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Stakeholders are constituencies who are affected, voluntarily or involuntarily, by the actions taken by an organization, such as a corporation. Commonly cited examples of corporate stakeholders are employees, financial intermediaries, shareholders, customers, and suppliers, all of whom are affected by, respectively, a firm’s compensation and hiring decisions, investment choices, dividend and share repurchase policies, product-related issues, and material purchases. The term, however, is often more broadly applied to include local, state, and federal governments because firms pay taxes and use public resources; it can also be extended to include the local community because firms interact with the natural environment and engage in philanthropic activities; and furthermore, because many firms operate on an international scale, it may even include the global community.
Stakeholders may raise issues of concern with corporations and suggest actions that corporations should take. For example, if shareholders are concerned that a corporation is holding too much money, they may argue for increased dividends. Constituents from a local community concerned with air quality may urge a corporation to invest in cleaner technologies. Even though they are not legally required to do so, corporations may consider and implement stakeholders’ ideas because they provide a host of resources to corporations. Lenders and shareholders make financial resources available, employees and suppliers provide physical inputs, governments supply regulatory oversight, and citizens contribute to the social environment in which operations occur. In short, a corporation cannot exist without the support of a diverse set of stakeholders.
A corporation must consider the principles of stakeholder theory or stakeholder management when it decides which stakeholders to acknowledge and how to best respond to their often incompatible requests. The notion of stakeholders originated in the mid-1960s, but it was in the 1980s that, as evidenced by Edward Freeman’s 1984 book Strategic Management, the idea of stakeholder management began to gain ground in the field of economics. Stakeholder theory represents a significant departure from the older principal-agent view of the firm, which effectively recognizes shareholders as the only legitimate constituency by nature of their ownership position. Stakeholder theory, in contrast, understands the corporation in law and in practice as more than an extension of shareholders with narrow, well-defined goals. Rather, the corporation is viewed as its own entity with its own rights and obligations. As the trustees of the firm, usually its board of directors, are responsible for the firm, they can and should serve other constituencies for the benefit of the corporation. Furthermore, in practice, the distinction between shareholders’ and other stakeholders’ concerns may not be so clearly defined: Shareholders themselves are often employees, consumers, and residents in the communities where corporations operate. Consequently, as James Hawley and Andrew Williams argue in their 2000 study The Rise of Fiduciary Capitalism, shareholders may not be best served by the maximization of the share price alone and may be more concerned with a firm’s employment opportunities, quality of goods, and impact on the environment.
It is not clear which stakeholders will most benefit and what changes in corporate activities are likely to result when corporations acknowledge them. The outcomes could range from managerial opportunism, as Michael Jensen notes in his 2000 article “Value Maximization, Stakeholder Theory, and the Corporation Objective Function,” to economic democracy, as Paul Hirst suggests in his 1997 essay “From the Economic to the Political,” and anything in between these extremes. In any case, the concept of stakeholders greatly broadens the theorization of the corporation in terms of its governance, objectives, and conditions of existence.
Bibliography:
- Freeman, R. Edward. 1984. Strategic Management: A Stakeholder Approach. Boston: Pitman.
- Hawley, James P., and Andrew T. Williams. 2000. The Rise of Fiduciary Capitalism: How Institutional Investors Can Make Corporate America More Democratic. Philadelphia: University of Pennsylvania Press.
- Hirst, Paul. 1997. From the Economic to the Political. In Stakeholder Capitalism, eds. Gavin Kelly, Dominic Kelly, and Andrew Gamble, 63–71. Houndmills, Basingstoke, U.K.: Macmillan, and New York: St. Martins.
- Jensen, Michael C. 2002. Value Maximization, Stakeholder Theory, and the Corporate Objective Function. Business Ethics Quarterly 12 (2): 235–256.
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