Advantages and Disadvantages of Stakeholder Theory
The advantages and disadvantages of stakeholder theory abound. While the definition of a stakeholder varies, there are five main types.3 min read
The advantages and disadvantages of stakeholder theory abound. While the definition of a stakeholder varies, there are five main types. These include customers, employees, local community, shareholders, and suppliers. Typically, the law does not give a voice to stakeholders that are non-shareholders in a corporation.
For example, a non-shareholder would not have the right to set derivative actions against directors who have breached their duties. Also, a non-shareholder does not have any voting rights. As you can see, a stakeholder has a minimal impact on the corporation they serve, even though they will be directly impacted by any pitfalls of the corporation.
The Development and Implications of Stakeholder Theory
From a moral and ethical standpoint, the attitude taken towards stakeholders is not fair. Just like shareholders, stakeholders are responsible for the success of a corporation. Therefore, why shouldn't their interest be considered? This is where stakeholder theory comes in. It addresses these kinds of injustices.
Stakeholder theory is a doctrine that holds companies accountable to their stakeholders. It also establishes a balance between the diverging interests between stakeholders. There are three components to stakeholder theory:
- Descriptive accuracy
- Instrumental power
- Normative validity
Descriptive accuracy is used to outline the corporations' behavior. Instrumental power establishes a framework to observe the correlation between stakeholder management and the company's success. Normative validity is used to ascertain the purpose of the company. This makes normative validity the main focal point of stakeholder theory. A company's objective is a key issue in matters relating to corporate governance.
What Is the Purpose of Stakeholder Theory?
Stakeholder theory ties into social responsibility. It focuses on the potential of every participant. Stakeholder theory also aims to keep ethics and economics in line while achieving the company's goals. In other words, a company should be run in a manner that benefits the stakeholders, and directors should be accountable to them. This means that companies cannot use stakeholders to benefit themselves in the long run. Rather, the main objective should be earning profits for the stakeholders.
Directors are considered mediators. That means they have to answer to stakeholders while balancing the diverging interests of stakeholders. Directors must align themselves with stakeholders and disclose every bit of information while looping stakeholders into the corporate operations. Stakeholder theory has been accepted in case law. It allows directors to deny shareholders' interest when compared to stakeholders' benefits.
The Primary Debates of Stakeholder Theory
It's not just shareholders who contribute to a company's success. Stakeholders have a direct impact on a company's operations. The stakeholder theory makes it clear that directors have a responsibility to shareholders and stakeholders alike. The company is to be run for their benefit.
One could argue that a primary focus on shareholders exhibits a certain amount of bias toward shareholders. This could hurt stakeholders and violate ethical and moral codes. Companies are starting to move away from a shareholder primacy and accept stakeholder theory. That does not mean stakeholder theory is perfect. In fact, many will still argue against it.
Advantages of Stakeholder Theory
Stakeholder theory is not a single model that identifies the objectives of a corporation. It also takes economical and ethical questions into consideration. Furthermore, it promotes fairness for everyone involved in the company and gives directors an objective. They must work to benefit the stakeholders.
This creates an environment where social wealth is promoted for everyone. Stakeholder theory is a good combination of economy and ethics. No company can survive if it only has the shareholders' economic gain in mind. It needs to accept feedback from creditors, customers, employees, suppliers, and the like. After all, a stakeholder's investment directly impacts the company's performance and wealth. As a result, if directors keep stakeholders in mind, the entire company will stand to benefit from that frame of mind.
What's the Difference Between Stakeholder Theory and Stakeholder Primacy?
Shareholder primacy draws the same conclusions. It just goes about it in a different way. Shareholder primacy does not consider stakeholders' interests to be the responsibility of directors. This means the increase of social wealth is reliant upon the maximization of shareholders' interest.
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