Stakeholder Theory of the Modern Corporation

R. Edward Freeman
Management has a fiduciary responsibility to stakeholders Corporations a tool for immortality
All groups affected by a corporations decision and policy

Primary

Secondary

Primary Stakeholder
Employees (union) Wholesaler Retailer
Skill Distribution Capital

Shareholder

Compete

Business

Lend Money

Competitor
Money Material

Creditor

Customer

Supplier

Nature of Interest and Power

Interest
Shareholder - Return/Dividend

Power

- Exercising voting right - Capital Gain - Exercising right to inspect book and record Employee - Stable employment - Strike - Fair pay - Union bargaining power - Safe and comfortable - Publicity Creditor - Repayment of loan - Calling in loan - Interest -Take over loans collateral Supplier - Regular order - Refusing to meet order - Paid promptly - Supplying to com[etitor Distributor - Good product quality - Buying from competitor - High reliable product - Boycotting company Customer - Fair exchange - Purchasing from competitor - Safe & reliable product - Boycotting company Competitor - Be profitable -Forcing tokeep up - Gain a larger market - Charge lower price

Secondary Stakeholder
Local Communities General Public
Skill, Environmen t Opinion

Central/Local Regulation Govt.

Tax
Friendly Hostile

Business Support

Services

Business

Foreign Govt.
Social Demand

Image, Publicity

Media

Social Activist

Nature of Interest and Power

Interest
Local Com.

Power

- Employ local residents - Restricting operating licenses - Environment is protected - Lobbying government for - Local area is developed regulation of the company Social - Ensure that company - Publicizing the negative issues Activist conform to legal and - Lobbying government for ethical standard regulation of the company Media - Keep the public informed - Publicizing the negative issues on all issues - Monitor the company Business - Provide services and - Assist company in business Support information endeavor & dev. effort Government - Taxes - Regulation, licenses,& permit - Economic development - Boycotting company Foreign Gov. - Economic development - Permit to do business - Social improvement - Regulation General - Social value Protected - Support activist Public - Prosperity for society - Condemn or praise company - Risk minimized - Press government to act
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 Business can succeed only if they maintain good relationships with all their stakeholders These relationships can be strengthened, if organization fulfill their obligations towards their stakeholders

Business should go beyond profit maximization to

TRUSTEESHIP, or the multi-fiduciary

stakeholders concept, whereby management sees itself as responsible for achieving balance among all stakeholders interests.

According to Freeman and Reed, stakeholders may be: Any group of people, who have stake in the business. Those, who are vital to the survival and success of the organization Any group that is affected by the activities of the organization.

Earlier, objective of most business was to enhance the shareholder value But now, the focus is on satisfying all stakeholders by allowing them to share in the profits of the corporation

Based on their relationship with the organization, stakeholders can be classified as: Internal stakeholders ( shareholders, employees and management)- any decision taken by the management has direct impact on them External stakeholders individual and groups, who have some claim on the company (consumers, suppliers, creditors, competitors and community) All stakeholders play a crucial role in the success of a corporation

 Identify stakeholders most critical to survival:

Identify which stakeholders The stakeholders interests and concerns Claims stakeholders are likely to make on on the organization Stakeholders who are most important the organizations perspective Identify the resulting strategic challenges

to

Usually the most important:

Customers Employees Stockholders

Companies must identify the most important stakeholders and give highest priority to pursuing strategies that satisfy their needs.

Stockholders are a companys legal owners

and the provider of risk capital, a major source of capital to operate a business.
Risk capital
No guarantee to the stockholders that: They will recoup their investment Or earn a decent return ESOPs Employee Stock Option Plans Employees may also be shareholders

Maximizing long-run profitability & profit growth is the route to maximizing returns to shareholders, as well as satisfying the claims of most other stakeholder groups.

To grow profits, companies must be doing one or more of the following:

1. 2. 3. 4. Participating in a market that is growing Taking market share away from competitors Consolidating the industry via horizontal integration Developing new markets through:
Diversification Vertical Integration International Expansion

Stockholders receive their returns as:

Dividend payments Capital appreciation in market value of shares

 Shareholders Employees Management

have primary stake in the business Shareholders are considered members of the company, who help to achieve the companys goals by investing in business Entitled to share, in the profits of the company Entitled to receive up to - date information about the companys performance

As per U.K., Institutional Shareholders Committee (ISC) shareholders are the true proprietors of the company Obligations as such include =maintaining good relations with top management =exercising their voting rights

Must honor the trust of the shareholders Managing the company efficiently in order to secure a fair and competitive return on owners investment. Disclosing relevant information to shareholders, subject and only to legal requirements and competitive constraints Conserving, protecting and increasing shareholders assets. Respecting the shareholders requests, suggestions, complaints and formal resolutions.

EMPLOYEES
Relationships governed through legal contract Employees contribute their effort and time towards development of organization Development of organizations improves society

Expectations
= Wages, = Benefits, = Security Concepts = Lifetime employment = growth and well being

Provide adequate compensation Provide working conditions that respect each employees health and dignity Honesty in communications with employees and openness in sharing information Listening: wherever possible, to act on suggestions, ideas, requests and complaints Engage in negotiations when conflict arises Avoid discriminatory practice and guarantee equal treatment and opportunity regardless of gender, age, race, and religion Protect employees from avoidable injury and illness in the work place Encourage and assist employees in developing skills and knowledge that are required for task accomplishment

MANAGEMENT
Any decision taken by management has an impact on the stakeholders

at one hand, they are employees with some kind of explicit or implicit employment contract On the other hand: management is entrusted with duties of safeguarding the welfare of the corporation

Role of management involves in Balancing the multiple claims of different stakeholders o Owners want higher financial returns o Customer want more money spent on R&D o Employees want higher wages and better benefits o Local community expect environment friendly equipment According to stakeholder theory, organization should not give preferential treatment to any stakeholder group Task of the management is to Keep the relationship among the stakeholders in balance- if these relationships become imbalanced, survival of the firm is in jeopardy

 Consumers Suppliers Creditors Competitors

CONSUMERS
Exchange resources for the product of the firm and in return receive the benefits of the product

Provide life blood of the firm, in the form of revenue

Corporations re-invest earnings Indirectly customers pay for new product development and services Attention to customer needs automatically address the need of suppliers and owners

5 Rs,
The right quality Right quantity Right time Right place Right price Producing as per specific need of consumers, as per their purchasing power Quality goods at reasonable prices Prompt and adequate services Improving standards of living by producing goods and services of high quality Treating customers fairly in all aspects of business transactions Ensuring health and Safety of Customers.

=
= = = = =

raw materials, what they supply, will determine final product quality and price
Must seek fairness and truthfulness in all activities

including pricing and licensing

Ensure activities are free from coercion and

unnecessary litigation.

Ensure long term stability in supplier relationship

in return of value, quality

Share information with the suppliers and integrate

them in the planning process

Ensure timely payments.

= =

include supplies org. buy goods on credit from suppliers They may cease to fill orders, if a company is unable to pay the amounts due, or takes too long in making payments

=
=

Creditors and suppliers, who supply goods to the debtor / company as demanded
Debtor though in a position to pay chooses the last possible moment (un-ethical)

Fair economic competition is one of basic requirements for increasing the wealth of nations.
Responsibility of organization towards competition

Foster open markets for trade and investment Competitive behavior that is socially and environmentally beneficial and demonstrate mutual respect among competitors Refrain from seeking or participating in questionable payments or favors to secure competitive advantage Respect both tangible and intangible property rights. Refuse to acquire commercial information by dishonest or unethical means such as industrial espionage

Community gives business, the right to build or rent facilities, benefits from the tax revenues raised in the form of local services infrastructure etc. Firms Responsibilities towards Society Respect human rights and democratic institutions Support public policies and practices that promote human development through harmonious relations between business and other segments of society Collaborating with such activities that aim at improving the standards of health, education, workplace safety and economic well being Promoting and stimulating sustainable development and playing a leading role in promoting and enhancing the physical environment and conserving the earths resources Supporting peace, security, diversity and social integration respecting the integrity of local cultures Encouraging charitable donations, educational and cultural contributions, and employee participation in community and civil affairs

Indirectly through growth; Business operations influence the extent to which growth is equitable; Directly through
the incomes and jobs they generate producing products that serve the needs of the society the opportunities they provide for increasing incomes through their marketing and purchasing arrangements, employment and training policies their contribution to local communities through the provision of social services and infrastructure.

Expected to be starting block in an issue like business, ethics & corp. governance Role of legislator and promoter of human rights to start with Through legislation : improvement in business practices, in the areas of environment and management, human resource management and labor rights Crucial role to play in creating and managing forums for dialogues among business, its stakeholders and society at large Sound environment policies and in fighting corruption and fraud . Role of Corporate = Legislature provide moral minimum = Civic societys role in voicing their opinion

Milton Friedman (1970)

=

The Social Responsibility of Business is to increase its Profits

Denied that corporate executives had any moral duty to relax the conditions of profit maximization on behalf of the wider interests of society. They are under a strict contractual duty to act for the owners of the company (the stockholders)
One and only one social responsibility of business (is) to increase profits so long it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud

What Is Social Responsibility?

Two Opposing Views of Social Responsibility

Classical view - managements only social

responsibility is to maximize profits Milton Friedman - managers primary responsibility is to serve the interests of the stockholders doing social good adds to the cost of doing business costs have to be passed on to consumers

 Socioeconomic view - businesses are not just economic institutions

managements social responsibility goes beyond making profits to include protecting and improving societys welfare businesses have responsibility to a society that:
endorses their creation through laws and regulations supports them by buying their products/services

more organizations around the world have increased their social responsibility

Social Responsibility Of Managers

Early 1900, mission of business was exclusively economical Partly due to interdependence of many groups, social involvement of business has increased Many stakeholders or claimants What social responsibility is really? Social responsibility of business, now being posed with reference to government, non profit foundations, charitable organizations even religious institutions

Role Of Government
Social changes can be implemented by enactment of legislation in many instances Contributing to social problems does not always involve net expense

Social Audit
How social performance be evaluated? Social Audit first proposed by Howard R. Brown in 1950s Social audit defined as :-

A commitment to systematic assessment of and reporting on some meaningful , definable domain of the companys activities that have social impact
o one required by government and involves pollution control, product performance requirements and equal employment standards o other concerns a great variety of voluntary social programs

Social Responsibility And Social Responsiveness

Social responsibility idea considered in early part of 20th. Century. 1953-social responsibility of businessman by Howard R Brown-business should consider social responsibility of their decisions Corporate social responsibilityis seriously considered the impact of companys actions on society Social responsiveness the ability of a corporation to relate its operations and policies to the social environment in ways that are mutually beneficial to the company and society Social responsiveness implies actions and the how of enterprises responses

Social Responsibility versus Social Responsiveness

Social Social Responsibility Responsiveness Major consideration Focus Emphasis Decision framework Ethical Ends Obligation Long term Pragmatic Means Responses Medium and short term

Social Responsibility And Economic Performance

Most Research Shows a Positive Relationship
methodological questions associated with trying to measure social responsibility and economic performance issue of causation

Evaluation of Socially Conscious Mutual Stock Funds

social screening - applying social criteria to investment

these funds often outperform the market average Conclusion

a companys socially responsible actions do not hurt its long-term economic performance

The Social Audit

Negative

Low

Medium

High

Negative

Low

Medium High

Favored Strategies

Social responsibility

Pure Philanthropy

Cause related marketing

Enlightened self interest

Summing Up Social Responsibility four-stage progression of an organizations social responsibility

each stage implies an increasing level of managerial discretion Stage 1 - promote stockholders interests by seeking to minimize costs and maximize profits
all laws and regulations are followed feel little obligation to satisfy other societal needs

Stage 2 - managers accept their responsibility to employees and focus on human resource concerns
improve working conditions

 Stage 3 - expand responsibilities to other stakeholders

actions include providing fair prices, highquality products and services, safe products, and good supplier relations

Stage 4 - managers feel responsibility to society as a whole

try to advance the public good promote social justice, preserve the environment, and support social and cultural activities

To Whom Is Management Responsible?

Lesser

Social Responsibility

Greater

Stage 1 Owners and Management

Stage 2 Employees

Stage 3 Constituents in the Specific Environment

Stage 4 Broader Society

Socially responsible investment (SRI)

Corporate social responsibility.

Corporate citizenship.

Corporate governance.