Stakeholder Theory of the MNC

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