Stakeholder Theory

Corporate Social Responsibility is closely linked to the term “stakeholders”, and almost each definition of CSR stresses how important it is for companies to satisfy their stakeholders’ needs and wants. Stakeholders could be defined as people or organizations who express a relevant interest or have a stake in the business. They affect or are affected by business activities and outcomes (R. E. Freeman, 1984). Moreover, they serve as a certain inducement for companies to implement CSR activities as the success of the company can be measured on its relationship with stakeholders (R. Freeman & Phillips, 2002).

Initially, the single most important stakeholders of the company were shareholders.

However, this approach has been changing in recent times, and new groups of stakeholders has been taking into account acquiring greater significance. The new vision assumes that not

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only financial aspect should be considered when company is making the decisions, but also the interests of all groups of the stakeholders of this organization (Phillips, 1997).

Eventually, it will improve the company’s image and increase the value of the business, thereby contributing to the interests of the shareholders (Davis, 1973).

Each of the group of stakeholders has its particular impact on the business. That is why it is important for the company to determine for itself to whom it is responsible and who are its major stakeholders, namely in order to correctly understand how to interact with them and meet their expectations. There are many ways of categorizing stakeholders. One of them that will be used in this study is dividing stakeholders into primary and secondary ones.

Individuals or groups that are directly interested in business are known as primary stakeholders. The decisions adopted by a company have a direct impact on their primary stakeholders. They are an integral part of the company’s existence without which it cannot continue operating in future (Clarkson, 1995). Generally, primary stakeholders have a financial or/and non-financial connection with the business. Therefore, because of such great influence and considerable role of primary stakeholders in sustainable functioning of business, it is important for organizations to effectively identify the demands of their primary stakeholders in order to implement appropriate actions. Examples of primary stakeholders are employees, customers, suppliers, shareholders, investors. Another group of stakeholders is known as secondary stakeholders – people or organizations that are indirectly related to the business. Community groups, trade unions, state or local government bodies, competitors, media groups, pressure groups, regulators are some examples of secondary stakeholders. They do not have a direct stake in the business, and are not directly affected by its decisions. Furthermore, company’s survival does not depend on this type of stakeholders, and they are not as significant for business as the primary ones. But regardless of this fact, they have a particular influence on the business and may even affect its relationships with primary stakeholders either positively or negatively. In comparison with primary stakeholders, secondary stakeholders have a broad publicity that could be reached through the media, and influence a company’s reputation (Clarkson, 1995). Accordingly, influencing the company’s perception by the primary group of stakeholders. Whereas some concerns of primary stakeholders are usually solved within the organization at the internal level, and do not receive wide publicity. Thereby the role of the secondary stakeholders should not be underestimated, and their interests should not be disregarded. On the contrary, businesses need to make sure that the needs and wants of their major secondary stakeholders are kept satisfied. Moreover, because of the fact that primary stakeholders have close

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connection with the business makes it easy to clearly identify them. Whereas secondary stakeholders are not always well recognizable as long as they call attention and receive publicity for the need to express their view on certain actions made by the company. So as any concerns of secondary stakeholders are immediately become public, it is necessary to solve them at an early stage. Also, it is significant to understand that primary and secondary stakeholders may vary greatly depending on the nature of business. In this way, some representatives of primary stakeholders in one industry could belong to a secondary group of stakeholders in another industry.

Stakeholder Theory is based on the fact that there is a close relationship between business and its stakeholders. Furthermore, it states that there are different groups of stakeholders, and organizations should take into consideration interests of all of them and make efforts to balance them as they could be contradictory (Hill & Jones, 1992). So the point is that companies are responsible not only for their shareholders, but also for their customers, suppliers, employees, local communities, government bodies and all other available groups of stakeholders as they as well have a legitimate interest in business.

Initially and obviously, shareholders have a legitimate interest because they invest their money in the company by buying shares (and thus receive ownership interest in the company). In this way, business have a certain obligation towards its shareholders and it should accommodate their shareholders’ interests which consists in maximizing the value of the share. But, according to stakeholder theory, an organization should focus not only on their shareholders’ demands, but also on other groups needs and wants as they also have a vested interest in business.

 Customers: as stated above, customers are one of the primary stakeholders of the company, and they have a stake in business. They buy products of the company and thereby generate revenue for this company. In this way, customers have a legitimate interest, and business should address their demands. Basically, customers want business to provide them with quality and safe products at reasonable prices, and in addition, they also want to be aware of any information related to these products including negative impacts that they may contain.

 Employees: they are directly involved in business operations of the company as they are working for the company and adding value to it. So, in return, employees want to have a job security, fair wages and safe working conditions. Businesses need to

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serve the needs and wants of their employees as they also have a legitimate interest in the company. Therefore, employees are as well should be involved in business decision making process that is related to impacts it may have on their stakes. In addition, it is important to include implementing of ethical behavior towards workers.

 Suppliers: they provide business with necessary resources for its functioning, and act as a source of goods and services. Companies to which suppliers are providing their materials are considered as their clients. So, suppliers rely on their clients because by this way they are generating profit. Suppliers are closely connected with the business, and they can influence its ability to successful operation in the market.

Given the fact that suppliers are vital for business, companies in their turns should address their concerns about safety of their business and maintaining long-term business cooperation.

 Local communities: they also have a legitimate interest in business as they are providing companies with the environment in which they are operating. It as well involves jobs that the local community ensures for the company based on which it builds economic activity. In return, local communities can benefit from the business activities of the company as they are creating wealth. But not all actions of business are related to positive outcomes. Some of the activities can negatively affect local communities. Thus, companies should take into account the demands of local communities that lie in protection of local environment and involvement in community life including sponsorships and donations.

 Government bodies: they create a legal framework for companies in which they are operating. Government bodies have a stake in collection of taxes and wealth creation by business. So, companies should be in compliance with regulations provided by government bodies.

As it can be concluded from the above mentioned points, business should strive not only to meet the interests of their shareholders, but also to serve the demands of other groups of stakeholders as they as well have a legitimate interest in business. Moreover, it can be inferred that there are a certain number of company’s stakeholders with their own concerns

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that should be met. However, the interests of stakeholders could be corresponded, not connected or in conflict with each other. And, the companies are accountable to balance these interests (Taran & Betts, 2015).

According to Donaldson and Preston (1995), there is a division to descriptive, instrumental and normative stakeholder theory (Donaldson & Preston, 1995). Each of the approaches represent a stakeholder theory from different perspectives.

1. Descriptive approach aimed at providing a better understanding of certain characteristics of the organization through the explaining of how the stakeholders, managers and corporations are interacting, and what are the relationships between them. Descriptive stakeholder theory is also used to describe the nature of the business and the way it works, what managers think about managing and how the companies are actually managed.

2. Instrumental approach states that there is a direct linkage between compliance with stakeholders’ demands and business performance. It describes a correlation between satisfying stakeholders’ needs and achieving main business objectives including profitability and growth. And on the contrary, ignoring companies’ stakeholders’

interests will lead to a greater risk for poor business performance. That is why the relationship with stakeholders are seen as instrumental: if a company wants to be successful and increase its profits, it needs to adopt practices aimed at accommodating the concerns of its stakeholders.

3. Normative approach assumes that stakeholders’ interests should be served not because it will lead to some positive outcomes for business, but because of the fact that stakeholders are crucial for business. They have a stake in business and pursue a legitimate interest. Accordingly, companies have an ethical obligation towards its stakeholders to address their concerns. Normative stakeholder theory serves as a guideline for right and moral behavior presented by business agents to stakeholders of the company.

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