Corporate Social Responsibility The Stakeholder Theory Vs. The Shareholder Theory

The question of whether corporations have a social responsibility has occupied to a large extent debates on corporate management. While there are those who may argue in favor or against this notion, it is clearly evident that the matter is indeed of a complex nature. For who is to say that company owners are obligated to serve the society or even claim otherwise. However, for this discussion, the paper will focus on the stakeholder and shareholder theories of corporate management in a bid to evaluate the extent of corporate social responsibility. From a general perspective it is logical to claim that the stakeholder theory attracts the prospects of corporate social responsibility and provides a sound management framework as opposed to the shareholder theory.

The shareholder theory posits a model which puts shareholders at the center of corporations (Friedman, 57). This model generally places the interests of shareholders at the forefront with disregard to stakeholders within the organizations. This factor of stakeholder insignificance is often to the extent that change within the organization can only be implemented if it benefits the shareholders. Any cries from stakeholders are only passively considered and not included in the model for change.  As such, managers direct their efforts towards ensuring that shareholders remain pleased and satisfied with their investment returns. In practicality any decisions made in regard to the organization must be of utmost benefit to the shareholder.

Furthermore as owners of the organization, shareholders are entitled to any profits accrued and this also gives them the mandate to decide on the forms of expenditure. It is in this sense that the shareholder theory implies the inexistence of corporate social responsibility. Mostly because shareholders are not willing to make social investments from their profits and are instead preoccupied with increased profit making. This theory further authenticates the profit entitlement of shareholders using the contractual agreements among executive stakeholders. This contract sees to the agreements for remuneration and this creates more authority for shareholders who expect the executive stakeholders to comply with their demands.

The theory of shareholders is not compliant with the law. This emphasis on shareholders interests defies corporate law which requires the claims and concerns of all stakeholders to be considered. Moreover, it has become clear that companies must take into consideration stakeholders interests as the law requires them to provide them with necessary information in regard to the products. Labor laws have also been influential in delegating corporations to account for stakeholders interests. This model is further from how real businesses are run and it can only be supported by normative views which depict ideal businesses (Friedman, 59).

On the other hand, the stakeholder theory of corporate management focuses on the interests of stakeholders within a business entity. With respect to this theory shareholders are considered as part of the stakeholders and both groups are mandated to demand for any action from the executive management. This theory emphasizes that both factions have vested stakes in the organization. For shareholders, they have their stakes in form of stocks or even bonds. Other stakeholders who may include customers, suppliers, employees and the local community possess various interests in the company. Both customers and suppliers accrue benefits from the exchange of goods and services while employees are entitled to wages which support their livelihoods. Employees also gain other benefits like retirement packages, security and insurance benefits among others. Finally, there is the aspect of the community which accommodates companies within their localities. These communities benefit from economic and social involvements of the organization. In comparison with executive managers in the shareholder theory, executives in the stakeholder theory work towards to satisfaction of the overall organization. Since all stakeholders interests are inherently linked, executives ensure that organizational endeavors aim at the positive benefits of all.

The stakeholder theory possesses normative core elements such as the doctrine of fair contracts. Organizations are meant to be governed under the guidelines of various principles like those of governance, externalities, contracting costs, limited immortality, entry and exist and the agency principle. These principles also work with respect to stakeholders interests within and outside the organization.

It is accurate to claim that the stakeholder theory promotes corporate social responsibility. In addition, it is a more realistic approach for corporate management. This theory is built under the recognition constraints of businesses as humanity and societal constructs. Within organizations stakeholders are treated with respect to their overall roles as human beings as opposed to being a means to an end. This is further illustrated in the ethical guidelines incorporated in the relationships which exist amongst stakeholders. Executives in their agenda to further the objectives of all stakeholders are expected to recognize any ethical implications which may end up harming the stakeholders. Therefore, this theory separates individual selfish interests from the overall satisfaction of stakeholders. A view which favors the dominance of a particular controlling group over others like in the shareholder theory does not befit the agenda for common interests. In essence, the arguments for the shareholder theory are not realistic in the modern world. Such views claim that the goodness of shareholder models emanates from their abilities to accrue better consequences for the entire organization. However, this view fails to incorporate the self interest component which drives most shareholders at the helm of organizations (Freeman 63). The previously experienced financial crisis is testament to how shareholders can make decisions geared towards their own profit making endeavors without considering the consequences to other stakeholders. Credit banks at this time gave consumers loans even when they knew that the consumers were in no capacity to repay. Despite this, they still expected to get the loans back together with interest. Eventually, most of these banks ended up in bankruptcy suits and closures. This also indicates how the shareholder theory increases the vulnerability for the collapse of corporations.

Another factor which advances the stakeholder theory is its consideration for individual and group rights of all the stakeholders. It is vital to create equality within organizations especially in regard to property rights. Giving exclusive property rights to shareholders undermines the rights of other stakeholders who may be affected by these rights. Furthermore, such a mindset is bound to instigate and aggravate conflicts within the organizations. Alternatively, it is better to serve all stakeholders under the umbrella of equality where conflict resolution and management is best understood and implemented.

Character is a virtue often embraced by the stakeholder theory. Corporations are run on the basis of building businesses which are bound by such virtues like efficiency, respect, fairness and integrity (Freeman 66). These virtues are inexistent in the shareholder theory which aims at satisfying personal interests. Moreover, these virtues allow stakeholders to decide on what benefits them the most. This ideology promotes corporate social responsibilities as the management is expected to ensure that all stakeholders are fairly treated. It is also in this light that corporations extend charity to the community by building facilities like schools, hospitals and others which enhance the wellbeing of their employees and consumers who are also part of this community.

A pragmatic approach is depicted in the stakeholder theory which views the general desire for all human beings to live better and fruitful lives together. There is the emphasis put on the well being of the society, an element which has been marked by the emergence of business concepts over the years. It is only when we can have fairness, equality, character and other societal virtues that stakeholders are able to develop valuable concepts. Without collaboration, corporations are rid of the very principles meant to govern fair governance and equity. It is also in line to support the stakeholder theory based on the fact that stakeholder management is in tandem with favorable performance. This is mainly credited to the inclusion of all stakeholders within the corporations managerial framework which motivates most of them into better performance. Usually the outcome is increased product output which generates profits and benefits for all stakeholders.

The failure for the shareholder theory to integrate ethical considerations it its framework robs it the very essence of effective business relations. Without respect for stakeholders, ethical standards are compromised when executives embark on strategies which favor the interests of shareholders. Indeed an aim to increase the value of profits for the shareholders may include the use of unethical means such as disloyal behaviors, breach of contracts, discriminatory practices and disrespect. These unethical standards also make the shareholder theory morally untenable and undermine the values in which most societies are founded on. When community members become aware of the negative implications of having such organizations around, they are bound to withdraw their support. For instance, in a situation where workers of a manufacturing industry are engaged in the sale of drugs to young adults in the neighborhood, community members will lobby against the industrys operations. It is possible for shareholders to fault the implementation of any measures to alleviate the situation.  However, under a stakeholders theory perception, the industrys management would be interested in doing what is best for the community and other stakeholders. As such it becomes imperative to provide funds for the rehabilitative costs of the communitys youths and to do the same for the employees together with incentives for preventing the repetition of such negative trends.

Friedman (51) argues that the only social responsibility of businesses is to create more profits. This perspective hits a familiar mark with the shareholder theory whose sole target is the increment of profits. Under such circumstances, executive mangers are given the responsibility of advancing the corporation owners needs which makes it impossible for other stakeholders to take up social responsibilities. Moreover, this claim further limits the plausible incorporation of the shareholder theory into corporate management because most institutions want to be grounded on societal and moral values which do not permit such vices as greed and corruption.

In spite of the argument in favor of the stakeholder theory, it is important to point out various limitations which emerge in regard to implementation and potential capacities. There is likelihood for the emergence of individualized interests within the stakeholder framework. For instance, managers may develop vested interests and in a bid to meet them comply with shareholders demands for favoritism. Furthermore, instances where employees use unions for the demand of better wages may directly implicate factors of profitability. Another illustration involves cases where organizations seek to expand their premises at the expense of the degradation of the environment. Having managers responsible for all stakeholders is also likely to cause the development of multiple principles. Problems of accountability emanate from this and there may end up being double standard measures enacted in the corporation. If managers choose to support employees agenda for wage increment, they may get applauded by the unions and other stakeholders but get punished by the shareholders.

The problem of disorganization is also prominent among stakeholder based corporations. It can be impossible for the many groups to achieve order and create effective management systems which are able to avert conflicts within the organization. Without the inclusion of all stakeholders in the board of directors it can be indeed hefty to implement a system which is meant to represent the interests of all stakeholders. A deeper organizational problem can also emerge especially when stakeholders are unable to collectively select a representative. However, the role of supporters of this theory is to ensure that there are no divisions formed on the basis of poorly and efficiently managed organizations.

The stakeholder theory is justified in sidelining the shareholders interests because within the theorys guidelines both shareholders and stakeholders must be treated with equal measures. While this may emerge as beneficial to other stakeholders there are reasons behind the prioritizing of shareholders. The argument should not be based on the fact that share holders are more valuable or their interests more important but on factual evidence which supports this claim.  Shareholders may be the principle owners of the company and this allows them to be treated as such. However, it does not mean that they should be in control of the organization. Other stakeholders can perform this duty just as well.

This discussion has argued in favor of the stakeholder theory. This managerial framework constitutes structures, values, attitudes and practices which are aimed at enabling the wellbeing of all stakeholders. This theory distances itself from the basic view that organizations are inclusive of stakeholders but advances its managerial implications. The normative arguments of ethical considerations, fairness and equity and social responsibilities offer substantial justification for this theory. It is also important to note that shareholders are also regarded as equal stakeholders within this framework leaving no room for unfairness. Despite that the shareholder theory argues the possibility of profit enhancement for the overall organization it does not account for the motivational element depicted the stakeholder theory. The stakeholder theory is often associated with high performance which is attributed to increased product output and indirectly to the collaborative measure of motivation.

The alternative to the stakeholder theory is highly ethical and also morally tenable within todays society. In essence, property rights are central to this theory just as much as it is to the shareholder theory. It is these rights that are crucial to the furthering for the search of equality and fairness fostered by the stakeholder theory. A fundamentally well structured organization based on the stakeholder theory has potential for overall success. It is also right to affirm the fact that this theory presents a sound framework for the modern corporation.


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