Intermediate Diploma Thesis, 2001
16 Pages, Grade: 1.3
2. Stockholder Theory
3. Stakeholders and Their Theory
4. Normative Grounds on Stakeholder Justification (the Theory of Property)
5. What turns a group or an individual into a stakeholder?
6. Different Views on Stakeholder and Stockholder Theories
6.2 The Body Shop and Du Pont: Real Life Examples of the Theories
6.3 Some annotations of my own opinion
8. List of References
When Frederick Winslow Taylor practiced his idea of scientific management, owners where the only stakeholders, who ever counted. Till way passed the two world wars, the situation did not change. Managers were obligated to pursue owners’ interests, which were merely making money. Employees had to work hard and were badly compensated, consequences for the environment were not known, and customers bought what they could get. When the markets became maturated, customers started to gain bargaining power and companies had to take their interests and needs into account. Strategic marketing of goods implied advertising and customer orientation. This trend accelerated and globalization, workers’ unions, environ-mental concern, and supplier relationships are just a few of many crucial external influences, a business has to face in today’s world. As Daft (2001: 11) states “Organizations get into trouble when they fail to pay attention to ethical issues in the blind pursuit of making money.” But how far does this attention really go? Many companies still pursue their only goal, namely maximizing shareholder value, and react to the needs of the other stakeholders only when great pressure is exercised. If those enterprises still survive, are stakeholders’ concerns of any importance? Or to phrase it differently: Which approach should today’s companies follow, the stockholder theory or the stakeholder approach?
To answer this question, this paper will proceed with following sub-points. Firstly, a definition and explanation of the above mentioned theories will be provided. The stakeholder theory will be further underlined by the description of the normative grounds, which it is based on. The paper will clarify also, whether companies do have a social responsibility. The attributes, which separate stakeholders from non-stakeholders will be outlined next. Continuing, different views on those theories will be disclosed and examples for both approaches described, before the paper will end with some thoughts of mine and a conclusion.
The concept of the stockholder theory rests solely on the basis of the corporate ownership. Managers act as agents for the shareholders, who are the principals. The main reason of the firm is to maximize its owners value. Managers are supposed to take every decision with the stockholders’ best interest in mind, whether those decisions concern the short- or the long-term. But since what is best for the shareholders is not always what is best for the managers, a conflict can arise. Costs that are associated with managers acting upon their own behalf and defaulting on their responsibility towards the owners are called agency costs. This describes already one of the most problematic circumstances concerning this theory. But this approach exhibits a number of further shortcomings as well. If managers’ interest is constantly fixed on stockholders, other factors from the external environment influencing the company might not be noticed or may not be taken seriously. When the communication between the market and the enterprise is lacking, the firm’s flexibility can be restraint and the customer orientation may be questioned. This can lead to a bad social reputation, which might actually influence the stock prices negatively.
But there are also some positive factors. If managed properly, the firm might display financial strength and can be lean and competitive. This situation will be the case, if other stake-holders’ interests will be taken into account in order to generate profits for the stockholders. In the case of strong financial performance, owners might develop a relationship to the company, which may result in loyalty and protection from hostile attacks.
Summarizing, using the stockholder approach can result in a competitive concern, but whether the drawback of the bad social reputation might at some point in the future lead to an insurmountable competitive disadvantage, has yet to be proven. In a simple environment this approach might work best, since the company will not have to deal with too many changing outside influences.
A very important question is the definition of stakeholders. It is very interesting that many authors come up with many definitions. Some provide an explanation using a very broad view, while others try to describe this concept very narrowly. Freeman (1984: 46) states that “A stakeholder in an organization is (by definition) any group or individual who can affect or is affected by the achievement of the organization’s objective”. Contrary, Clarkson (1994: 5) declares that stakeholders “are placed at risk as the result of a firm’s activities”. In one way or another, there are some widely accepted groups of stakeholders, namely owners, employees, customers, creditors, community, suppliers, and the government (Daft, 2001), which will be described in turn:
Owners are commonly seen as being among the most important stakeholders. Their main interest lies in maximizing their wealth. There are two types of investors: those with a short-term horizon, who engage in transactions to reap off some fast gains, and those with a long-term horizon, who keep the stocks for awhile and are even willing to accept short-term losses to ensure long-term profits.
Although employees also depend on the profitability of the firm, other issues are of crucial importance to them. A secure job, fair compensation, a pleasant working climate, save work-ing conditions are as important as fair treatment, empowerment, and personal development. Many companies, nowadays, attach great importance to the satisfaction of their workforce since an employee-friendly business will attract highly skilled workers, which in turn will influence profitability.
Customers play a central role for a company, since they represent the justification of the business’ existence. Customers perceive a company via the firm’s product, which in turn will be influenced by attributes like quality, price, performance, durability, and so on. In today’s market-oriented culture, companies acknowledge their clients as intelligent actors in the market and try to fulfill their needs to the greatest extent possible.
Creditor’s importance varies between countries. While U.S. American companies rely more on stockholders for financing themselves, German and other Central European firms can be described as quite heavy lenders. Accounting systems in those countries will therefore show differences due to theses facts. Towards creditors, it is important for companies to be creditworthy in order to be able to borrow at low interest rates.
The probably most broad group of stakeholders with the most dispersed interests can be gathered under the term community. Examples here are the society in general and, more specific, nearby municipalities, environmentalist groups, but also future generations. This group of stakeholders is very likely to have little power compared to a very strong interest in the behavior the firm. Many ethical groups, e.g., possess legitimate claims, but do not retain the power to make themselves heard.
Suppliers have a similar interest in a business like consumers, just from the other point of view. Reliability, timely payments, fair treatment and nowadays even long lasting relation-ships are among the expectations of this stakeholder group. Firms emphasize these relationships, since bad quality and belated deliveries from the supplier side will in turn influence the company’s end product and the relationship to its own customers.
The last stakeholder is the government, which influences the firm in two ways: financially via taxes and subsidies and regulatory via laws. Merger controls are a good example for the forces governments exercise towards companies. Unlawful behavior will be costly and might even result in lost confidence of other stakeholders like customers and employees.
The stakeholder theory states that some or even all of the above mentioned stakeholders will be taken into consideration, when it comes to company decisions and actions. Sometimes firms might handle arising problems in a way that does not maximize stockholder’s return, since other stakeholders’ interests take precedence over owners’ claims. That Royal Dutch Shell dismantled the oil rig Brent Spa and did not just waste it in the North Sea, might not have been in their shareholder’s best interest, at least not at first sight. Environmental pressure from Greenpeace and social awareness left Shell with no other choice. In the end, this action probably prevented a drop in Shell’s stock price and was in the stockholder’s interest after all.
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