STAKEHOLDER THEORY AND THE CORPORATE OBJECTIVE



Introduction:
As we all know, the stakeholder theory has been subject to various debates and analysis by many scholars in the field of corporate governance about its implementation and workability since the landmark publication of ‘Strategic Management: A Stakeholder Approach (1984), by R. Edward Freeman. The major question arises about the governance of the firm is that, “for whose benefit and a whose expense should the firm be managed?”1 His answer was mainly based on the basis of the parties who benefit or lose as a result of the operation of the firm or, in other words, those parties who have a stake in the firm.


Now, it is very important to define who the stakeholders of a firm are, as Freeman defined, the stakeholders in a firm are management, the local community, customers, employees, suppliers and owerns.2 According to the various supportive authors of the stakeholders’ theory, the stakeholders must be actively integrated in the decision-making process of the firm which makes them more secure that their interests are taken into consideration.

The present study will briefly described two practical proposals for the implementation of a stakeholder model of the firm and further critically analyses them from the point of view of their workability and the legal issues they give rise to.

Stakeholder Model- Implementation:
The idea of the stakeholder model is to suggest the mangers to formulate and implement process to satisfy all the groups who have a stake in their business. Further, the stakeholder theory reflects and directs the managers to develop an encouraging relationship which inspires their stakeholders like employees, shareholders, suppliers, customers, and communities where everyone strives to give their best to deliver the value the firm promises to ensure its long-term success.3 Many firms like eBay, Lincoln Electric, Google provide convincing examples of how those firms developed and run their businesses in terms highly consistent with stakeholder model.4    
[1]                
Proposal: Trusteeship Models5
The trusteeship model is proposed by Kay and Silberston as an alternative to shareholder-agency model of corporation. This model recognizes the company i.e. the large public corporation as a social institution rather than considering it as a creation of private contract.

The concept of trusteeship is borrowed from English law which governs the behaviour of someone who controls and manages assets which they do not beneficially own themselves.6 The authors of this model see the directors to preserve, protect and enhance the value of the assets, and to balance reasonably the various claims to the profits which these assets create. 7 It must be noted that the assets of the firm includes the skills of its employees, the reputation of the company in the community, and particularly the expectations of the suppliers and customers. Hence, this model thus broadens the responsibility of the managers as trustees, not only towards the financial interests of its shareholders but also towards all the stakeholders of the corporation. The reflection of this concept is mainly based on the definition of the company as Kay and Sliberston see it as a ‘nexus of long established trust relationships’.
The authors of this theory propose only modest changes over a period of four years of time aiming to ensure the relative stability of corporations by the removal of threats of hostile takeover and further boast the consultation process with the stakeholders regarding the appointment of directors of the company. This approach avoids the confinement of definition of the stakeholder on the basis of contractual relations is one of the distinctive advantage of this model.

Under this model, the managers as trustees have the duty “to balance the conflicting interests of the current stakeholders and additionally to weigh the interests of the present and future stakeholders”8. This proposal thus broadens the stakeholders approach by considering the future stakeholders which includes the future interest of the current suppliers, future employees and customers. 
[2]
We can summaries this proposal with the convincing argument of Kay and Silberston, that the corporate governance should be a structure that balances the following three criteria
(a)              “give recognition to the trusteeship model of firm behaviour which acknowledges corporate personality;
(b)              Allow managers to pursue multiple objectives while holding them responsible for their performances; and
(c)              Encourage team cohesion but be subject to outside influence so as to discourage introversion and ensure that success is rewarded and failure penalized”9.

Proposal II: ‘Corporate Senate or Corporate Democracy’10            
There are many strong views on stake-holding model. One of which according to Driver and Thompson is the consultation and involvement of various stakeholders brings about motivational changes that enhance the performance of the corporation by having the ‘corporate senate or corporate democracy’’ model in implementing the stakeholder theory. The main concept of stake-holding is generally to bring results in strengthening the company. It is argued by the authors of this model that the collective motivation is one of the important factors for the performance of the corporation by way of accumulating those interests by having a ‘corporate senate’.

The corporation consists of possible number of different stakeholder reflecting a wider societal context in which the firm exist and increasingly being pressed to recognize in its decision making structures.11 These stakeholders have wide interest in the firm and they can only register their interests by the possible way of ‘Corporate Senate’.12 The corporate power must be balance by way of governance which oversees fairness by the way of involving the stakeholders in the process of decision making of the firm. 
[3]          

The activity of the firm involves participation of various  stakeholders, for example, the customers might depend on the goods or services offered and the local community which in turn benefit from the direct or indirect employment. It must be stressed that the firm is not only a commercial organization but also a public institution subject to public law with certain responsibilities.13 It paves the way for opening up the corporation to stakeholder interests by way of democratization of the firm.

According to Driver and Thompson, “this approach sees economic democracy, equality and fairness as absolutely central in the securing of liberty, rather than as a potential threat to it”.14 This positive liberty is very effective in initiating actions and undertakes tasks in a range of arenas. Firm democracy is characterized by promoting interest of stakeholders who were traditionally excluded.      

The authors15 concentrated on enhanced role for a form of ‘corporate senate’ in a four tier structure which involves “the traditional shareholder meeting, social or works council, board of directors, and supplemented with a corporate senate where these established interest could be finally brought together in decision making or advisory arena alongside the other interest.”

Practical Problems of Implementing
1.         No Exclusive Definition:
Both the proposals failed to clearly define or identify the stakeholders, which is the major drawback in the successful implementation of their respective models in the stakeholder theory. The managers are left unclear on the identification of their stakeholders in the case of implementation of the above mentioned proposals which will further leads to the uncertainty on their responsibility towards their stakeholders.

2.         Complex Structure:
The further categorization of stakeholders into internal stakeholders like managers, shareholder and employees and external stakeholders like customers, suppliers, the local community, the environmental interests, the national interest by Driver and    
[4]             

Thomason16 broadens the concept of complex structure makes the proposal difficult to implement in such an internationalized setting. The major practical problem is how to constitute various interests of the stakeholders into a ‘constituency’ and exercise their rights in decision-making.

Moreover, it is very difficult to identify and aggregate the widely dispersed customers and suppliers, local community or national interest, and the environment as a potential stakeholder into a clear constituency.17 Due to such internationally spread constituencies it is practically impossible to conduct the democratic procedures of direct voting in the constituencies in many cases.

3.         Legal Issues:          
The companies are incorporated independent of their owners under the law. Being the subject of law the companies have the right to sue, or be sued, in their own name, independently of those who either work in them or own them.18

If these proposals are implemented, “the possible standard of assessing directors’ or managers’ behaviour of balancing various interests would have to be subjective as an objective standard would make the court intrude too much into the business decision-makings, which will be followed by excessive legal costs and huge amount of court inquiry work”.19

4.         Enforceability   
The trusteeship model failed to specify the situations where the directors or managers are responsible to interests of the various stakeholders. “The issue of whether directors are required to consider stakeholders’ interests under all circumstances or just under certain circumstances is not specified in any part of the proposal”.20

There is no indication in the proposals regarding the extent of which the directors have to consider the interests of the various stakeholders, or the relief or remedy available to
[5]        

Stakeholders when their interests are prejudiced.21 Due to the lack of enforceability, both the proposals are doubtful in enhancing stakeholder protection.

5.         Future Stakeholders:   
The trusteeship model proposes that the managers are responsible to balance the interests of the present and future stakeholders. This concept raises two main issues. The first issue is the difficulty in identifying ‘the future stakeholders’ which may lead to further uncertainty. The second issue is enforcing the balancing of interests between the current and future stakeholders.

Is it possible to identify the future stakeholders even without having a proper definition of stakeholder? Is it possible for the managers as trustees to consider the interests of future stakeholders or to enforce the balancing of interests between the present and future stakeholders, without the clear identification of the stakeholders? The trusteeship model is silent on such issues.

6.         Residual Issues:        
Both the proposals makes the directors and managers responsible to act fairly between the various stakeholders of the company, however, they failed to clarify the priorities among various stakeholders. The managers will be in great confusion in balancing the interests of its stakeholders when there is conflict of interests between two or more stakeholders.

Conclusion
Amongst the other stakeholder models, the ‘corporate senate’ proposal by Driver and Thomason and ‘trusteeship model’ proposal by Kay and Silberston discussed above are practically strong in the implementation of the stakeholder model of the firm.

These basic issues and legal issues analyzed regarding the workability of both the proposals must be clearly answered for the successful implementation of their own respective model in corporations. It has to be very specific in identifying the rights and
[6]              

responsibilities among various stakeholders and also it must also suggest the mechanism of resolving the conflicting rights and responsibilities among the stakeholder groups.22

we can conclude these proposals of the stakeholder model with the words of A.J. Hillman and G. D. Keim23. According to them, “building better with primary stakeholders like employees, customers, suppliers, and communities could lead to increased shareholder wealth by helping firms develop intangible, valuable assets which can be sources of competitive advantage. On the other hand, using corporate resources for shareholders because the companies’ relations with different stakeholder groups can yield distinct effects on corporate business development”.
[7]     

Bibliography:
I.          Books:

1.                  Simon Learmount, Corporate Governance: what can be learned from Japan? (Publication: Oxford University Press) 2002
2.                  M. Moschandreas, Business Economics, (2nd Edition) (Publication: Cengage Learning EMEA) 1999.
3.                  Jill Solomon, Corporate Governance and Accountability (2nd Edition) (Publication: Chichester Wiley) 2007.
4.                  Christine A. Mallin, Corporate Governance (2nd Edition) (Publication: Oxford University Press) 2007.
II.        Articles      
1.                  Freeman, Wicks, and Parmar, “Stakeholder theory and the Corporate Objective Revisited” Organization Science Vol. 15, No. 3, May- June 2004.
2.                  Kay and Silberston, “The issue has existed for as long as there have been social institutions; yet two decades ago, the term ‘Corporate governance’ had not been coined”, Perspectives on Company Law vol. 2, 31 August 1996 < http://www.johnkay.com/business/149 > last accessed 2nd April 2009.
3.                  Driver and Thompson, “Corporate Governance and Democracy: The Stakeholder Debate Revisited”, Journal of Management and Governance 2002.
4.                  Shuangge Wen, “Regulatory stakeholder consideration in UK’s proposed Company Law regime –Effects and Expectations”, (CRRC 2008) < http://www.crrconference.org/downloads/2006wen.pdf > last accessed 31st March 2009.
5.                  A. J. Hillman and G. D. Keim, “Shareholder value, Stakeholder Management, and Social Issues: What’s the bottom line?” (2001) 22 Strategic Management Journal llllllll125-139.                    


[1] See Freeman (1997), page 67.
2 Ibid, page 67
3 See Freeman, Wikcks, and Parmar: Stakeholder theory and “The Corporate Objective Revisited” Organization Science vol. 15, 3 many- June 2004. pg. 364
4. Ibid  
5 John Kay and Aubrey Silberston
6. See Simon Learmount, Corporate governance: what can be learned from Japan? Published by Oxford University Press, 2002, pg. 14
7 See Kay and Silberston, The issue has existed for as long as there have been social institutions; yet two decades ago, the term ‘corporate governance’ had not been coined, Perspectives on Company Law Vol. 2 31 August 1996 < htt://www.johnkay.com/business/149 > last accessed 2nd April 2009.
8 Ibid   
9 See M Moschandreas, Business Economics, (2nd Edition, Publication: Cengage Learning  EMEA, 1999) pg. 231
10. See Driver and Thomason, Corporate Governance and Democracy: The Stakeholder Debate Revisited, Journal of Management and Governance 2002.
11 Ibid Pg. 111
12 Ibid pg. 112       
13 Ibid pg. 121
14 Ibid Pg. 122
15 Driver and Thomason
16 Corporate Governance and Democracy: The Stakeholder Debate Revisited, Journal of Management and Governance   
17 Ibid Pg 125
18 Ibid Pg 123
19 See Shuangge Wen, Regulatory stakeholder consideration in UK’s proposed Company Law regime –Effects and Expectations, (CRRC 2008) <http://www.crrconference.org/downloads/2006wen.pdf >  last accessed 31st
20 Ibid 
21 See Shuangge Wen, Regulatory stakeholder consideration in UK’s proposed Company Law regime- Effects ad Expectations, (CRRC 2008) < http://www.crrconference.org/downloads/2006wen.pdf > last accessed 31st March 2009. 
22 Beauchamp and Bowie 91997) page 54.
23 “Shareholder value, stakeholder Management, and Social Issues: What’s the bottom line?” (2001) 22 Strategic Management Journal 125 – 139. 
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