Stakeholder Theory of Corporate Governance

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Stakeholder theory stresses the dependency of many different groups on the firm's management. This approach to corporate governance strongly suggests that corporations are run by loosely defined groups of people, each seeking something different from the organization. This theory can show who benefits from a firm, as well as who, in fact, controls its corporate policy.

Types

Stakeholders should not be confused with “shareholders.” The latter only refers to one group of stakeholders, those who have invested money in the firm. Stakeholders are those who have a “stake” in the firm and its performance. These include customers, suppliers, employees, the community and even the government and its regulatory agencies, not to mention the IRS.

Features

The primary feature of the stakeholder theory of corporate governance is that those who have a stake in the functioning of the firm are made up of large and diverse groups. Simply put, stakeholders are those who seek some benefit from the optimum running of the firm. Stakeholders have different goals and seek different benefits from the firm. Workers seek job security, the IRS wants its tax payments, investors want dividends,and the community wants a solid economic base. The stakeholder theory holds that these different interests do, in fact, control the firm in their own specific ways, and none has any better right to have its voice heard than any other.

Function

The stakeholder theory is both a descriptive and a normative theory. It is descriptive in that it functions as a way of describing how a company is constituted and controlled. In this case, one can see how customers or investors all have their say in how the firm markets its products, for example. It is a normative theory in that it suggests how a firm should be run. It mandates that a well organized firm will take all “stakeholder” groups into account in formulating basic policies.

Benefits

Stakeholder theory is a highly democratic and participatory concept of corporate governance. Under this model, the firm is not merely a profit-making machine for elite investors and major executives. It is a profoundly social institution that is meant to serve more than its shareholders. It is a communal institution that benefits large segments of the local population. Thousands of lives are potentially connected to and dependent upon the proper workings of the firm.

Problems

Since stakeholders are from large and very diverse groups, it seems hard to make them components of a workable theory of corporate “governance.” The groups mentioned as possible or actual stakeholders are so varied and wide that it is practically impossible that they speak with a common voice, let alone actually serve in an oversight capacity. The stakeholder theory might be successful in identifying those who have a vested interest in the firm, but whether these stakeholders can actually “run” a firm is a very different matter.

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References

  • "Academy of Management Review;" The Stakeholder Theory of the Corporation;Thomas Donaldson and Lee E. Preston; 1995
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