The Stakeholder Theory - Essay Example

STAKEHOLDER Emerged during the last two decades, the Stakeholder Theory (Freeman, 1984) referred to when organisations work to satisfy and inform their stakeholders with relevant information tailored to their specific interest. A stakeholder has been defined by Freeman (1984: 46) as “any group or individual who can effect, or is affected by, the achievement of an organisation’s objectives.” Clarkson (1995 :5) defined stakeholders more specifically as those that “bear some form of risk as a result of having invested some form of capital, human or financial, something of value, in a firm.” Moreover, Mitchell et al (1997: 858) lists twenty-five other publications with various definitions of stakeholders. Without a clear consensus on how to define a stakeholder, the essential question that most definitions attempt to answer is, ‘What is a stake?’ The two definitions above certainly represent a contrast in broad versus narrow viewpoints of stakeholders. With Clarkson’s (1995) narrow perspective, a distinction can be made between stakeholders that voluntarily or involuntarily bear some form of risk. Voluntary stakeholders are those that bear risk based on an investment of either capital, human, or financial value in a firm. Involuntary stakeholders are at risk due to the activities of the firm. The common element between both types of stakeholders is risk, and without risk there is no stake (Mitchell et al., 1997). In the broader definition offered by Freeman (1984), the list of possible stakeholders is so expansive that it could include almost anyone or any entity. Diverse groups such as suppliers, community, industry, local government, neighbors, lobby groups, labor unions, and the natural environment have been included as stakeholders under this broad definition. The broadness of this definition (i.e. “can effect or is affected by”) allows the stake to be either unidirectional or bidirectional, and there is no requirement for reciprocal action as in a contract or with a relationship (Mitchell et al., 1997). From the critical perspective, Freeman’s definition (1984) is so broad that it would include everyone or every entity, except those with no power to affect the firm and have no relationship to the firm. The claim that a stakeholder is “any group or individual who can effect, or is affected by, the achievement of an organisation’s objectives” (Freeman, 1984: 46) is so broad that it is not falsifiable. In contrast, Clarkson’s definition (1995) uses risk to represent some form of legitimate claim on an organisation by stakeholders. A legitimate claim is required to fully understand the stakeholder environment, but does not necessarily imply the power to influence the organisation (Mitchell et al., 1997). Stakeholders must have something of value at risk (i.e. capital, human or financial value) in a firm, as well as represent a legitimate claim upon the firm (i.e. current wages, warranties and equity). Preston and Post (1975) theorised that the stakeholders in a firm could be classified as either primary or secondary. They offered that stakeholders were primary to the organisation when they provided “the basis for exchange relationships between it and the rest of society” (Preston and Post, 1975: 75). Post et al. (1996) later explained that these stakeholders would be the market-driven ones. Preston and Post thought that stakeholders should be considered secondary when their relationships or activities were “ancillary or consequential to its primary involvement activities” (1975: 96). No matter how one labels them, some stakeholders will bear some sort of direct risk in an organisation’s performance, and others will be indirectly impacted by the organisation’s performance whether they care to be or not (Freeman, 1984). The difference between these two groups is the primary stakeholders have deliberately chosen to accept the risk of the firm’s performance, whereas the secondary stakeholders have no choice in accepting the risk but are nonetheless affected by the performance of the firm. Secondary stakeholders are ancillary to the primary exchange relationship of the business (Preston and Post, 1975) and may include the community, local government, lobby groups, labor unions, or the natural environment. Even those that may have the resources will certainly also be oriented toward primary stakeholders since they are directly involved in the economic exchange relationship. Frooman (1999) asserts that there are two types of stakeholders: strategic and moral. The strategic stakeholder deals with how certain interests are managed and are the one who can impact an organisation and its direction. The moral stakeholder seeks to balance certain interests of the organisation and is the ones who are actually impacted by those interests. In organisations, communicating with and between stakeholders the interests or key directional strategies can also impact the organisations outcomes and infrastructure. Frooman (1999) adds that balancing power between stakeholders influences key organisational strategies. At the most basic level large mining companies must have customers (clients), contractors, suppliers, and definitely have employees. In contemporary business context, companies operating within mining and metallurgical industries are not monopolies and management will envision at least one or more competitors. There will naturally be interactions between employees, management, suppliers and clients and actions or reactions with competitors in the marketplace. Mining development businesses must be financed, so investors may be comprised of an owner, business partners, or others with a financial investment in the outcome of the business. These investors may also interact with other stakeholders and be relevant to most businesses. Therefore, the primary stakeholders for large mining development companies are employees, clients, suppliers, contractors, investors, and competitors. In the context of large mining development, the secondary stakeholders are the community, local government, labor unions and, of course, natural environment. From the critical perspective, according to stakeholder theory, the conflict of interest between different stakeholders within an organisation is an evitable and is considered to be natural. In the context of mining development companies, the conflicts in stakeholders’ interests can occur regularly, but in principle these interests are not necessarily antagonistic in their nature. For instance, investors as primary stakeholders of any mining development company are interested in company’s continuous profitability and so are company’s employees, because employer’s positive financial indicators result in better compensation, working conditions, and professional development of human resources. Simultaneously, the concerns of local community regarding pollution and industrial wastes produced by the economic activities of mining development companies seem to be in conflict with those interests of companies’ stockholders and management. However, these conflicts can be offset if mining developing companies establish particular green policies, such as park and forestation enhancement, and other policies that reflect their organisational commitment to local communities and environment. The six primary stakeholders – employees, clients, suppliers, contractors, investors, and competitors – have an economic relationship to the mining development companies. Since primary stakeholders have a direct economic exchange relationship between the firm and society (Preston, 1975), each are important to the firm. Any stakeholder group could be seen as the most significant stakeholder to a particular mining development company. Every mining company may have a strategic interest in employees. Employees may be anxious over job security, pay parity, benefits, or their association with their employer. Research has shown that the performance of an organisation is directly related to the attitude and behavior of the firm’s employees (Riordan, Gatewood, & Bill, 1997). Large companies, including those of mining development sectors, have shown a greater propensity to institute a formal hierarchical structure, establish a recognised division of labor, and augment administrative processes to be more attune to the workforce as the business increases the number of employees. Likewise if employees feel ignored as an organisation grows, workers may feel that an implied psychological contract has gone unfulfilled, and that may impact workplace attitudes and eventually the intention to leave the company. Simultaneously, mining companies interested in growth and mutual prosperity, may decide that the attitude and performance of the workforce is paramount to the manufacture of their products or services, and management may be more oriented toward employees than any other stakeholder group. Large mining developing companies are more likely to enjoy loyal clients when they have an orientation toward clients. The firm’s reputation has been shown to have the broadest influence over other attributes, such as brand image, on perceptions of client’s value and client’s loyalty. Given the importance of clients’ perceptions on an organisation’s performance, large manufacturing firms like mining companies have been found to engage in relationship marketing to craft a bond with clients that can strengthen perceptions and reinforce loyalty to the organisation. Investors may be of primary concern to mining companies since it is the investors that provide the capital to begin, maintain and grow a business when an owner cannot finance company alone. Outside investors typically come from one of three sources: 1) banks or financial institutions, 2) venture capitalists, or 3) angel investors. Banks or financial institutions make up the bulk of outside investors and generally stress the financial aspects of the business. Venture capitalists are very selective investors that are not only concerned with financial issues, but also with market issues. Additionally, venture capitalists generally require an active involvement in the governance of the company in which they invest, as well as a potential equity position in exchange for the risk that is accepted when investing in a mining development business. When shareholders or investors are concerned with their investment as demonstrated by a lack of performance of a mining company, managers and executives are removed from their positions more quickly and other executives are less likely to engage in strategies that may be perceived as risky. With outside investors actively involved in an organisation, it would be reasonable for a mining company to have a greater orientation toward investors rather than any other stakeholder group. REFERENCES Clarkson, M. B. E. 1995. A Stakeholder Framework for Analyzing and Evaluating Corporate Social Performance. Academy of Management Review, 20(1): 92-117. Freeman, R. E. 1984. Strategic Management: A Stakeholder Approach. Boston, MA: Pitman. Frooman, J. 1999. Stakeholder influence strategies. In Academy of Management Review, 24 (2), 191-205. Mitchell, R. K., Agle, B. R., & Wood, D. J. 1997. Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4): 853-886. Post, J. E., Frederick, W. C., Lawrence, A. T., & Weber, J. 1996. Business and Society: Corporate Strategy, Public Policy, Ethics. New York, NY: Mc-Graw Hill. Preston, L. E., & Post, J. E. 1975. Private Management and Public Policy: The Principle of Public Responsibility. Englewood Cliffs, NJ: Prentice Hall. Riordan, C. M., Gatewood, R. D., & Bill, J. B. 1997. Corporate image: Employee reactions and implications for managing corporate social performance. Journal of Business Ethics, 16(4): 401-412. Read More