Stakeholder Theory of the MNC
Stakeholder Theory of the MNC
1. Introduction..................
2. Basic idea of the Stakeholder Theory and Definition ....................3
2.1. The stakeholder concept – popular
and trendy........................
2.2. Different definitions of Stakeholder...................
2.3. What is a Stakeholder?..................
2.4. Who are Stakeholders?.................
2.5. History of the Stakeholder Theory........................
3. Contribution of Freeman to the stakeholder literature ..................9
3.1. Freeman Strategic Management ..............................
3.2. Freeman’s essential book: A stakeholder
approach......................
4. Normative, instrumental, and descriptive stakeholder theory....13
4.1. Introduction..................
4.2. Normative theory........................
4.2.1. Objective.....................
4.2.2. The action of a company should
be ‘ethic’.......................
4.2.3. Freeman’s normative theory........................
4.3 Analytic theory........................
4.3.1. Introduction..................
4.3.2. Strategic management: Freeman
(1984) and Savage et Al. (1991)........................
4.3.3. Stakeholder identification: Mitchell,
Agle and Wood (1997)........................
4.3.4. Friedman and Miles (2002)........................
5. The stakeholders: from theory to practice......................
5.1. The Corporate Social Responsibility
theory........................
5.2. The three main current of the CSR...........................
5.3. Te different CSR strategies ..............................
5.4. The Limits of the theory and its
application ..............................
6. Conclusion ..............................
Stakeholder Theory of the MNC
1. Introduction
In our work we want to explain the principle ideas of the stakeholder theory.
The fact that the stakeholder concept has achieved widespread popularity among
academics, media and managers we think that it is an important task to bring some
system into all those confusing approaches around to the stakeholder concept. At the
beginning we will comment on the basic idea of the stakeholder theory. We will also
try to give a clear definition of what the concept is all about. Freeman who has
contributed a lot to this approach will be the main guide line in our work. We will also
give a brief overview of the history of the stakeholder concept and how it developed
and why it became so popular lately. After that we will explain in a bit more detail the
importance for organization attention to stakeholders. Further on we want to show
how the stakeholder concept has been realized by companies. At the end of the
paper we want to show the application and the limits of the stakeholder theory.
In general the goal of our work is to give a better understanding of the stakeholder
concept and make readers sensitive about how the stakeholder concept could
change management practice.
2. Basic idea of the Stakeholder Theory and Definition
The traditional definition of a stakeholder is “any group or individual who can
affect or is affected by the achievement of the organization’s objectives” (Freeman
1984). The general idea of the Stakeholder concept is a redefinition of the
organization. In general the concept is about what the organization should be and
how it should be conceptualized. Friedman (2006) states that the organization itself
should be thought of as grouping of stakeholders and the purpose of the organization
should be to manage their interests, needs and viewpoints. This stakeholder
management is thought to be fulfilled by the managers of a firm. The managers
should on the one hand manage the corporation for the benefit of its stakeholders in
order to ensure their rights and the
participation in decision making and on the other
Stakeholder Theory of the MNC
hand the management must act as the stockholder’s agent to ensure the survival of
the firm to safeguard the long term stakes
of each group.
The definition of a stakeholder, the purpose and the character of the
organization and the role of managers are very unclear and contested in literature
and has changed over the years. Even the “father of the stakeholder concept”
changed his definition over the time. In one of his latest definitions Freeman (2004)
defines stakeholders as “those groups who are vital to the survival and success of
the corporation”. In one of his latest publications Freeman (2004) adds a new
principle, which reflects a new trend in stakeholder theory. In this principle in his
opinion the consideration of the perspective of the stakeholders themselves and their
activities is also very important to be taken into the management of companies. He
states “The principle of stakeholder recourse. Stakeholders may bring an action
against the directors for failure to
perform the required duty of care” (Freeman 2004).
All the mentioned thoughts and principles of the stakeholder concept are
known as normative stakeholder theory in literature. Normative Stakeholder theory
contains theories of how managers or stakeholders should act and should view the
purpose of organization, based on some ethical principle (Friedman 2006). Another
approach to the stakeholder concept is the so called descriptive stakeholder theory.
This theory is concerned with how managers and stakeholders actually behave and
how they view their actions and roles. The instrumental stakeholder theory deals with
how managers should act if they want to flavor and work for their own interests. In
some literature the own interest is conceived as the interests of the organization,
which is usually to maximize profit or to maximize shareholder value. This means if
managers treat stakeholders in line with the stakeholder concept the organization will
be more successful in the long run. Donaldson and Preston (1995) have made this
three-way categorization of approaches
to the stakeholder concept kind of famous.
2.1. The stakeholder concept – popular and trendy
In the past view years the concept of stakeholders has boomed a lot and
academics wrote a lot about the topic. But also non-governmental organizations
(NGOs), regulators, media, business and
policymakers are thinking about the
Stakeholder Theory of the MNC
concept and are trying to implement it in some way or the other. Most contributions
are particularly about the normative principle. They promote the vision of the
company and the role of managers whose objective is mainly to maximize
shareholder value in order to be sustainable. However, this perspective seems to be
giving way to that business has more and broader responsibilities. Those are best
defined in terms of the stakeholder approach. Another reason why this topic is very
popular and contested among theorists is that there is quit an amount of contesting
literature around which is tried to be replaced and up dated. Along with the popularity
has come a profusion of different overlapping approaches to the stakeholder
concept. This has led to a confusing situation in this sector. In order to deal with this
conceptual con fusion a number of classification schemes have been developed. The
most famous literature contribution which makes the distinction between normative
and strategic or analytical stakeholder theory was done by Donaldson and Preston in
1995. We will discuss this concept of stakeholders in more detail later on in our
paper.
2.2. Different definitions of Stakeholder
As a consequence of the booming of the stakeholder concept and the
literature written about the topic a lot of different definitions of stakeholder developed.
The use of the stakeholder approach in big variety of context brings some criticism to
the concept with it. Friedman (2006)
mentions:
That group of writers comes to coalesce around particular social constructions of reality, leading to
writers referring to stakeholders without being aware of relevant theoretical issues that have been
raised in other literatures.
Roberts and Mahoney (2004) have examined 125 accounting studies that used the
stakeholder language and found that nearly 65 percent “use the term stakeholder
without reference to any version of stakeholder theory”. The important thing is that
writers use the same label to refer to a lot different concepts. This of course can have
great consequences on ethical, policy,
and strategic conclusions.
Stakeholder Theory of the MNC
2.3. What is a Stakeholder?
In the book of Freeman (1984) the earliest definition is often credited to an
internal memo report of the Stanford Research Institute (SRI) in 1963. They define
them as “those groups without whose support the organization would cease to exist”.
Freeman (2004) has continued to use this definition in a modified form: “those groups
who are vital to the survival and success of the organization”. This definition is
entirely organization orientated so the academic circles prefer the definition of
Freeman (1984) where he defines stakeholders as “any group or individual who can
affect or is affected by the achievement of the organization objectives”. About twenty
of the 75 definitions share this definition. Friedman (2006) states that this definition is
more balanced and much broader than the definition of the SRI. The phrase “can
affect or is affected by” seems to include individuals of outside the firm and groups
may consider themselves to be stakeholders of an organization, without the firm
considering them to be such.
A more detailed distinction and analysis of the different definitions would go far
beyond the extent of this paper.
2.4. Who are Stakeholders?
A very common way of differentiating the different kinds of stakeholders is to
consider groups of people who have classifiable relationships with the organization.
Friedman (2006) means that there is a clear relationship between definitions of what
stakeholders and identification of who are the stakeholders. The main groups of
stakeholders are:
•
Customers
•
Employees
•
Local communities
•
Suppliers and distributors
•
Shareholders
In addition other groups and individuals are considered to be stakeholders in the
literature of Friedman (2006):
Stakeholder Theory of the MNC
•
The media
•
The public in general
•
Business partners
•
Future generations
•
Past generations (founders of organizations)
•
Academics
•
Competitors
•
NGOs or activists – considered individually, stakeholder representatives
•
Stakeholder representatives such as trade unions or trade associations of
suppliers or distributors
•
Financiers other than stockholders (dept holders, bondholders, creditors)
•
Competitors
•
Government, regulators, policymakers
Managers are treated differently in the literature. Some regard them as stakeholders
others embody them in the organization’s actions and responsibilities. A very
interesting view of managers came from Aoki (1984), who saw managers as referees
between investors and employees.
Of course all categories of stakeholder groups could be defined more finely.
For example media could be split up into radio, television and print media, or
employees as blue-collar and white collar workers, or in terms for which department
they work. An advantage of finer categories of stakeholders is that by doing so more
homogeneous grouping of people is more likely. The negative fact about this would
be the greater chance of overlap of interests
and actions.
2.5. History of the Stakeholder Theory
In the mid-1980 a stakeholder approach to strategy came up. One focal point
in this movement was the publication of Richard Edward Freeman. He is generally
credited with popularizing the stakeholder concept. The title of the work is – Strategic
Management and only the subtitle is A
Stakeholder Approach and came out in 1984.
Stakeholder Theory of the MNC
Doing this he indicated that his view of the stakeholder concept was done from the
perspective of the company. He built on the process work of Ian Mitroff, Richard
Mason and James Emshoff. Actually the use of the word stakeholder came from the
pioneering work done at Stanford Research Institute (SRI) in the 1960s. They further
were heavily influenced by several concepts that were developed in the planning
department of the Lockheed Company and these ideas were developed from the
researching done by Igor Ansoff and Robert Steward. Ansoff was around 1960s
working for the SRI in association with Lockheed (Friedman 2006). It is also clear
that business leaders were thinking and expressing the stakeholder concept long
before the early 1960s. Dodd (1932) states that already GEC was identifying four
main groups which whom they had to deal with. Those four groups were defined as
shareholders, employees, customers, and the general public. Further, Preston and
Sapieca (1990) mentioned that Johnson & Johnson identified customers, employees,
managers, and the general public in 1947. The company Sears named „four parties
to any business in the order of their importance“as “customers, employees,
community and stockholders“in the year 1950. Schilling (2000) that the start of
thinking about the stakeholder concept was the work of Follet in 1918. Friedman
(2006) considers
“Here a concern about the corporation, which emerged along with the origins of the corporation as a
legal entity which he, calls the soulless
corporation”.
This shows a moral or normative vacuum that has favored ideas of how this could or
should be dealt with. In order so fill this vacuum the stakeholder concept has come
up to handle this demand. By distinguishing in this work between pre- and post-
Freeman (1984) it should be easier to understand why the stakeholders approach
has become so popular during the last twenty years. Generally important to know is
that from the start on the stakeholder
approach grew out of management practice.
Stakeholder Theory of the MNC
3. Contribution of Freeman to the stakeholder literature
3.1. Freeman Strategic Management
An argument for the more frequently used stakeholder concept in the early
1980s could be the changes among workers, students, consumer groups and
environmentalists in the late 1960s. One possibility of arguing about the development
of this field is to see the planning process as becoming increasingly sensitive to the
business environment and the need for good information about it. Friedman (2006)
has the opinion that at the time where the SRI came up with their memo they called
for information systems to scan and track stakeholder responses to changes in
corporate strategy as part of this environment. The SRI has developed “measures of
satisfaction” for the stakeholder groups who they have found. Freeman (1984) noted
that planners did not want to attempt to influence specific stakeholder behavior rather
they wanted only to forecast the future environment in order to adapt it with the
capabilities of the company. In the 1960s the environment was very stable, relatively
static and kind of predictable. Freeman (1984) stated that prior to his work, the
strategic planning literature did hardly consider stakeholders, and when, only very
undefined, as generic groups, and only legitimate or friendly stakeholders. The
groups like competitors or other rivals were left out. The literature of that time just
developed simplistic approaches for considering the environment the stakeholders
were ignored. Porter (1980) for example was one theorist who dealt with the
environment and split it up into his SWOT analyses (strength, weakness,
opportunities and threats).
Friedman (2006) mentions an interesting exception. Ansoff who was a key
contributor to the strategy literature from the 1960s to the 1970s and was part of the
Lockheed-Stanford connection that produced the initial stakeholder definition. He
defines objectives as “decision rules which enable management to guide and
measure the firm’s performance towards its purpose” and responsibilities as
“obligations which the firm undertakes to discharge “and not “part of the firm’s
internal guidance and control mechanism” (Ansoff1965). Another interesting
contribution he made is that the distinction
of constraints which he defined as
Stakeholder Theory of the MNC
“decision rules which exclude certain options from the corporations freedom action”
such as certain rules or regulations
enacted by the government.
3.2. Freeman’s essential book: A stakeholder approach
The main idea behind the book of Freeman’s book titled Strategic
Management, A Stakeholder Approach, was to try to build a framework that was
responsive to the concerns of managers who were being confronted with
unprecedented levels of environmental turbulence and change. He argued (Freeman
1984):
“Gone are the good old days of worrying only about taking products and services to market, and gone
is the usefulness of management theories which concentrate on efficiency and effectiveness within
this product-market framework”.
Traditional strategy frameworks were not helping managers anymore to develop new
strategic directions and also did not help creating new opportunities. Freeman (1984)
said that current theories are inconsistent with both the quantity and kinds of change
that are occurring in the business environment of the 1980’s. Turbulence
organizations are facing the need for new management and a new conceptual
framework was. And his approach was a response to this challenge. In Freeman’s
(1984) opinion it was not enough to solve the calls for increased productivity using
the methods from Japan or Europe. He believes that “business-labor-government
cooperation” is only part of the solution. Both internal and external change has meant
that the model of the organization as a mere resource-converter is no longer “valid”
and suitable. Internal change includes owners, customers, employees and suppliers.
External change for Freeman (1984) includes:
The emergence of new groups, events and issues which cannot be readily understood within the
framework of an existing model or theory…. It makes us uncomfortable because it cannot be readily
assimilated into the relatively more comfortable relationships with suppliers, owners, customers and
employees….It originates n the murky area labeled “environment” and affects our ability to cope with
internal changes.
Stakeholder Theory of the MNC
Some examples for external change would have be the expansion of government
activities, the increase in foreign competition, the 1960s environmentalist movement
associated with the publication of Rachel Carson’s The Silent spring (1962) and the
formation of the Environmental Protection Acts., the growth of groups concerned with
special interests such as gun control or abortion, and also the media became more
important in business. All those changes favored the need of a new model of the
organization. Freeman (1984) made his view of the firm with the common hub-andspoke
picture (see Figure 1). Managers are not mentioned because they work within
the firm and so they are assumed to be within the hub. Important to know is that
Freeman notes that the illustration of his diagram is very oversimplified and as
already mentioned the groups shown can be broken down into more specific
categories (see Section 2.4.).
Freeman chose the word Stakeholder on the basis of the traditional term stockholder
which takes only a look at the economic point of view. Where the
stakeholders are defined as “any group of individual who is affected by or can affect
the achievement of an organization’s
objectives” (Freeman 1984).
Stakeholder Theory of the MNC
Figure 1 : Stakeholder map of a MNC /
Source: Freeman (1984)
Owners
ActivistsPolitical
Stakeholder Theory of the MNC
The purpose of stakeholder management was to create methods to manage
the different groups and relationships that resulted in a strategic fashion. Further
Freeman (1984) thinks that the idea of stakeholders, or stakeholder management, or
a stakeholder approach to strategic management, suggests that managers must
formulate and implement processes which satisfy all and only those groups who have
a stake in the business. The main task in this process is to manage and integrate the
relationships and interests of shareholders, employees, customers, suppliers,
communities and other groups in a way that guarantees the long-term success of the
firm. A stakeholder approach is very much concerned about active management of
the business environment, relationships and the promotion of shared interests in
order to develop business strategies. But due to the fact that a lot of different
stakeholder concepts are around in literature in order to get a better overview the
next chapter will go in more detail in the contribution to the literature done by
Donaldson and Preston (1995) who distinguish between normative and strategic or
analytical stakeholder theory.
4. Normative, instrumental, and descriptive stakeholder
theory
4.1. Introduction
Freeman’s work “Strategic Management: A stakeholder Approach” (1984) offers a
managerial and practical scope and does not really constitute a theory. But it has
constituted a base for the development of the stakeholder theory, witch have been
widely developed since the 1980’s. Stakeholder concept gave rise to heterogenic
theoretical developments witch have been summarized in Donaldson and Preston
Article “The Stakeholder Theory of the Corporation: Concepts, Evidence, and
Implications” (1995). They suggested that the stockholder theory literature can be
seen as three branches:
Stakeholder Theory of the MNC
-Descriptive: The aim is to understand how managers deal with Stakeholders
and how they represent their interests. The corporation is viewed as a
constellation of interests, some time competitive and some time cooperative.
The analytic theory will show how the MNC can deal with these divergent
interests of stakeholders.
-Instrumental Approach: Study the organizational consequences of taking
into account stakeholders in management examining the connections between
the practice of stakeholder management and the achievement of various
corporate governance goals.
-Normative: Identification of moral or philosophical guidelines linked to the
activities or the management of corporations.
Donaldson and Preston argue that if these three approaches are combined without
acknowledgement it would result to confusion.
First we will study the normative approaches of the stakeholder theory witch are
considered by many as the core of the theory, then we will study the Instrumental
and descriptive theory (analytic), and we will finally try to find common concepts of
the stakeholder theories.
4.2. Normative theory
4.2.1. Objective
The objective of the normative theory is to answer the following questions,
“what are the responsibilities of the company in respect of stakeholders?” and “why
companies should take care of other interests than shareholders interests?”. The
normative theory is linked to moral, values and philosophic purposed. For Donaldson
and Preston (1995) the normative theory is the core of the stakeholder theory. For
them stakeholders have a legitimate interest
in MNC's and their interests have
Stakeholder Theory of the MNC
intrinsic value. But Freeman think that the idea of Donaldson and Preston suppose a
separation between economics and ethics spheres. For Freeman every organization
theory incorporates a moral dimension,
even if it is most of the time implicit.
For many authors relationships between the firm and stakeholders are based
on moral commitments. Not only to optimize profit managing stakeholders
relationships in an optimal way. The relations between firms and its stakeholder can
be valuable for the company as a reflection of it values and principles. Each company
should define fundamental moral principles, and use these principles as a basis for
decision making.
4.2.2. The action of a company should be ‘ethic’
One pillar of the normative stakeholder theory is that the company decisions
affect stakeholder outcomes and has to be ethic. In this kind of situation, when the
action of an agent affects an other agent, the company has to build ethics principles.
Decisions made without any consideration of their impact are usually thought to be
unethical. Donaldson and Preston (1995) state that the stakeholder interests has an
intrinsic worth not indirectly linked to the company interests. A firm should not ignore
claims of stakeholders simply because honoring them does not serve its strategic
interests. The firm should build principles or “rules of the game” on how the company
should operate building contracts with
stakeholders.
4.2.3. Freeman’s normative theory
Evan and Freeman (1990) tried to build a normative theory based on this
definition of stakeholders: “Those groups who are vital to the survival and success of
the corporation”. It means customers, employees, suppliers, communities,
shareholders and managers. Evan and Freeman call for a redefinition of the
purposes of the firm to act as a vehicle for coordinating stakeholders interests. They
propose two principles:
Stakeholder Theory of the MNC
•
Principle of corporate legitimacy. The company should be managed for the
benefit of its stakeholders. Stakeholders must participate in decisions that
substantially affect their welfare.
•
The stakeholder fiduciary principle. Managers must act in the interests of the
stakeholders as their agent in the interests of the corporation to ensure the
survival of the firm.
Managers have the same duties than other employees but they also have a duty
of safeguarding the welfare of the firm. For making stakeholder management
practicable Evan and Freeman propose a stakeholder board of directors comprising
representatives of the five stakeholder groups, plus a director witch would be elected
unanimously by the others and be vested
with the duty of caring for all stakeholders.
One year later in ‘doctrine of fair contracts” Freeman develops how contracts can
be made between the corporation and stakeholders. In the model stakeholder
representatives are assumed to be rationally self interested and to understand the
implications of different corporate designs for success or failure. In this condition
parties should choose the six following rules (‘Doctrine of fair contracts’ Freeman
1994):
•
The principle of entry and exit: The contract has to define process that clarify
entry, exit and renegotiation conditions for stakeholders to decide when an
agreement can be fulfilled
•
The principle of governance: Procedures for changing the rules of the game
must be agreed by unanimous consent. This would lead to stakeholder
governing board.
•
The principle of externalities: If contract between A and B involve C, C has to
be invited as a party of the contract.
•
The principle of contracting costs: Each parties must share in the cost of
contracting
•
The agency principle: Any party must serve the interests of all stakeholders
Stakeholder Theory of the MNC
•
The principle of limited immortality: The corporation should be managed as if it
can continue to serve the interests of stakeholders through time.
These principles represent an ideal to guide actual stakeholders in devising a
corporate constitution or charter. It permits to build strategy on ethics asking “what
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