Stakeholder theory has its origins in management literature of the 1960s at the Stanford Research Institute (SRI). ‘Stakeholder’ was defined as ‘those groups without whose support the organization would cease to exist’. The list of stakeholders originally included shareowners, employees, customers, suppliers, lenders, and society. From the 1960s, the stakeholder concept was further evolved in strategy literature by the work of Russell Ackoff, C., West Churchman, and other systems theorists; the literature on corporate social responsibility; and the work of Eric Rhenman and other organization theorists (Freeman, et al., 2010, pp. 30-31).
In 1984, Freeman’s landmark book, ‘Strategic Management: A Stakeholder Approach’ defined stakeholders as “any group or individual that can affect or is affected by the achievement of the corporation’s purpose” or more generally “the organization’s objectives” (Freeman, 1984, p. vi and 46). In conceiving a stakeholder approach, Freeman provided a conceptual map for corporations to interpret the changes that had occurred in their external environment so that “… managers can begin to respond in a more effective way to the demands that these changes have wrought”. He specified “… the emergence of the consumer, environmental and other activist groups; an increase in the scope of government; a global marketplace and the resulting strength of foreign competitors; an increasingly hostile media; and a general decline in the level of confidence which members of our society place in the business corporation and its managers” as part of the turbulent environment needing to be strategically managed for corporate survival (Freeman, 1994, p. 246-247). He held the view that enterprise level strategy should answer the question “what do we stand for?”, and involve tradeoffs about the relative importance of stakeholder concerns, values and social issues. Freeman argued that organizations that do not have an appropriate enterprise strategy over time are not socially viable and experience a great deal of internal and external stress. In this context, he defined a typology of enterprise strategy: specific stakeholder strategy; stockholder strategy; utilitarian strategy; Rawlsian strategy; and social harmony strategy (Freeman, 1984, p. 101).
Since Freeman, many articles and books on the stakeholder concept have been published. A number of scholars have done reviews of stakeholder literature and have defined various ways of understanding stakeholder theory. Donaldson and Preston
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(1995) defined three aspects of stakeholder theory: descriptive; instrumental; and normative. The descriptive aspect reflects and explains past, present and future states of affairs of corporations and their stakeholders. The instrumental aspect makes a connection between stakeholder approaches and commonly desired objectives such as profitability. The normative aspect interprets the functions of the corporation, including the identification of moral or philosophical guidelines for the operation and management of corporations. Donaldson and Preston (1995) argued that stakeholder theory is ‘managerial’ and recommends the attitudes, structures and practices that, taken together, constitute a stakeholder management philosophy with its ultimate justification found in its normative base (Donaldson and Preston, 1995).
Jones and Wicks (1999) described two divergent approaches to the stakeholder theory – a social science approach and a normative ethics approach, and proposed a convergent approach to stakeholder theory development. These scholars argued for stakeholder theory to have a well-defended normative core and supporting instrumental arguments to demonstrate its practicability. They proposed that the normative core be about morally desirable relationships characterized by mutual trust and cooperation (Jones and Wicks, 1999).
Pragmatic philosophy has been offered by Buchholz and Rosenthal (2005) as a way of providing the theoretical basis for a relational understanding of the firm and its stakeholders. They argue that the corporation is not isolatable from its stakeholders but is in fact constituted by the multiple relationships in which it is embedded and which give it its being. The major function of the corporation is therefore the enrichment of these multiple relationships (Buchholz and Rosenthal, 2005).
The connection of stakeholder theory with strategic management had been made by many scholars with a number of them providing stakeholder-based strategic management tools. Freeman (1984) introduced a model of strategic management that dealt with an evaluation of stakeholders; managing stakeholders to achieve organizational objectives; and measurement of stakeholder satisfaction with organizational outcomes.
This stakeholder approach to strategic management was further developed by Harrison and St. John (1994, 1998). They introduced the stakeholder approach as an overarching framework within which traditional approaches such as industrial organization economics and the resource-based view operated as strategic tools. These scholars divided the stakeholder environment into three regions: the broad environment; the operating environment; and the internal organization. The broad environment (society, technology, economy and political/legal) forms the context in which the firm and its operating environment exist. The operating environment consists of external stakeholders that influence the firm and over which the firm has some influence. The internal organization is made up of stakeholders with formal ties to the firm. This is shown in Figure 1.1.
Figure 1.1. The organization and its primary stakeholders.
Source: J.S. Harrison and C.H. St. John (1998). Strategic Management of Organizations and Stakeholders: Concepts and Cases. 2nd edn. Cincinnati, OH: Southwestern College Publishing. p. 8.
The model of Harrison and St. John considered the resource-based view as a tool to help managers determine how internal stakeholders may be used to create competitive advantage. Porter’s (1985) five forces are integrated into an analysis of external stakeholders, and traditional economic approaches are used to analyze the remote environment (Harrison and St. John, 1994; 1998). Freeman, et al., (2007; 2010) later clarified the basic idea of managing stakeholders as essentially one of creating value for them. Business is understood as a set of relationships among groups that have a stake in the activities that make up the business. They defined “primary or definitional stakeholders” as part of an inner circle composed of financiers, customers, suppliers, employees and communities. They are “those groups without whose support the business would cease to be viable”. Those who affect primary stakeholders, the special interest groups, consumer advocate groups, competitors, government and media, comprise the “secondary or instrumental stakeholders” (Freeman et al., 2010. pp. 25-26).
Another group of scholars later defined three broad categories of stakeholders, which were similar to Harrison and St. John’s (1994; 1998) three regions of the stakeholder environment: the resource base; industry structure; and social-political. Each group is characterized as being situated in a set of concentric circles with those belonging to the resource base closest and those belonging to the socio-political the most distant (Post et al., 2002a; 2002b). This is shown in Figure 1.2.
Global Economic Forces Global Politics/Legal Forces
Sociocultural Forces
The Operating Environment
Technological Change The Broad Environment
Competitors Customers
Government agencies and administrators
Activist Groups Local Communities Financial Intermediaries Supplier Unions The Organization Owners/board of directors Managers Employees
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Figure 1.2. Broad categories of stakeholders Source: Post et al., 2002a; 2002b
The issue of understanding stakeholders, how firms relate to them and how to prioritize them has been a recurring issue in stakeholder theory. This has sometimes been referred to as ‘stakeholder legitimacy’ and answers the question of who among the many stakeholders deserve consideration. Kaler (2002) noted several streams of definitions such as claimant (stakeholders are groups who make a claim on the firm); influencer (stakeholders are those who can influence, or may be influenced by the firm); or a combinatory definition. He argued for the claimant definition as superior (Kaler, 2002). Mitchell, Agle and Wood (1997) suggested the criteria of power, legitimacy and urgency as principles for defining who really count as stakeholders. Phillips (2003a) proposed the principle of fairness as a basis, arguing that stakeholders who voluntarily accept the benefits of a mutually beneficial scheme of cooperation are the groups who have legitimacy and a claim on the firm, as well as duties owed to it.
Clarkson’s (1998) distinction between primary and secondary stakeholders emphasized the role that the former group has in making the firm a going concern, and that the latter group has a more indirect relationship with the firm and is not critical to its survival. Other scholars have also made this distinction between primary and secondary stakeholders. Primary stakeholders are groups whom the firm is closely, formally or officially tied, and may have special duties that are similar to what is owed to shareholders. Secondary stakeholders have more distant ties and to whom management has no special duties, but to whom they may have regular moral duties such as not harming (Carroll, 1993; Gibson, 2000).
A key area of inquiry in stakeholder theory is stakeholder engagement defined broadly as the process of involving individuals and groups that either affect or are affected by the activities of the firm. Stakeholder engagement as a theme has been characterized as an under-theorized area of research (Greenwood, 2007; Sloan, 2009; Freeman et al., 2010). Greenwood argued that stakeholder engagement may be understood in a variety of different theoretical perspectives, and may or may not involve a moral dimension. He offers a model of stakeholder engagement that allowed
Social-Political Industry Structure Resource Base Industry Structure Social-Political Resource Base
for corporate responsibility or corporate irresponsibility (Greenwood, 2007). A recently concluded research involving key European corporations characterized two models of stakeholder engagement: the control model and the collaboration model. The control model is focused on managing risk and ensuring survival of the company, while the collaboration model is oriented at partnering with stakeholders towards contributing to the strength and sustainability of the company. The research emphasized the importance of shifting models of stakeholder engagement from control to collaboration (Sloan, 2009). The salient dimensions characterizing these models are in Table 1.1.
Table 1.1. Models of Stakeholder Engagement
Dimension Control Model Collaboration Model
Corporate focus Arm’s length engagement Inclusive engagement Manager orientation to
stakeholders
Stakeholders are a source of risk
Stakeholders are a source of opportunity
Key engagement processes Monitoring, listening, telling Collaborating, partnering, learning Relationship to core
business process
‘Bolted on’ to core business and strategic processes
Integrated into core business and strategic process
Potential for corporate change
Limited change Transformative change
Likely performance Good Great
Source: Sloan, 2009
Much earlier, stakeholder management scholars defined two basic postures for managing stakeholders, which have parallels with Sloan’s (2009) control and collaboration models of stakeholder engagement: buffering and bridging (Daft, 1992; Harrison and St. John, 1994). Buffering is described as a low-interaction stakeholder management approach. It involves monitoring activities with the purpose of containing the effects of stakeholders on a firm. Bridging lowers organizational barriers, builds on interdependencies, recognizes common goals and includes the formation of longer-term relationships (Freeman et al., 2010). In a study about businesses playing an active role in the protection of human rights, an empowerment and constructive engagement perspective was also developed (Mena et al., 2010).
The non-profit and public sectors have a great affinity to the concept of stakeholders and stakeholder engagement/management. A review of literature, exploring the foothold of stakeholder theory beyond the corporate context, has yielded various perspectives related to law, public administration, health care and environmental policy. Neugebauer (2003) proposed stakeholder theory as providing a useful strategy for indigenous peoples to protect their interests better. Poindexter (1995) saw stakeholder theory as providing a process for decision-making that can be used to resolve conflicts over environmental issues. De Lopez (2001) provided a review of a stakeholder management framework in the Ream National Park,
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Cambodia, in the context of resolving trade-offs between conservation and development. Jamal and Eyre (2003) offered a detailed study of a multi-stakeholder process that resolved conflicts towards developing a new plan for a protected area in Canada. In fisheries management, Mikalsen and Jentoft (2001) distinguished different classes of stakeholders and separated primary from secondary groups, noting that stakeholder theory makes normative (duties to honor the legitimate claims of stakeholders), managerial (designing proper structures) and instrumental (positive outcomes) claims upon managers. They emphasized that managers need to consider groups that have been overlooked in the past as legitimate stakeholders, including local communities, environmental agencies, consumers and future generations. In water management, Beutler (2005) among others, made reference to methods of the International Association for Public Participation (IAP2) that relate degrees of involvement, increasing level of impact, goals of outreach, public expectations, and tools and methods to forms of stakeholder engagement that span inform, consult, involve, collaborate, and empower. Beutler (2005) identified eleven prerequisites to stakeholder collaboration, with the need for stakeholders to represent organized constituencies as an important condition. Grimble and Wellard (1997) studied the relevance of stakeholder analysis as a tool for natural resource management (NRM). They argued that for strategic approaches to be efficient, equitable, and sustainable, there is a need to differentiate stakeholders, as primary and secondary, active and passive, according to level of importance, and capacity to exert influence. These scholars noted that subsistence farmers and other small-scale resource users are critical stakeholders, though often overlooked and under-appreciated. They raised market failure as well as poverty and under-representation as specific issues that need to be addressed in stakeholder analysis in NRM (Grimble and Wellard, 1997).
On the whole, much of the literature on stakeholder theory within law, public policy, health care and the environment explore the descriptive and instrumental dimensions of stakeholder theory, although there are some notable references to normative stakeholder theory. Many of them provide empirical tools for stakeholder analysis, management, and engagement. In health care literature, there is much emphasis on stakeholder analysis with the purpose of trying to attain advantage for the organization, or developing the best strategy to manage each stakeholder. This is in contrast to the stakeholder literature in public/environmental policy and natural resource management where there is a strong emphasis on engagement with stakeholders and a belief that the larger normative goals to guide organizations emerge from the give and take of stakeholder dialogue (Freeman, et al., 2010).
In social entrepreneurship literature, stakeholder theory has been cited by scholars of the social economy school, notably Spear et al., (2010) as a theoretical perspective for understanding social enterprises as organizations where stakeholder groups with differing interests, beyond owners and members, are given consideration and representation in boards to respond to broader social interests. Vidal (2010) takes it
further by providing a theoretical introduction to social enterprises as multi- stakeholder organizations. She proposes multi-stakeholder dialogue (giving a voice to stakeholders) and multi-stakeholder administration (giving a vote to stakeholders in decision making bodies) as means for achieving multi-stakeholder governance (a state where commitments approved by different stakeholder groups define organizational direction) in social enterprises. Vidal (2010) defined a multi-stakeholder organization as one that promotes the interests of several stakeholder groups, no matter how unequal. By giving them a voice and a vote in decision-making structures, the multi- stakeholder organization is assumed to be better equipped to address society’s general interests. The emphasis on multi-stakeholder organization and governance in literature from the social economy school of social entrepreneurship is explained by scholars such as Defourny (2001) as an innovation from the more traditional social economy organizations composed of homogeneous groups such as workers’ cooperatives or mutual societies of civil servants.
While not explicitly locating their work in extending stakeholder theory, social entrepreneurship scholars from the social economy school include features of what may be considered a different stakeholder engagement model as part of the social dimensions of their working definition of an ideal type of social enterprise. Specific features such as decision making based on “the principle of ‘one member, one vote’ or at least a voting power not distributed according to capital shares on the governing body…. but the decision making rights are shared with other stakeholders” (Defourny, 2001. p. 20) go beyond the corporate stakeholder engagement strategies of control and collaboration defined by Sloan (2009). Corporate collaboration models may promote inclusive engagement but decision-making in their governance structures is still distributed to stakeholders according to capital shares. Social enterprises having a “democratic management style” and in many cases aiming to “further democracy at local level through economic activity” (Defourny, 2001. p. 20) also go beyond the features of these corporate models of stakeholder engagement. Using Vidal’s (2010) framework of multi-stakeholder governance in social enterprises, Sloan’s (2009) corporate collaboration models may be characterized as promoting stakeholder dialogue (giving stakeholders a voice) but not multi- stakeholder administration (giving stakeholders a vote).
Even as stakeholder theory has had a growing foothold beyond the corporate context, Bevan and Werhane (2010) raised an issue about the corporate centricity of stakeholder theorizing and the need to give a face to the different categories of stakeholders.
Leading scholars on the stakeholder theory, in concluding their book, Stakeholder Theory: The State of the Art, have called for a “richer description” of stakeholder engagement strategies or models, a “redescription” of organizations other than corporations in stakeholder terms and “relating descriptions” or contributing to the conception of stakeholder theory for different types of organizations (Freeman, et al.,
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2010. p. 286). It is in this context, that this thesis contributes to the conception of a stakeholder theory for social enterprises with the poor as primary stakeholders (SEPPS), a dominant type of social enterprise in the South.