Freeman Stakeholder Theory - Essay Example

Freeman’s Stakeholder Theory According to the “Doctrine of Fair Contracts”, Corporations ought to be governed in accordance with six principles: (i)the principle of entry and exit (ii) principle of governance (iii) principle of externalities (iv) principle of contracting costs (v) the agency principle and (vi) the principle of limited immorality.(www.alpha.fdu.edu). In arriving at this Doctrine, Freeman’s theory holds that both stockholders and stakeholders have a right to demand certain actions from management because they all have a vested stake in the corporation.

Owners have a financial stake in the corporation and expect returns on their investment. Employees have their jobs and livelihoods at stake and suppliers provide raw materials to the corporation, hence its success is vital to their success. Similarly, managers, customers and the community are other stakeholders in the corporation, all of whom stand to benefit from it. (Freeman, 1984). On this basis, Freeman argues that changes that have occurred in corporations law have resulted in constraints, in that stakeholder interests are being compromised in the interest of promoting the interests of stockholders, which has produced an outcome that is not conducive to the general good.

He therefore contends that all stakeholders have the right to benefit equally and need to participate in determining the future direction of the firm. The purpose of the firm cannot be described as merely that of maximizing profits for stockholders (Freeman, 1999). Freeman bases his Doctrine of Fair Contracts on a normative basis, i.e, that fairness dictates that the purpose of the firm and its operations should be such as to ensure that there is a basic equality maintained among all groups of stakeholders.

Therefore, the normative basis applies justice and fairness, as outlined in Rawls’ theory, using the device of the social contract. Under the social contract, every person has the right to certain basic liberties, which are equal to that which others have (Rawls, 1971:53). Furthermore, opportunities should be available to everyone without restriction and they must be of the greatest benefit to the least advantaged members of society (Rawls, 1971:303).Applying a normative basis to stakeholder holder theory, the guiding principle is that a firm should be managed in such a way that the benefits are balanced for all stakeholders and this is achieved by the Fair Doctrine principles outlined above.

When a firm is managed in such a way that only stockholders benefit, then this may undermine the rights of other stakeholders and impact upon ethical conduct of the firm in general and impair the cause of justice and fairness. Freeman’s argument works because it is based upon basic ethical principles of goodness and fairness, which have been advocated by philosophers over the ages and have withstood the test of time. Freeman’s theory is a stark deviation from the established principle of profit making upon which corporations have functioned and which forms the basic framework of a capitalistic society.

Moreover, with the recent focus upon the need to introduce ethical conduct in corporations after the scandals at Enron, etc, Freeman’s focus upon ethical distribution of the firm’s resources among all stakeholders becomes relevant and applicable. It is a bold move in that it changes the framework of the corporation from a profit centered one to an ethical one that takes into account, a variety of diverse stakeholder interests, including the community. References:* Freeman, R.E., 1984.

“Strategic management: A stakeholder approach.” Boston: Pitman Publishing* Freeman, R.E., 1999. “Divergent stakeholder theory” Academy of management: The Academy of Management Review, 24(2): 233-37* “Overview” [online] available at: http://alpha.fdu.edu/~sollars/mgmt6547%20Class%204.htm