Stakeholder Theory of the MNC

 

Stakeholder Theory of the MNC

1. Introduction........................................................................................3

2. Basic idea of the Stakeholder Theory and Definition ....................3

2.1. The stakeholder concept – popular and trendy..........................................................................4

2.2. Different definitions of Stakeholder....................................................5

2.3. What is a Stakeholder?..........................................................6

2.4. Who are Stakeholders?...........................................................................6

2.5. History of the Stakeholder Theory................................................................................................7

3. Contribution of Freeman to the stakeholder literature ..................9

3.1. Freeman Strategic Management ...................................................................................................9

3.2. Freeman’s essential book: A stakeholder approach......................... 10

4. Normative, instrumental, and descriptive stakeholder theory....13

4.1. Introduction........................................................................................................ 13

4.2. Normative theory......................................................................................... 14

4.2.1. Objective................................................................................................ 14

4.2.2. The action of a company should be ‘ethic’........................................................................... 15

4.2.3. Freeman’s normative theory................................................................... 15

4.3 Analytic theory............................................................................................. 17

4.3.1. Introduction.................................................................................... 17

4.3.2. Strategic management: Freeman (1984) and Savage et Al. (1991)................................... 18

4.3.3. Stakeholder identification: Mitchell, Agle and Wood (1997)................................................ 21

4.3.4. Friedman and Miles (2002)................................................................................................... 22

5. The stakeholders: from theory to practice....................................24

5.1. The Corporate Social Responsibility theory............................................................................ 24

5.2. The three main current of the CSR............................................................................................ 26

5.3. Te different CSR strategies .................................................................. 28

5.4. The Limits of the theory and its application ............................... 30

6. Conclusion .......................................................................................33  
 

 

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