable to all their stakeholders. However, in that case, the stakeholder theory is incompatible with business and all substantive objectives. Again, from the stakeholder theory, the duty of corporate managers to create value for their shareholders is undermined and that managers’ responsibilities towards shareholders are contradictory to their responsibilities under the agency theory. Thus, while the stakeholder theory expects managers to fulfil the needs of all stakeholders of their firms, the agency theory regards managers as agents who have been appointed by the shareholders to look after their interests and maximise shareholder value. The stakeholder theory, therefore, requires that managers violate the prior duties or responsibilities to shareholders that they undertook in accepting their jobs (Sternberg 1997). According to Sternberg (1997) therefore, despite the sincere hopes which are so often attached to stakeholder theory; it is not likely to improve corporate performance.