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4.5. The classification of stakeholders

There are two main ways to classify stakeholders: Internal v external

Internal stakeholders are those included within the organisation such as employees or managers whereas external stakeholders are such groups as suppliers or customers who are not generally considered to be a part of the organisation. Although this classification is fine it becomes increasingly difficult in a modern organisation to distinguish the two types when employees might be subcontractors and suppliers might be another organisation within the same group.

Voluntary v involuntary

Voluntary stakeholders can choose whether or not to be a stakeholder to an organisation whereas involuntary stakeholders cannot. For example a supplier can choose to not deal with the organisation and therefore is a voluntary stakeholder. The local society or the environment are not able to make this choice and must therefore be considered to be involuntary stakeholders.

4.6. Stakeholder Theory

The argument for Stakeholder Theory is based upon the assertion that maximising wealth for shareholders fails to maximise wealth for society and all its members and that only a concern with managing all stakeholder interests achieves this.

Stakeholder theory states that all stakeholders must be considered in the decision making process of the organisation. The theory states that there are 3 reasons why this should happen:

It is the morally and ethically correct way to behave Doing so actually also benefits the shareholders

o It reflects what actually happens in an organisation

As far as this third point is concerned then this is supported by research from Cooper at al (2001) into large firms. This research shows that the majority of firms are concerned with a range of stakeholders in their decision making process:

Concerned with

Very concerned with

Stakeholder

%

%

Customers

89

57

Employees

89

51

Shareholders

100

78

Suppliers

70

3

The environment

62

5

Society

73

3

Fig 4.2 Stakeholder inclusion in decision making

According to this theory, stakeholder management, or corporate social responsibility, is not an end in itself but is simply seen as a means for improving economic performance. This assumption is often implicit although it is clearly stated by Atkinson, Waterhouse and Wells (1997) and is actually inconsistent with the ethical reasons for adopting stakeholder theory. Instead of stakeholder management improving economic, or financial, performance therefore it is argued that a broader aim of corporate social performance should be used (Jones and Wicks, 1999).

4.6.1. Details of Stakeholder Theory

A fundamental aspect of stakeholder theory, in any of its aspects, is that it attempts to identify numerous different factions within a society to whom an organisation may have some responsibility. It has been criticized for failing to identify these factions (Argenti, 1993) although some attempts have been made. Indeed Sternberg (1997) suggests that the second of Freeman's (1984) definitions of stakeholder, which is now the more commonly used, has increased the number of stakeholders to be considered by management adopting a stakeholder approach to; in fact this definition includes virtually everything whether alive or not.

However attempts have been made by stakeholder theorists to provide frameworks by which the relevant stakeholders of an organisation can be identified. Clarkson (1995) suggests that a stakeholder is relevant if they have invested something in the organisation and are therefore subject to some risk from that organisation's activities. He separated these into two groups: the voluntary stakeholders, who choose to deal with an organisation, and the involuntary stakeholders, who do not choose to enter into - nor can they withdraw from - a relationship with the organisation. Mitchell, Agle and Wood (1997) develop a framework for identifying and ranking stakeholders in terms of their power, legitimacy and urgency. If a stakeholder is powerful, legitimate and urgent then its needs will require immediate attention and given primacy.

Irrespective of which model is used, it is not controversial to suggest that there are some generic stakeholder groups that will be relevant to all organisations. Clarkson (1995) suggests that the voluntary stakeholders include shareholders, investors, employees, managers, customers and suppliers and they will require some value added, or otherwise they can withdraw their stake and choose not to invest in that organisation again. It is argued that involuntary stakeholders such as individuals, communities, ecological environments, or future generations do not choose to deal with the organisation and therefore may need some form of protection maybe through government legislation or regulation. Other more specific interest groups may be relevant for certain industries due to the nature of the industry or the specific activities of the organisation.

For example in the UK utility industries have been regulated by a regulator since privatization and thus the regulator is a stakeholder of these organisations. Similarly certain industries are more environmentally, politically or socially sensitive than others and therefore attract more attention from these stakeholder groups, and again the water or nuclear industries provide examples here.

 
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