‘Stakeholder Theory’ as an organisational management concept supports good Corporate Governance models.
Discuss whether stakeholder theory assists in determining good corporate governance models for a company.
The recent increase in awareness surrounding Corporate Governance partly arose from what was considered to be some of the ‘darkest days in business’ during the early 2000’s when numerous multi national corporations unexpectedly collapsed. People the world over were greatly effected by these events, which brought into question the role of good business practice in today’s society. Freeman’s (1984) seminal work “Strategic Management: A Stakeholder Approach” describes ‘Stakeholder Theory’ as a structure that supports effective Corporate Governance by way of protecting and looking after not just its shareholders, but all stakeholders that have a vested interest in the company. Central to the discipline of Corporate Governance is the ethical behaviour of corporations (Crane, 2004), ‘Stakeholder Theory’ is the most influential and popular theory to emerge thus far that addresses the role of ethics in business (Stark, 1994). This essay builds on the idea that ethics, business, sustainability, responsibility and the environment are no longer separate (Freeman et al., 2010) in today’s global business world. Critics of Stakeholder theory claim that the shareholder’s ability to gain maximum profits are compromised, however recent research has shown that by creating value in a responsible manner whilst taking all constituents into account actually leads to a more profitable company, whilst encouraging long term outcomes (Donaldson, 1995). Critics also claim that stakeholder’s interests are so varied its impossible to give equal fairness to all. Whilst it is impossible to make every stakeholder’s interest equal, three key areas are assessed to determine the attributes and relevence of each stakeholder within the company’s ethical codes; power, legitimacy and urgency (Wickham, 2009).
The term ‘Stakeholder Theory’ whilst in use from the 1960’s was further developed by Edward Freeman in the 1980’s and has vastly grown in popularity in recent years. Stakeholders may include but are not limited to employees, creditors, consumers, suppliers, whilst also incorporating the extrinsic interest of Governments, competitors, the community, environment and society at large (Buchholtz, 2012). Refer to figure 1.
Fig 1. A firm and its stakeholders (Polonsky Michael, 1995).
The Australian Stock Exchange Corporate Governance Council guidelines (Australian, 2007) identify’s eight key priciples relating to the rules, relationships, systems and processes within and by which authority is exercised and controlled in corporations. By applying the eight principles to monitor and assess risk, optimise performance, create value and provide accountability. ‘Stakeholder Theory’ addresses these principles by concentrating on the moral responsibilities of business organisations in terms of the scope of fiduciary obligations towards their stakeholders. Researchers from Bologna’s University set out to determine whether stakeholder management actions could bring strength to internal legitimacy, thereby creating better working conditions that lead to improved company competitiveness, developed by company employees (Longo, 2008). They began by conducting two surveys on the employees of a leading Italian agricultural company who had been implementing ‘Stakeholder Theory’ for many years and had received numerous awards in recognition for their processes. They were asked a multitude of questions surrounding their roles in the workplace, their feelings toward their colleagues, employers and their work environment in detail. The researchers were then able to define quantitative measures of the system of resources to determine the role of stakeholder policies in the development of the intangible resources (Longo, 2008). Those intangible resources...
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