Charles Darwin in one of his remembered scientific ingenuity proclaimed that it is not the strongest of the species that survive, or the most intelligent, but the ones most responsive to change. Social organization and technological innovation have become two crucial simultaneous thrusts which have interacted to create a need for new goals and new institutions to serve them with the progress of our capitalistic institutions. The productions in the modern economy are more likely in the form of intangibles comparing to the productions in the old one, based on the exploitation of ideas rather than material things.
Globalization and information technology are changing every single aspect of the approach by which we work according with. Technological development had brought on a higher sustained level of productivity growth which allowed faster economic growth with less inflation.
Nature and Conceptual Roots
Stakeholder theory is a managerial principle in that it reflects and directs how managers operate rather than directly addressing management practitioners and theorists. Significant in understanding the theory is the two important questions: what is the purpose of the firm? And what responsibility does management have to stakeholders? Yet, before we go through understanding the underlying assumptions on these core questions, we must first view the established theoretical and conceptual meaning of the theory developed by various economic and management theorists.
There is a plethora of understanding and meaning of a stakeholder. But let us utilize the classical definition of stakeholder being developed by major exponents of the theory, the said theory argues that every person or group participating in the activities of a firm and stands to be an asset to create profit has the legitimate power to control and obtain firm’s services and benefits. Its definitive meaning was popularly developed by Freeman (1984: 31-32) as “those groups without whose support the organization would cease to exist” this includes shareowners, employees, customers, lenders, and society. According to Donaldson and Preston, there are at least four considerable theses correlated to stakeholder theory. Firstly, ST serves as a model of the corporation given its descriptive nature. Secondly, it doles out an investigative framework establishing connections between conventional firm performance and the practice of stakeholder management. Thirdly, although the nature of Stakeholder theory is descriptive and instrumental, it is fundamentally normative. Shareholders are identified by their interests and all shareholder interests are considered to be inherently valuable. Fourthly, ST is managerial in principle and nature in that it recommends attitudes, structures, and practices and necessitates simultaneous attention be given to the interests of all legitimate stakeholders. Given this classical meaning of the theory, it is unsurprisingly receives various modifications, critique, redefinition and revision in order to be generally acceptable in different business and economic sectors. Let us now take a look at into the blueprint of the theory that somehow will lead us to understand its role and effects on the modern organization and marketing strategy.
1. Major Schools, Principles and Contributors
The rise of the stakeholder concept may not be drastic and fast without the
support of media mileage, public interest and concern about corporate governance. The term stakeholder was first used in 1963 with the intention of generalizing the notion of stockholders as the only group to whom management needs to be responsive. Slinger (2000), identified the emergence of stakeholder concept as important as that for creating effective management and marketing strategy of a firm. More recently, Freeman (1999: 234) has admitted that the word stakeholder is an “obvious literary device meant to call into question the emphasis on ‘stockholders’.” In 1996’s speech of Tony Blair as the leader of the UK opposition Labor party, marked as an end to the popularity of the term yet for Freeman and Phillips, “the past 15 years has seen the development of the idea of stakeholders into an ‘idea of currency’ (2002: 1332)”. The rise of the concept has been fairly less dramatic in the academic literature. This represents an unusual case where philosophical terminology has become part of the popular lexicon.
The appeal of stakeholder theory for management theorists is both empirical and normative (Cragg, 2002: 115). Empirically, stakeholder theory rests on an “observation or what we might call a fact.” The given positive and negative influence of stakeholders may have varied effects to organizations. On the other hand, organizations activities may also have varied impact on individuals and groups whose interests may be exaggerated either favorably or unfavorably. For Freeman’s business thought, stakeholder is essentially a pragmatic concept, regardless of the content of the purpose of a firm; the effective firm will manage the relationships that are important. In its normative stance, stakeholder theory holds any corporate activities are influenced by the notion of moral principles in which stakeholder theory definitely conveyed.
Stakeholder theory is based on two principles that balance the rights of the claimants on the corporation with the consequences of the corporate form. The principle of corporate effects states that the corporation and its managers are responsible for the effects of their actions on others (Evan & Freeman, 2004: 79). This principle is consciously drawn from the modern moral theory of utilitarianism. Utilitarian theories hold that moral worth of actions or practices is determined solely by their consequences. Utilitarianism is committed to the maximization of the good and the minimization of harm and evil. Hence, a corporation is seen as responsible for its impact in all areas that would necessarily include its social impact. Another principle is the principle of corporate rights which states that the corporation and its managers may not violate the legitimate rights of other to determine their own future. This principle is drawn from the deontological ethical theory of Immanuel Kant based on the respect-for-persons principle that person should be treated as ends and never only as means. Stakeholder theory assumes that stakeholders are distinct with their own valid needs and interests with respect to the organization. The principles of stakeholder theory are in keeping with the pluralist assumptions that labor is more than a commodity or factor of production, that there exists inequality of bargaining power between employers and employees in imperfect labor markets, that employers and employees are likely to have differing goal and as such there is like to be conflict between parties and that employee voice is important in a democratic society.
2. Distinct Contribution
One of the most distinguished contributions of stakeholder theory is its
relevance and close connection in today’s emerging corporate trend which is the corporate social responsibility (CSR). Companies nowadays engage in CSR based on the notion that they can reap benefits from such engagement. Increasingly, CSR is analyzed as a source of competitive advantage and not as an end in itself. In effect, the concept of CSR has evolved from being regarded as detrimental to a company’s profitability to being considered as somehow benefiting the company as a whole, at least in the long run.
In relation to this, the stakeholder perspective has become something which is inescapable if one wants to discuss and analyze CSR. The theory is considered as a necessary process in the operation of corporate social responsibility as a complimentary rather than conflicting body of literature. In fact, recent analysis of the extensive body of research on ethics and social responsibility issues show that an important number of the authors who devote themselves to these areas of study have mostly drawn on stakeholder theory.
CSR is one area in which the stakeholder theory has been commonly applied because the changing nature of the business environment created a demand for firms to acknowledge their responsibility to a broader constituency than their shareholders/owners and to help solve important social problems especially those they have helped to create.
3. Impact Analysis
Researchers have explored stakeholder theory from various perspectives. Some
made a review on the impact of stakeholders on the firm using agency theory as their backdrop, investigates stockholders from the point of corporate social responsibility and corporate social performance and some use network theory to understand the influences that stakeholders have on an organization. Others also have investigated the appropriateness of stakeholder theory to explain or support approaches to improving corporate performance. Within organizations, the role of stakeholder theory is seen to extend past the formulation of strategy, into the establishment of performance goals. Montanari et al (1990) notes that the performance gals set by a manager are influenced by the pressures exerted by the organization’s stakeholders. This suggests that a process might exist within organizations whereby stakeholder interests are recognized and included as key components in the establishment and development of performance goals.
There has been considerable interest in recent years in stakeholder theory at the corporate level in organizations. The notion that stakeholder interests are key strategic assets of an organization that could lead to the establishment and development of corporate performance goals is well accepted in the management literature. Hence, the stakeholder approach can be effectively used at the manufacturing level to establish manufacturing performance measures. Using this approach at the manufacturing level would allow for both the inclusion of the interests of the internal stakeholders at a higher organizational level.
Moreover, stakeholder theory offers the potential to conceptualize the organization-employee relationship as a moral relationship and the employee as a moral ‘claimant’ of the organization. As moral claimants, employees have the right to pursue their own interest and to be engaged in decisions that affect these interests. It has been established, however, that engaging with, or attending to the need of employees is not a sufficient condition for the relationship between the organization and its employees to be considered moral.
Corporations that do not respond to stakeholder pressures and social expectations risk losing legitimacy. To address growing social expectations of social performance, some corporations have adopted design features believed to be ethical and consulting firms have promoted the use of ethical design features. However, the normative underpinnings of these design features and their effectiveness for corporate social performance has been under-addressed. Although, Freeman’s stakeholder theory constitutes a major theoretical advance in incorporating ethical considerations into the construction of organization design, little has been done to develop specific, normatively based design principles for corporations. Scholars have continued to call for normative underpinnings for stakeholder theory nonetheless; no specific design principles or organizational design features have been developed.
On the other hand, according to Mintzberg et al (1984), Freeman took a rational approach to political forces, offering several propositions like an analysis of the behavior of the stakeholder, an explanation of that behavior and an analysis of coalitions between stakeholders. They find Freeman’s definition of the term problematic. Such that associating the concept of civil society with stakeholder theory has become common practice. Stakeholder theory in one way can be considered as a weak theory of civil society considering important key points for argumentation. Stakeholder theory can be considered as affording a strategic perspective which although somewhat unfamiliar, serves as the foundation of business ethics. It occupies an intermediate position between strategic management and political philosophy in that it presents a new form of sovereignty, the sovereignty of big business. Even if it legitimizes, or neutralizes the sovereignty of the firm, it conceptualizes and situates it in relation to other liberal models.
In the theory of civil society, the weakness of stakeholder resides above all in a fragmentary and atomistic representation of society even when they are united into groups. ST stumbles against mediation of the sum individual interests. It segments and divides society into divergent interests that, it claims, could render convergent. Meanwhile, the theory of civil society does not present society as an addition of individual interests but as a process of dialectic mediation between intermediate bodies, individual interests, the constitutional and political state and positive law.
Under the same issue on civil society, stakeholder theory is also associated with the rupture with patrimonial capitalism. In reality, stakeholder theory mirrors a new kind of patrimonial capitalism: salaried patrimonial capitalism. Since in 1980s, capitalism has not only remained patrimonial but has also become a kind of salaried patrimonial capitalism in that it is to a very large degree composed of household savings invested in pension funds. This factor surmises the logical flawlessness that stakeholder theory is considered a defense and illustration of new type of shareholder capitalism.
More studies expressed the deficiencies of stakeholder theory. The theory’s inability to explain the potential influence of secondary stakeholders over firms and industries, the other is related to the relative neglect of the institutional context of firm – stakeholder interactions. Stakeholder theory currently lacks specificity regarding the way in which and the extent to which secondary stakeholders are able to increase and leverage their salience with firms. Their ability to do so is remarkable, since secondary stakeholders have a weak bargaining position vis-à-vis the firm: there is no resource dependency on the part of the firm, and often there are no legal provisions to secure their stakes.
In some cases, while the general perspective of the theory may be plausible, there are splinters in the conceptual and empirical foundation on which it rests. These flaws weaken it and mask some of its implications. Some theorists and critics suggest that ST is based on a limited analysis of the relationship of business activity to the institutional structure of modern capitalist society. It understates the need for fundamental structural change if the interests of stakeholders are to become integral to the operation of the organization. Donaldson and Preston (1995) argue that the justification for Stakeholder Theory as an implicitly or explicitly normative model rests on the validity of the owners’ claims to property rights. Even if ST is limited to the problem of governance and control in large corporations the problem of moral justification of ST turns on the idea that maximizing stockholder wealth or other interests of owners cannot morally be taken as more privileged than the interests of others who have a stake in the enterprise. This requires arguing that the claims of stakeholders on the enterprise are legitimate in the sense that they have comparable status to the claims of owners. The moral status of these claims and the moral obligation to honor them turns on the relative strength and legitimacy of the owners’ claims based on their assertion of property rights: if their property rights are legitimate, then the owners are eroding and therefore that there are multiple legitimate claims on the enterprise, none of which have priority over any other. Another interesting fissure on the theory is the ideological defense of a professional-managerial class.
Stakeholder theory as its is generally discussed provides an implicit ideology that defends increasing the power of a particular kind of manager; those who work in large administrative structures in business, non-profit organizations and government and identify with other managers as members of a professional managerial class, a self-conscious class of people whose interests are antagonistic to the interests of both capitalists and workers. Stakeholder theory offers a way to articulate the interests of members of this class, legitimate its claims to authority and establish its autonomy from other institutions in society. By invoking the interest of a wide range of vaguely defined stakeholders who are to be served by an enterprise run in their interest by its managers, the managers can claim to be serving the general interest of society in the name of the public good. As an ideology, stakeholder theory can be used to defend a manager’s interpretation of the merits of claims made by competing stakeholders and deflect critiques of managerial power and prerogatives.