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- Stakeholder Theory: A Short Introduction and Bibliography
Stakeholder Theory: Short Introduction and Bibliography
The recent rise in corporate social responsibility (CSR) initiatives by firms globally can be traced back to the rise of Stakeholder Theory. Stakeholder theory stands in contrast to agency view of the firm. While CSR initiatives according to agency view of the firm are value reducing, stakeholder theory suggests that it is the fiduciary duty of the firm to take these initiatives.
Stakeholder theory is a theory of organization management and it relies heavily on ethrical and moral principles. The core tenet of Stakeholder Theory is that the company has obligations not just to its shareholders but also to other groups which are affected by its operations (e.g., communities living near a factory or employees working for it). Stakeholder theory argues that company has a moral and ethical duty to maximize outcomes for all.
This goal sets itself apart from the more popular value-maximization mindset in important ways. Value Maximization proposition argues that social welfare is maximized when each firm maximizes its market value. This generates a relatively simple corporate objective function of maximizing shareholder wealth. In contrast, the stakeholder theory by arguing for maximization of interest of all stakeholder (which may often be in opposition to one another) lacks a specific objective function. In stakeholder theory, attention to well-being of non-shareholders is compulsory for more than prudential reasons of wealth maximization of shareholders. In this sense, stakeholder theory is inherently moral rather than mathematical.
However, there have been attempts off-late to merge what have now become two alternative belief systems regarding the theory of the firm – stakeholder orientation and value maximization. Two new concepts that have been gaining ground recently are “Instrumental Stakeholder Theory“ and “Enlightened Value Maximization.”
Instrumental Stakeholder Theory aims to integrate stakeholder concept, economic theory, behavioral science, and ethics. The theory holds that a subset of stakeholder principles (like trust, co-operation) can result in a significant competitive advantage which will help in value enhancement.
Enlightened Value Maximization suggests that firm value cannot be maximized in long-term by ignoring or mistreating an important constituency (customers, employees, suppliers, community environment, etc.). A similar concept is also “Enlightened Stakeholder Theory.” This theory espouses that while good relations with all constituencies are of paramount importance, it should always be done with long-term value maximization in mind. The key concept here is “long-term” as financial markets may not fully understand the implication of firm’s policies over the short term.
Bibliograpgy
- Pigou, Arthur C. “The economics of welfare.” McMillan & Co., London (1920).
- Friedman, M., “The Social Responsibility of Business is to Increase Its Profits,” New York Times Magazine, September 13, 1970, 32.
- Freeman, R.E. 1984. Strategic management: A stakeholder approach. Boston: Pitman.
- Ogden, S. & Watson, R. 1999. Corporate performance and stakeholder management: Balancing shareholder and customer interests in the U.K. privatized water industry. Academy of Management Journal, 42(5):526-538
- Hendry, J. 2001. Missing the target: Normative stakeholder theory and the corporate governance debate. Business Ethics Quarterly, 11(1):159-176.
- Hillman, A.J. & Keim, G.D. 2001. Shareholder value, stakeholder management, and social issues: what’s the bottom line ? Strategic Management Journal 22(2), 125 – 139
- Jensen, Michael C. 2002. Value maximization, stakeholder theory, and the corporate objective function. Business Ethics Quarterly, 12 (2): 235-47.
- Freeman, R.E., Wicks, A. & Parmar, B. 2004. Stakeholder theory and ‘the corporate objective revisited’ Organization Science 15 (3): 364-369.
- Charron, D.C. 2007. Stockholders and stakeholders: The battle for control of the corporation. Cato Journal, 27(1):1-22.
- Moneva, J., Rivera-Lirio, J.M., & Munoz-Torres, M.J. 2007. The corporate stakeholder commitment and social and financial performance. Industrial Management and Data Systems, 107(1): 84-102.
- Bénabou, Roland, and Jean Tirole, 2010, Individual and corporate social responsibility, Economica 77, 1-19
- Jensen, Michael C. “Value maximization, stakeholder theory, and the corporate objective function.” Journal of applied corporate finance 22, no. 1 (2010): 32-42.
- Kitzmueller, Markus, and Jay Shimshack. “Economic perspectives on corporate social responsibility.” Journal of Economic Literature 50, no. 1 (2012): 51-84.
- Magill, M., M.Quinzii, and J.-C Rochet, “A Theory of the Stakeholder Corporation,”Econometrica (2015) 83(5), 1685-1725.
- Krueger, Philipp, 2015, Corporate goodness and shareholder wealth, Journal of Financial Economics 115, 304-329
- Ferrell, Allen, Hao Liang, and Luc Renneboog. “Socially responsible firms.” Journal of Financial Economics 122, no. 3 (2016): 585-606.
- Hart, Oliver, and Luigi Zingales. “Companies should maximize shareholder welfare not market value.” (2017).
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