Welcome to this video. In this video we will discuss another theory of corporate governance that holds a broader view of a corporation and the role of boards of directors. The theory discussed in this video is the stakeholder theoretical perspective of corporate governance.
In this video, we will identify individuals, groups, and entities that are stakeholders to a corporation. We will also discuss the types of stakeholder theoretical models and how these models are used to understand the role of the board of directors within a corporation. So without wasting more time, let's begin this video properly.
So, what is the stakeholder theoretical perspective in corporate governance? Stakeholder theory views a corporation through a wider lens. It goes beyond the focus of theories such as agency and stewardship theory that overemphasizes the duty of care towards shareholders.
Stakeholder theory rather focuses on the duty of care towards every stakeholders to a corporation. In other words, stakeholder theory is used to argue to whom an organization or a corporation is responsible. To understand the arguments of stakeholder theory, it is imperative to define what we mean or who we refer to as stakeholders in this context.
In this context, we define stakeholders as those who have a legitimate stake in a corporation and you already know to whom we refer, these are the shareholders. We also define stakeholders as those who affect and can be affected by a corporation, formally or informally. In other words, nearly everyone is a stakeholder to a corporation. Considering these definitions of who stakeholders to a corporation are, a problem emerges as to how to manage these inexhaustible list of stakeholders. For this reason, stakeholder theorists have narrowed down corporate stakeholders to primary stakeholders.
Primary stakeholders are those indispensable to an organization and those to which an organization owes its continued existence. Apart from the shareholders who have a legitimate stake, these include the management, employees, customers, suppliers, community residents, government, and so on. Having identified who corporate stakeholders are, Stakeholder theorists argue that the corporation, its management, and the board of directors must maintain good relations with all corporate stakeholders, not just to shareholders who have a legitimate stake in the corporation.
It is also argued that this approach to stakeholder management would be useful in achieving and sustaining organizational performance. This justification for a stakeholder approach to corporate governance is explained further using three stakeholder models, namely Normative Stakeholder Theory, Descriptive Stakeholder Theory, and Instrumental Stakeholder Theory. Now let's consider these stakeholder models one after the other.
Normative Stakeholder Theory. When balancing and catering to the legitimate demands and interests of corporate stakeholders, the normative approach argues that this leads to intrinsic benefits to a corporation. The normative stakeholder approach is also used to highlight moral responsibility of a corporation to its stakeholders and to debate the legitimacy of various stakeholder groups. Descriptive stakeholder theory. This stream or model of stakeholder theory is used to examine the stakes, power, and salience of different stakeholder groups.
As stakeholder groups have different interests, their impacts on the corporation are also differentiated to a lesser or a greater degree. Finally, the Instrumental Stakeholder Theory. This is probably the more prominent stakeholder model or perspective.
The Instrumental Stakeholder Theory argues that the catering for the demands and interests of different corporate stakeholders groups will lead to enhanced corporate performance. In other words, when a corporation attends to the various demands of stakeholders, it leads to favorable corporate reputation, a corporation's access to resources controlled by stakeholders. and this eventually leads to an enhanced competitive advantage.
How these models of stakeholder theory are applied to corporate governance has led to recommendations on the composition of the corporate board of directors. The way the board of directors is composed will allow the board to carry out their roles in tending to the interests of different stakeholder groups effectively. Regarding the composition of the board, stakeholder studies in corporate governance recommend allowing stakeholder representation on the corporate board.
Stakeholders'representation on corporate boards has been classified as one of the service roles of the Board of Directors. With stakeholder representation on the corporate board, this is argued to facilitate the co-opting of external resources, establishing business and non-business affiliations, and enhancing the organization's reputation. Also, regarding the role of the board of directors according to stakeholder theorists, their role is to advocate and ensure corporate social responsibility and tend to the interests of a broader set of stakeholders, including the employees and society.
Now, let's stop here regarding this theory and summarize what we have learned so far about stakeholder theory. First we define to whom we refer using the term, stakeholders. Stakeholders are those who have a legitimate stake in a corporation and those who affect and can affect an organization achieving its corporate goals. We then identified the three streams of research or models of stakeholder theory.
These are normative stakeholder theory, which highlights the moral responsibility a corporation, its management, and the board of directors have towards their corporate stakeholders. Descriptive stakeholder theory which refers to how the corporation, its management, and its board of directors balance the interests of stakeholders while taking into consideration their impact on the corporation. Lastly, Instrumental Stakeholder Theory which focuses on how catering for stakeholders'interests leads to enhanced organizational or financial performance.
We then finally discussed the recommendation of stakeholder theorists regarding the composition of the board of directors. The recommendation is to have stakeholder representation on the corporate board to facilitate performance and ensure that the interests of stakeholders are catered for. That will be all for this video.
Once again, it is lovely to have you with us. Thank you for watching and see you in the next video.