Freeman’s Stakeholder Theory

It is a theory of organizational management and business ethics that addresses morals and
values involved in managing an organization. Edward Freeman’s Stakeholder Theory holds that
a company’s stakeholders include just about anyone affected by the company and its workings.
That view is in opposition to the long-held Shareholder Theory proposed by economist Milton
Friedman that in capitalism, the only stakeholders a company should care about are its
shareholders - and thus, its bottom line. Friedman’s view is that companies are compelled to
make a profit, to satisfy their shareholders, and to continue positive growth.
By contrast, Dr. Freeman suggests that a company’s stakeholders are "those groups without
whose support the organization would cease to exist." These groups would include customers,
employees, suppliers, political action groups, environmental groups, local communities, the
media, financial institutions, governmental groups, and more. This view paints the corporate
environment as an ecosystem of related groups, all of whom need to be considered and
satisfied to keep the company healthy and successful in the long term.
The stakeholder theory of business management questions the conventional view of a
corporation’s purpose, methods and goals. Corporate boards and executives have long
regarded maximizing profits and boosting stock price as their primary objectives. They
consider creating value for the corporation’s shareholders as their core legal and ethical duty. In
contrast, a business that takes into account all of its stakeholders, not just its shareholders,
focuses its efforts on defining the values of the company and strengthening the business and
societal relationships that will ensure the company’s long-term success.
It was elaborated by R. Edward Freeman in the California Management Review in 1983. He
followed this article with a book ‘Strategic Management: A Stakeholder Approach’. This book
identifies and models the groups which are stakeholders of a corporation and describes and
recommends methods by which management can give due regard to the interests of those
groups. Stakeholder theory argues that employees, customers, suppliers, financiers,
communities, governmental bodies, political groups, trade associations, and trade unions are as
important as shareholders. Even competitors are sometimes counted as stakeholders – their
status being derived from their capacity to affect the firm and its stakeholders.
The core concept of the stakeholder theory is that a corporation enables people to come
together to create economic value. The voluntary participation and cooperation of different
people and organizations allow all participants to improve their own circumstances. To achieve
success, stakeholder theory stresses that a corporation’s leaders must identify what factors and
values bring all of the company’s principal stakeholders together. They can then define the
corporation’s purpose, decide how they want to conduct business and develop the types of
relationships they need with different stakeholders. By fostering a shared sense of value that
the business creates, management can persuade stakeholders to help the company achieve its
goals.
Edward Freeman recognized it as an important element of Corporate Social Responsibility
(CSR), a concept which recognizes the responsibilities of corporations in the world today,
whether they be economic, legal, ethical or even philanthropic. Nowadays, some of the world’s
largest corporations claim to have CSR at the center of their corporate strategy. Whilst there
are many genuine cases of companies with a “conscience”, many others exploit CSR as a good
means of PR to improve their image and reputation but ultimately fail to put their words into
action. Recent controversies surrounding the tax affairs of well-known companies such as
Starbucks, Google and Facebook in the UK have brought stakeholder theory into the spotlight.
Whilst the measures adopted by the companies are legal, they are widely seen as unethical as
they are utilizing loopholes in the tax system to pay less tax.
Traditionally, the law has not given a voice to non-shareholder stakeholders in corporations.
For instance, in comparison with shareholders, these stakeholders do not have rights to trigger
actions against directors where they have breached their duties; also, they do not have voting
rights in companies. Because of that, the stakeholders have little influence in corporation even
they are affected by the downfalls of corporations. Standing on the moral and ethical ground,
the traditional attitude of stakeholders is unfair, because like shareholders, the stakeholders
contribute to the success of corporations too, and that their interests, therefore, should be
considered. Lastly, the traditional unfairness notion has been changed by the stakeholder
theory as it addresses the perceived injustices. The stakeholder theory is a doctrine that
ensures companies as organizations are accountable to their stakeholders, and balance
divergent interests between stakeholders.