Stakeholder Theory in Corporate Governance

Overview

• Stakeholder Theory: Expands the view of a corporation beyond traditional theories like agency and stewardship, which focus primarily on shareholders.
• Key Question: To whom is a corporation responsible? Stakeholder theory argues for a responsibility to all stakeholders, not just shareholders.

Definition of Stakeholders

• Stakeholders: Individuals, groups, or entities with a legitimate stake in a corporation.
  • Includes those who affect or can be affected by the corporation.
  • Stakeholders are not limited to shareholders but include a broader range of groups.
• Primary Stakeholders: Essential for an organization's existence, including:
  • Management
  • Employees
  • Customers
  • Suppliers
  • Community residents
  • Government

Importance of Stakeholder Relations

• Argument: Corporations should maintain good relations with all stakeholders to achieve and sustain organizational performance.

Stakeholder Theoretical Models

1. Normative Stakeholder Theory
   • Focuses on moral responsibility to stakeholders.
   • Balancing stakeholder interests leads to intrinsic benefits for the corporation.
2. Descriptive Stakeholder Theory
   • Examines the stakes, power, and salience of different stakeholder groups.
   • Stakeholder impacts on the corporation vary.
3. Instrumental Stakeholder Theory
   • Catering to stakeholder demands enhances corporate performance.
   • Leads to improved reputation, access to resources, and competitive advantage.

Application to Corporate Governance

• Board of Directors:
  • Composition should allow for effective representation of stakeholder interests.
  • Recommendations for stakeholder representation on corporate boards:
    • Facilitates co-opting of external resources.
    • Establishes business/non-business affiliations.
    • Enhances organizational reputation.
• Roles of the Board:
  • Advocate for corporate social responsibility.
  • Tend to the interests of a broader set of stakeholders, including employees and society.

Summary

• Stakeholders: Defined as those with a legitimate stake and those impacting corporate goals.
• Three Stakeholder Models:
  • Normative: Moral responsibility.
  • Descriptive: Balancing interests and impacts.
  • Instrumental: Enhancing performance through stakeholder care.
• Board Composition: Emphasizes stakeholder representation to cater to stakeholder interests.