The Stakeholder Theory of the Corporation - Dissertation Example

Business Ethics Stakeholders are a big part of the corporate world. A stakeholder in any business outfit is anyone who is affected by that particularbusiness, in other words, he or she has a stake or a role to play in the business or organization (Donaldson & Lee, 2009). The total number of stakeholders or groups of stakeholders will depend on the size and type of service or product that is offered by that company. The influence and importance of an individual will determine whether or not he/she will have a say as a stakeholder in a certain company (Fremond, 2000). It is true that stakeholders have some influence on how corporate organizations are governed, but the big question is: how influential are they? Is this influence recognizable in the stakeholders’ organizations? This debate has elicited a lot of ethical issues among corporate organizations. Business ethics is quite an important issue that all organizations, big or small have to adhere to. When people discuss the importance of stakeholders in a business, it might impact very negatively on the company’s ethical standards. In order to understand the ethical aspects of this debate, it is important to outline the people who are believed to be stakeholders in a business. Stakeholders can be employees, managers, investors, customers, suppliers, media, non-governmental organizations, members of the local community and business partners (Donaldson & Lee, 2009, p77). All these people play an integral role in enhancing organizational or corporate governance. Some Roles of Stakeholders Stakeholders are part and parcel of the organization that affects them in one way or another. Below are some of the roles that stakeholders are expected to play in the day to day running of an organization (Halal, 2000): Keeping the management on its toes Acting as checks and balances for all that goes on within an organization Stakeholders who are not directly involved with the day to day running of the organization help in organizing and coming up with corporate social responsibility activities for the organization. This paper aims at examining the ethical issues that arise out the role of stakeholders in organizations and how these issues affect corporate governance as we know it. The issues raised can affect a company either for the better or for worse. Ethical Issues Arising It is a collectively agreed notion that stakeholders are somehow affected by the organization in which they are affiliated to. Therefore the question about how far a stakeholder can go in order to influence corporate governance can cause a lot of confusion. According to Apreda, Kostovuk & Demir (2003), all stakeholders play an equal role in the development of a company. Yet there are people who would wish to classify different stakeholders. This begs the question: are some stakeholders more important than others? It is very common for stakeholders at the management level to downplay the presence and influence of the ‘lesser’ stakeholders. Whether this is intentional or not, it does not auger well with the rest of the company’s stake holders (Low & Cowton, 2000). Everybody would want to have their presence recognized and their voice heard. So if people are disregarded in this way, what is the need of including them as stakeholders in the organization? It would be better to have only the people whose contributions matter in the firm since having too many stakeholders under the same roof is a considerable waste. According to Halal (2000), most corporate executives think of stakeholders rather than in terms of competitive advantage and economic value, in terms of social responsibility morality, and ethics. Yet in the earlier definition, stakeholders have a role to play in the economic well being of the company. Those managers who regard stakeholders as mere objects within the organization are way off the mark. They even go against their own corporate ethics in suggesting that stakeholders cannot help a company gain economically. Yet it is these same managers who will want the stakeholders to support them in making the company successful. Halal’s (2000, p12) observation indicates that most managers use stakeholders just when it suits their various needs. This means that if the firm is facing an ethical or moral dilemma, then the managers and directors normally turn to the stakeholders in order to solve the problem. At this time, all the stakeholders become very important in the company’s decision making. After all that has been resolved, life goes back to ‘normal’. Decision making is left at the hands of the top brass only while the rest of the stakeholders go about their business. It should not be this way. The situation is only becoming worse when people start questioning the authority and role of stakeholders. The same way they are treated with utter respect and sense of importance by their counterparts should never end with the resolution of one problem. Their presence should be felt and recognized as long as they are stakeholders in that company. Many individuals have accepted this as the norm. People no longer have the mechanisms to question things that affect them in an organization. It is quite immoral to make life changing decisions without having a care how it is going to change or to affect the life of other stake holders (McGee, 2008). This in itself is an ethical issue compounded by the fact that many big corporations today put more care into wealth creation rather than wealth distribution. A lot of countries in the world have policies about wealth creation and distribution. It is put on paper in many countries that wealth creation should go hand in hand with wealth creation. For instance, if a company is making a lot of money by selling a product or service to the people, it is not the organization only that should enjoy the benefits. The customers as well as any of the firm’s casual workers should all feel this imminent wealth affecting them in a positive manner. However, this kind of open distribution of wealth is rarely practiced (Nam & Nam, 2005). The customers and local community are never considered in this sharing of wealth. When one questions the extent of the stakeholder’s influence in a company, they seem to have some hidden agenda, most likely to enrich themselves at the expense of other people who have an equal right to enjoy the same benefit (McGee, 2008). Freeman (2003) asserts that stake holders play an important role in ensuring business ethics are not compromised in any way. In his Stakeholder Model, he argues that organizations ought to be governed on behalf of their stockholders as they significantly determine the success of the corporation (Freeman, 2003, p3). The raging debate is about how far stakeholder involvement should go in the management of a company. This is in clear contravention of the widely accepted worldview that stakeholders matter at the same level (Freeman, 2003). Sang-Woo and Chong (2005) argue that most managers tend to hold onto the perception that the relationship between the firm and its stakeholders is one of the key factors of success in business, and possibly is the most critical factor. This is an encouraging observation, which should be emulated by all the players in the organizational decision making structure. This thought process by Nam and Nam is in agreement with Freeman’s Stakeholder concept. Another ethical dilemma when addressing the role of stakeholders comes in when a new stakeholder joins a company. In many cases, business owners and managers have had a difficult time trying to satisfy the needs of a new stakeholder and trying not to create a situation that can create conflict with the other existing stakeholders (McGee, 2008, p46). Running a business is all about making as much money as possible. Some companies go right ahead in rewarding the new stakeholder if it means sales and profit maximization. They do this in total disregard of their actions may impact negatively or otherwise on the other stakeholders. This is not only morally wrong; it also creates a huge and probably irreparable gap among stakeholders (McGee, 2008, p47). This could have some severe if not totally damaging effects on the company. Instead of increasing sales and profits as intended, the decision to reward one stakeholder will eventually bring the company down, and this is the one path that all managers try not to follow. In some cases, you might find that a certain stakeholder or group of stake holders is making demands that are unethical to the company. This is a dilemma that is faced by big organizations which have influential members of society as part of their stakeholders. Whereas some business executives bend to the will of these individuals, there are others who stand their ground and follow the laid down policy on stake holder management. Perhaps this is one of the scenarios that have brought about the debate on how far stakeholders should go in terms of corporate governance. Corporate Social Responsibility Stakeholders play an important role in governance issues that are related to corporate social responsibility. Corporate social responsibility involves giving back to the community some of the benefits a firm has managed to enjoy with the help of the members of that community (Fremond, 2000). When the issue arises of decreasing the amount of influence of stakeholders on corporate governance, a lot of questions arise regarding the motives of those who are bringing up such questions. Different stakeholders are used for different corporate social responsibility activities. For example, the local community can help and come up with the best CSR activities that will benefit everyone in that community. Investors can come in with their money and the company employees and managers can play their part to make the CSR successful. Trouble comes in when one stakeholder who is important to a project is left out (Heath, 2004). This may occur in the organizations where stakeholder involvement is not handled with the seriousness it deserves. For instance, a company might disregard the local community in which it works and come up with a project without consulting the people. Every one of the other stakeholders will chip in, but if the locals are not involved in the CSR, then it is likely to fail. Conclusion It is clear that most cooperates do not have a strong stand or policy regarding the role of stakeholders. Just like Freeman (2003) said, every stakeholder has an important part to play in the success of a firm. This is regardless of the fact whether the stakeholder holds any shares in the company or not. Every corporate should re-examine the way it handles its stakeholders. Everyone from the employee at the bottom to the top executive should know and understand their impact to the company. This will no doubt help the organization move forward. Stakeholders will have the motivation and conscience willingness to do all they can to see that they make a positive impact on their organization. The local community is also a part of the stakeholders of an organization that is located in a certain place. The other stakeholders, most especially the managers and the employees should take this fact into consideration when making decisions for their companies. They should realize that what they decide affects the locals in one way or another. If that decision impacts negatively on the local community, this could spell doom for the whole company because it in this same community where the company finds its customers and investors. No one will want to invest or get services from a business that does not regard the well being of the people around it. Therefore it is paramount to include every one of the stakeholders in decision making according to McGee (2008). This way, no one will feel left out or discriminated against at any one point. With this kind of business environment, every stakeholder will feel compelled to offer their best so that the company can continue to flourish. The employees will be motivated to work harder to increase the organization’s returns. The customers will feel satisfied at the services they are offered and they will become loyal to the organization. The investors will gain confidence in the business and they might pump in more money into it (Heath, 2004, p 251). Corporate governance is not something that should be left in the hands of a few. The managers should set up a mechanism that will be used as a communication channel all across the different levels of governance (Paas, 1996). They should mingle with their employees, customers and other stakeholders in order to make decisions that will make lasting and positive impact in the society in which they are also members. To avoid unnecessary and unethical debates regarding stakeholders, the organizations should map out the role of stakeholders in that business. They should be clear as to whether the roles should be participatory or advisory or both. Once the business managers have laid down their expectations of the stakeholders, it will be easy to meet the stakeholders’ expectations of the company. It is true that not all companies discriminate against some of their stake holders. There are those managers who know the value of stakeholders and they are very dedicated in involving them with different aspects of corporate governance. The Government and other relevant authorities should ensure that the rights of the lowly stakeholders are upheld (Heath, 2004, p254). There should be an equal playing ground for all organizations to involve their stakeholders in the day to day running of the organizations. If an individual has a rightful stake in an organization, then there is no need to make this stake a non-issue. All stakeholders should be allowed to play their respective roles in the organization. No single stakeholder should advance his own personal motives at the expense of another according to Freeman (2003, p65). This will only serve to bring the company down because major divisions are likely to arise. In line with Freeman’s line of thought, all stakeholders are important. Therefore a company should identify ways and means through which these stakeholders can have their needs satisfied without causing any harm to the business. The reward system should be equally applicable to each and every one of the stakeholders. There should not be cases where one stakeholder gets awarded at the expense of another. In any case, the decision to award stakeholders should be reached at after thorough consultation with everyone who is concerned. The individuals running the company should refrain from treating some stakeholders better than others. Treating all stakeholders equally also means that the communication channels should be accessible to all. Everyone will retain the right to say what they feel like saying, decision making will be all inclusive and not one of the stakeholders will be disregarded in this important process. In the end, everyone will be satisfied and there will be no need whatsoever to question the role of certain stakeholders in the governance of a corporate organization. References Apreda A., Kostyuk A. and Demir Y. (2003) Corporate ownership and Control, accessed 4th December 2009 http://www.virtusinterpress.org/journals-coc-index.html Donaldson T. and Lee E. P. (2009) “The Stakeholder Theory of the Corporation: Concepts, Evidence and Implications”, Academy of Management Review Vol. 23, No. 1, (1995): 65-91. Freeman E. (2003) Strategic Management: a stakeholder approach, Pitman Press, Boston. Fremond O. (2000) The Role of Stakeholders, accessed 4th December, 2009 http://www.oecd.org/dataoecd/5/41/1930657.pdf Halal W. (2000) “Corporate Community: a theory of the firm uniting profitability and responsibility,” Strategy and Leadership Journal, 28: 10-16. Heath J. (2004) “Stakeholder Theory, Corporate Governance and Public Management,” Journal of Business Ethics, 53: 247 – 265. Low C. and Christopher C. (2004) “Beyond Stakeholder Engagement: The challenges of stakeholder participation in corporate governance,” International Journal of Business and Ethics, No.1 Vol. 1: 45-55. McGee, R. (2008) Corporate Governance in Transition Economies, Springer, US. Paas D. (1996) “Stakeholders and Participation in Corporate Governance: A critique of some of the arguments,” Business & Professional Ethics Journal, accessed December 2009 http://www.faqs.org/abstracts/Philosophy-and-religion/Stakeholders-and-participation-in-corporate-governance-a-critique-of-some-of-the-arguments.html Sang-Woo N. and Chong N. (2005) Corporate Governance in Asia: recent evidence from Indonesia, Republic of Korea, Malasia, and Thailand, Asian Development Bank Institute, Chiyoda-ku. Read More