Stakeholder Theory - One of the Influential Models in Business Ethics - Literature review Example

ACCOUNTING THEORY REPORT Name Institution Professor Course Date Executive Summary Stakeholder theory is a prevalent blueprint for assessing ethical issues within business ethics. The theory surpasses traditional concept that stockholders are the major group to whom business managers owe a duty. This attained through contending that a group holding a stake in an enterprise such as local community, employees, suppliers and customers must take part in decision- making. Despite the significance of stakeholder theory in business ethics, Enyinna (2013) asserts that this theory is not ethical. He confirms that there are two approaches to stakeholder theory, normative and instrumental. He concludes that stakeholder theory is instrumental, and its conception of ethics is hypothetical. Drawing from the findings from the article and extensive literature review, this report explores whether stakeholder theory is a part or branch of normative theory. The findings indicate that there two major challenges facing stakeholder theory one being a lack of succinct and clear concept of stakeholder and ambiguity regarding the normative status of the stakeholder theory. To address these issues, further research both quantitative and qualitative should be done. Scholars should systematise issues critical to the theory and develop a research agenda that responds to the imperfections of stakeholder theory. Although the stakeholder theory is descriptive and instrumental, its fundamental foundation is normative. Table of Contents 1.0 Introduction 4 2.0 Literature Review: Article Summary……………………………………………………...4 2.1 Concept of Stakeholder…………………………………………………………………....5 2.2 Normative Status………………………………………………………………………......6 3.0 Findings and Discussion 6 4.0 Recommendations………………………………………………………………………....9 5.0 Conclusion………………………………………………………………………………..10 6.0 Reference List…………………………………………………………………………….12 1.0 Introduction Stakeholder theory is a theoretical blueprint of organisational management and business ethics that addresses ethical and moral values. It is visible in the enlarged responsibility, and accountability demanded of a firm through the balanced scorecard. Stakeholder theory provides a complete view of a firm’s obligations and challenges the view that augmenting shareholder value is the only responsibility of a business. The term stakeholder was coined for the first time in the business context in an internal memorandum at Stanford Research Institute in 1963 (McElroy & Engelen 2010, p.108).According to this theory, the commitment and responsibility of a firm surpass the shareholders to other stakeholders such as suppliers, communities, customers and employees. However, controversy exists over whether stakeholder theory is part of the normative theory. Enyinna (2013, p.79) asserts that a normative theory of business is an endeavour to focus the common theories of philosophical ethics entirely upon aspects of human life that entail business relationships. In this regard, a normative theory offers ethical principles that direct activities in business life. The normative status of stakeholder theory is far from clear. Enyinna (2013) concludes that stakeholder theory is not a normative theory, hence not really ethical. Based on the arguments presented by Enyinna (2013) and thorough literature review, this report assesses whether stakeholder’s theory is part or a branch of normative theory. The paper identifies issues relating to stakeholder and provides resolutions and recommendations to the identified issues. 2.0 Literature Review: Article Summary 2.1 Concept of Stakeholder Enyinna (2013, p.79) asserts that stakeholder theory is not part of the normative theory. He defines normative as an attempt to centre the common theories of philosophical theories absolutely upon the aspects of human life that entail business relationships. He confirms that for a business theory to be considered normative, it must be prescriptive instead of being descriptive. More importantly, a normative theory should prescribe on moral subjects and cannot prescribe the best manner to tackle a job interview. Enyinna (2013) also claims that a normative theory cannot be hypothetical. He claims that Freeman’s stakeholder theory appears to fulfil these conditions. The author claims that even if the stakeholder theory cannot deny the subsistence of obligations to employees, suppliers, communities and customers, it has little to say about them. Besides, stakeholder theory gives its constituencies less priority and more priority to the maximisation of profit. According to Enyinna (2013, p.79), the silence regarding the obligations of the business to their stakeholders make people consider businesses as amoral challenge. Freeman developed the stakeholder theory through revitalising the idea of managerial capitalising and replacing the concept that managers hold a duty to stockholders with the idea that managers hold a fiduciary link to stakeholders. Freeman developed the theory with the idea that stakeholders should be treated well and not as a means to some ends (Purnell & Freeman 2012, p.109). As a result, Freeman maintained that stakeholders must take part in the future direction of companies in which they hold a stake. However, Enyinna (2013, p.80) claim that there are scores of issues linked to Freeman’s manifesto beginning with the concept of stakeholder. Many people believe that stakeholder theory has established ethical principles in business. Ability to solve the problem of connecting capitalism to ethics makes proponents of stakeholder theory believe that the theory is ethical. However, Enyinna (2013) maintains that stakeholder theory is morally superior to stockholder theory. 2.2 Normative Status Enyinna (2013, p.80) identifies the normative status of the stakeholder theory as another issue surrounding the stakeholder theory. He asserts that similar to scores of other aspects of stakeholder theory, its normative status is not clear. He asserts that this problem is as a result of the ambiguity linked to the intent of the theory. According to Enyinna (2013), stakeholder interests can be considered, and stakeholder group identified for strategic and normative reasons. Strategic reasons are concerned with running the business while normative are linked to the satisfaction of moral imperatives. The author asserts that strategic stakeholder theorising can be amoral or unethical if normative implications are not taken into consideration. Enyinna (2013, p.81) asserts that stakeholder theorists focus disproportionately on strategic theory at the expense of normative theory. As a result, stakeholder theory is morally extraneous. In this regard, Enyinna (2013) concludes that stakeholder theory is principally instrumental or strategic and the morality expressed in the theory is founded on a philosophical expediency that considers morality hypothetical. Stakeholder theory is strategic because it focuses on strategic ends and it far from being ethical. 3.0 Findings and Discussion Enyinna (2013) conducted a systematic literature review to determine the ethical status of the stakeholder theory. Based on his analysis, two major issues are linked to the stakeholder theory. These issues include the controversy as regard the concept of stakeholder and ambiguity regarding the normative status of the stakeholder theory. These views are supported by Nankervis, Miyamoto and Smith (2013, p.78) who assert that stakeholder theory faces major challenges with the first challenge being a lack of a succinct and clear description of the stakeholder concept. The second challenge concerns how to classify stakeholders to comprehend the relationships amid them. However, Enyinna (2013) concern is whether the stakeholder theory is ethical or not. He maintains that stakeholder theory claims to support moral values yet literature demonstrates that the theory is strategic and only incidentally normative. According to Enyinna (2013, p.81), stakeholder theory does not quality as a normative theory. He asserts that stakeholder theorists can avoid philosophical-normative theory and embrace the instrumental theory. This is because ethics holds nothing to do with the philosophical search for what is correct. Judging from the arguments presented in the article, ‘Is stakeholder theory really ethical’ by Enyinna (2013), there lack doubt that stakeholder theory hold an effect on business practitioners and academia. There are scores of issues with the stakeholder theory, and numerous aspect of this theory had been challenged and scrutinised. According to Enyinna (2013, p.79), even the idea of stakeholder is a subject of much controversy. Nankervis, Miyamoto and Smith (2013) share these views. In their book, “Managing Services’, Nankervis, Miyamoto and Smith (2013 p.78) confirm that notwithstanding core boundaries outlined by various definitions, stakeholder theory experiences two major challenges. In spite of it being fairly well established that the principal responsibility of a firm is to serve the shareholders’ interests, a fundamental precept of stakeholder theory is to, in due course, serve all those constituents identified as a firm’s stakeholders. Even though the stakeholder theory has become essential in the blueprint of organisational ethics, it is quite intricate to identify non-stakeholders and stakeholders precisely. According to Fernando (2010, p.50), the stakeholder theory of corporate governance holds a long history. The theory represents a synthesis of economics, the stakeholder concept, business ethics and behavioural science (Friedman & Miles 2006, p.50). The theory considers a firm as an input-output model by overtly adding all interest groups. However, Fernando (2010, p.50) claims that the theory is grounded in scores of normative theoretical perspectives including ethics of fiduciary relationships, social contract theory, communitarian ethics, critical theory and theory of stakeholders to mention but a few. Although it is possible to create stakeholder analysis from different theoretical perspectives, in practice much of stakeholder analysis does root itself explicitly in a particular theoretical tradition, but functions at the level of individual norms and principles for which it offers little formal justification. The stakeholder theory is criticised because it is not applicable in practice by firms. More so, there is relatively little empirical evidence to suggest a connection between stakeholder concept and corporate performance (Phillips 2011, p.13). Stakeholder concept has attained widespread popularity among managers, academic and media in Australia thereby making it an imperative activity to bring some system into the confusing approaches around the stakeholder theory. Contrary to the views of Enyinna (2013), Psaros (2008, p.17) asserts that stakeholder theory is normative and entails acceptance of stakeholders as groups or persons with legitimate interests. However, stakeholder theory does not necessarily presume that managers are the rightful focus of corporate governance and control (Pasros 2008, p.17). An example of the validity of stakeholder theory in Australia has been the augmenting push towards CSR. In addition, the theory was applied in 2000 Childers incident where a backpackers’ hostel fire claimed 15 lives. Following the incidence, there was a rise in planning controls for hostels at the national level and reinforcement of local opposition to the placement of the hostel in residential areas. In this incidence, the backpackers were considered as a stakeholder group because of their economic impact on the region (Hannam & Ateljevic 2007, p.201). 4.0 Recommendations The basic concept of stakeholder theory is a redefinition of the firm; and how the firm should be conceptualised. With time, stakeholder theory has obtained recognition with major works of Donaldson and Preston (1995), Clarkson (1994) among other scholars. From an originally strategic perspective, stakeholder theory evolved and has been adopted as a way of management by scores of market-based firms. The success of stakeholder theory both in business practice and management literature is because of its simplicity. However, some scholars criticise the ambiguity and vagueness of this theory. Although early stakeholder theorists were ambiguous as to its distinctive focus, there is little doubt that a sense of intent that surpasses profitability and concern for stakeholder’s wellbeing were crucial to the origin of the theory. However, based on the literature analysis, stakeholder theory offers a way of combining ethical questions with intricate operational settings. The theory proves its importance to organisations (Duska 2007, p.158). However, further research on a pragmatic temperament is needed. The absolute quantity of shortcomings and contentions presented in literature implies that hypothetical approach is the domain of supposition with scores of assumptions underlying stakeholder theory never tested. As a result, it is important that further research both quantitative and qualitative be conducted to provide answers to issues relating to stakeholder theory. Scholars should systematise issues critical to the theory and develop a research agenda that responds to the imperfections of stakeholder theory. A major issue touching on the concept of stakeholder is evident. The plethora of definitions prevents comprehension as to what the term stakeholder actually presents. In this regard, boundaries should be established to provide a succinct and clear concept of the term. Research should be conducted to centre on the boundaries as to what the concept of stakeholder means. Concerning the question of instrumental, new models should be proposed that hold the potential to answer the different challenges relating to stakeholder theory. Further research should be conducted to differentiate different versions of descriptive and instrumental stakeholder theories to prevent definitional perplexity. It is important to obtain consistency within the normative part of stakeholder theory. 5.0 Conclusion Stakeholder theory is considered one of the influential models in business ethics. It is a concept concerning how firms really operate. The theory stress that for an organisation to be successful, it has to develop value for suppliers, employees, customer, communities and other people who hold a stake in the firm. The conventional definition of a stakeholder is any individual or group who affect or is affected by the activities of a firm. Enyinna (2013) maintains that stakeholder theory is not a normative theory but instrumental. However, he does not challenge the importance of stakeholder theory in the contemporary scholarship and corporate practice. Although the stakeholder theory has been advocated and interpreted as a purely descriptive theory of business or as an instrumental view, I believe that it undeniably holds normative aspirations. The least and clearest equivocal statements of this characteristic is provided by Donaldson and Preston (1995). Although the stakeholder theory is descriptive and instrumental, its fundamental foundation is normative and entails the recognition that stakeholders are groups or individuals with legitimate in substantive and or procedural aspect of a business activity. The theory is normative because the interests of all stakeholders are of intrinsic value. The stakeholder theory offers a useful blueprint for pinpointing and exploring corporate responsibilities and reminds people that stockholders are not only the legal stakeholders. Although stakeholder is fundamentally strategic, it promotes ethical values in business. 6.0 Reference List Duska, R 2007. Education, leadership and business ethics: Essays on the work of Clarence Walton. USA: Springer & Business Media. Enyinna, O 2013, ‘ Is stakeholder theory really ethical’, Journal of Business Ethics, vol.7, no.2, pp.79-86. Fernando, A.C 2009. Corporate governance: Principles, policies and practices. India: Pearson Education. Friedman, A & Miles, S 2006. Stakeholders: Theory and practice. UK: OUP Oxford. Hannam, K & Ateljevic, I 2007. Backpacker tourism: Concepts and profiles. UK: Channel View Publications. McElroy, M & Engelen J 2012. Corporate sustainability management: The art and science of managing non-financial performance. UK: Routledge. Nankervis, A, Miyamoto, Y & Smith, J 2005. Managing services. UK: Cambridge University. Phillips, R 2011. Stakeholder theory. UK: Edward Elgar Publishing. Psaros, J 2008. Australian corporate governance: A review and analysis of key issues. Australia: Pearson Higher Education. Purnell, L & Freeman, E 2012, ‘ Stakeholder theory, fact/value dichotomy, and the normative core: How wall street stops the ethics conversation,’ Journal of Business Ethics, vol. 109, no.1, pp.109-116. Read More