Stakeholder theory promotes good corporate governance

‘Stakeholder Theory’ as an organisational management concept supports good Corporate Governance models.
Discuss whether stakeholder theory assists in determining good corporate governance models for a company.

The recent increase in awareness surrounding Corporate Governance partly arose from what was considered to be some of the ‘darkest days in business’ during the early 2000’s when numerous multi national corporations unexpectedly collapsed. People the world over were greatly effected by these events, which brought into question the role of good business practice in today’s society.

Freeman’s (1984) seminal work “Strategic Management: A Stakeholder Approach” describes ‘Stakeholder Theory’ as a structure that supports effective Corporate Governance by way of protecting and looking after not just its shareholders, but all stakeholders that have a vested interest in the company. Central to the discipline of Corporate Governance is the ethical behaviour of corporations (Crane, 2004), ‘Stakeholder Theory’ is the most influential and popular theory to emerge thus far that addresses the role of ethics in business (Stark, 1994).

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This essay builds on the idea that ethics, business, sustainability, responsibility and the environment are no longer separate (Freeman et al., 2010) in today’s global business world. Critics of Stakeholder theory claim that the shareholder’s ability to gain maximum profits are compromised, however recent research has shown that by creating value in a responsible manner whilst taking all constituents into account actually leads to a more profitable company, whilst encouraging long term outcomes (Donaldson, 1995). Critics also claim that stakeholder’s interests are so varied its impossible to give equal fairness to all.

Whilst it is impossible to make every stakeholder’s interest equal, three key areas are assessed to determine the attributes and relevence of each stakeholder within the company’s ethical codes; power, legitimacy and urgency (Wickham, 2009).

The term ‘Stakeholder Theory’ whilst in use from the 1960’s was further developed by Edward Freeman in the 1980’s and has vastly grown in popularity in recent years. Stakeholders may include but are not limited to employees, creditors, consumers, suppliers, whilst also incorporating the extrinsic interest of Governments, competitors, the community, environment and society at large (Buchholtz, 2012). Refer to figure 1.

Fig 1. A firm and its stakeholders (Polonsky Michael, 1995).

The Australian Stock Exchange Corporate Governance Council guidelines (Australian, 2007) identify’s eight key priciples relating to the rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. By applying the eight principles to monitor and assess risk, optimise performance, create value and provide accountability. ‘Stakeholder Theory’ addresses these principles by concentrating on the moral responsibilities of business organisations in terms of the scope of fiduciary obligations towards their stakeholders. Researchers from Bologna’s University set out to determine whether stakeholder management actions could bring strength to internal legitimacy, thereby creating better working conditions that lead to improved company competitiveness, developed by company employees (Longo, 2008).

They began by conducting two surveys on the employees of a leading Italian agricultural company who had been implementing ‘Stakeholder Theory’ for many years and had received numerous awards in recognition for their processes. They were asked a multitude of questions surrounding their roles in the workplace, their feelings toward their colleagues, employers and their work environment in detail. The researchers were then able to define quantitative measures of the system of resources to determine the role of stakeholder policies in the development of the intangible resources (Longo, 2008). Those intangible resources being, “the capacity to motivate employees” (Donaldson, 1995), “the capacity to attract and keep professional and qualified personnel in the work market” (Turban, 1997), “the ability to develop internal and external company relationships” (Post, 2002).

The results indicated that the company's social policies had a significant influence particularly when it came to trust, job satisfaction, networking and communication, ability to work in a group and low turnover propensity” (Longo, 2008). Since 1983 Herman Miller the furniture manufacturing company has incorporated an employee as stakeholder program, employees carefully monitor and know how their roles contribute to the profitability. Employees review the numbers, particularly their EVA performances, an indication of their contributions to the long-term value of the company. “We are part of the company, we think and act for what’s best for the company, and we share in the fortunes of the business, like owners. We also work hard to understand our opportunities for long-term profitability and growth” (Miller, 2010).

Effective corporate governance structures encourage companies to create value, through entrepreneurialism, innovation, development and exploration, and provide accountability and control systems commensurate with the risks involved (Australian, 2007). According to a study conducted by the University of Northern Iowa, effective stakeholder management results in transparent financial reporting (Mattingly, 2009). By ensuring that decision making processes are transparent and the organisation is accountable to all its stakeholders, the effect on financial performance is a direct result of stakeholders' having an active role in organisation governance.

Additionally, organisations that exhibit stronger commitments to both institutional and technical stakeholders are more conservative in their accounting practices, a direct function of responsive corporate governance (Mattingly, 2009). As part of UPS’s 2011 Sustainability Report, Chairman and CEO Scott Davis spoke of the company’s financial reporting, “We are disclosing more information than ever before… this process spotlights which issues are at the nexus of UPS’s own business issues with those of external stakeholders, which helps guide us in the future toward creating more sustainable, longer lasting relationships (UPS, 2011).

Businesses are contributing to society more than ever before, how they contribute and make decisions raises significant ethical issues, ‘business ethics’ can be said to begin where the law ends (Crane, 2004). Additionally, companies are having to look toward creating not only sustainable organistations but environmentally sound and socially responsible establishments (Wolfe, 2007). The controversial economist Milton Friedman once said, “the only social responsibility of business is to maximise profits” (Friedman, 1962) . This way of thinking is inline with traditional ‘Agency Theory’, where the manager’s only obligation is to shareholders (Crane, 2004). However, there is inconsistency with this argument, from a legal perspective and an economic perspective. Firstly, it is simply naïve to say that the only group who has a legitimate interest in the corporation is the shareholder. There are a multitude of groups that hold a legitimate ‘stake’ in the corporation through legal binding contracts that stipulate certain rights and claims on the corporation (Crane, 2004).

For example there is legislation in place that protects workers’ rights in relation to pay and conditions, therefore from an ethical point of view the corporation has an obligation to their employees (Freeman, 2008). Secondly, there are external ramifications when a corporation ceases to consider the broader implications of it stakeholders, for example if a corporation closes down one of its factories in a small community and lays off the employees, the effect on the community is widespread, from the local business owner who loses customers, public services being cut, in turn the whole community is effected (Freeman, 2008).

Recognising that the stakeholders interests have intrinsic value (normative approach), it makes not only ethical sense, but economical sense that the company takes responsibility to meet the stakeholders needs (Argandona, 2007). At Fuji Xerox responsibility and responsiveness to stakeholders is a key driver to ensure long term to sustainability. Managing Director at Fuji Xerox Nick Kugenthiran says “We manage our sustainability performance across seven areas of accountability; Business profitability & Longevity, Corporate Governance & compliance, Satisfying Customers, Providing a responsible solution, engaging employees, influencing sustainability outcomes and minimizing environmental impact” (Fuji.Xerox, 2011). A transparent disclosure to their stakeholders is evident in their sustainability reporting, and ethics and integrity are key corporate values.

Their strong commitment to corporate citizenship demands exemplary legal compliance at a minimum. “We are working to integrate sustainability more explicitly into our governance and planning frameworks, and see an opportunity to improve our approach to risk management” (Fuji.Xerox, 2011). More and more businesses are recognising and working toward a model that incorporates corporate social responsibilities, which encourages a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Refer to figure 2

Fig 2. Carroll’s four-part model of corporate social responsibility (Crane, 2004).

The critics of ‘Stakeholder Theory’ argue correctly that you cannot give all stakeholders equal interest in the business, however the process of ‘Stakeholder Analysis’ is applied as a means of systematically gathering and analyzing qualitative information to determine whose interests should be taken into account. When developing and/or implementing a policy or program, the qualities being assessed are Power, Legitimacy and Urgency, these qualities help distinguish and assign priority to the appropriate stakeholders for any given project (Winkler, 2009). Refer to Figure 3. This method best recommends how management can give due regard to the interests of those groups. In other words, it attempts to address the principle of “Who or What Really Counts” (Freeman, 1984).

Figure 3. Salience Stakeholder Model (Hseih, 2009).

In Conclusion ‘Stakeholder Theory’ assists in shaping good Corporate Governance by addressing the ethics of managing an organisation. The companies corporate strategies consider the interests of their stakeholders, groups and indivduals who can affect, or is affected by, the achievement of the organisation’s purpose (Freeman, 1984). Furthermore, businesses are now under more pressure to become sustainable, transparent, ethical, environmentally responsible organisations and the most effective orgainsational management approach is ‘Stakeholder Theory’.

By utilising the ‘Stakeholder Analysis’ process, organisations are able to determine which stakeholders interest are a priority. Like many theory’s, Stakeholder theory is not without its flaws, additional research needs to be conducted along with further criticism in order for the theory to evolve and advance the way organisations carry out Business. By creating an holistic framework for which company’s govern and protect not only its shareholders, but the wider constituents of the organisation, namely the stakeholders (Mallin, 2004), business and society are now forever intrinsically connected, and with ‘Stakeholder Theory’ continuing to take a larger role, businesses will be better off, ultimately society too.

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