Stakeholder can be defined as “any group or individual who can affect or is affected by the achievement of the organization’s objectives”. This theory focuses on wider aspect rather than only focusing on just the shareholder. Stakeholder theory is a fundamental theory about how business works at its best and how it could work. It is concerning on the value creation and trade on how to manage a business effectively.
A consequences of focusing on organization or company’s stakeholder is that the shareholder value itself can be enhanced and improved when a wider stakeholder group-such as employees, provider or credit, customers, suppliers government and the local community is taken into ...view middle of the document...
Second, addressing the stakeholder interest is perceived and proved to directly improve company’s profitability because of the good reputation.
Unlike agency theory in which the agents are working and serving solely for the stakeholders, this theory suggest that managers or agents in organizations have a network of relationships to serve and this include the suppliers, employees and business partners. It was argued that this group of network is important other than owner-manager employee relationship as in agency theory (Freeman, 1999).
Stakeholder theory also argues that managers should make decisions and take into consideration all the interests of the company’s stakeholders. Since there are no specific one interest of the stakeholder groups (such as the profit maximization of the shareholder theory), it is difficult for managements to determine which one of the stakeholder interest that will meet the firm’s objectives and it is hard for them to fulfill all of the interest together in a time.
On the other hand, there still exist conflicting interests of individual groups with each other and this “leaving managers with a theory that makes it impossible for them to make purposeful decisions” (Jensen, 2001). This is because the manager had to meet the needs of different stakeholders’ interests and thus it is hard for them to decide which the best to be taken into considerations. Organization and companies cannot afford to ignore the issues of its stakeholder interests if they want to maximize its shareholder wealth because all stakeholder groups will contribute to the success of the corporation.
The stakeholders of an organization change can changed from time to time due to the decisions taken by management or as a result of external events which are outside its control. It is up to management to find out who their company stakeholders are and what their needs involve. For instances, the directors of global corporations had to consider making ethical decisions which will meet the interest of global stakeholders. Simply moving operations from one part of the globe to another in the interest of shareholder value will not eventually solve the problems of increasing global-stakeholders problems. A board that pays less attention to the interests of its stakeholders cannot maximize its shareholder value.
However in relation to company performance, this theory has made a number of key contributions. For example, by emphasizing on maintaining goodwill with stakeholders, the organization will have a much better business ethics. Stakeholder ideas will develop the corporate value statements as well as the board's role in creating corporate ethics codes, social and environmental reporting...