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
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
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