Posted By: Admin, 14 Jun, 2013 - 07:41 pm
The idea of stakeholders comes from economic theory about the nature of the organization.
Originally, the idea was that the purpose of the organization was simply to make as much profit as possible. The owners of the company appoint the directors to do that and in doing so the owners incur costs (e.g. paying the directors) so it’s called “agency theory”.
That idea comes from a time when owners could ignore the interest of people connected with the company such as the employees and the community. So academics started thinking about other ways of thinking about the company.
In 1963 Cyert and March wrote “ A Behavioural Theory of the Firm”. It introduced the idea of stakeholders. It said that stakeholders influence the decisions that organizations make. Ansoff and McDonnell say that a stakeholder is “an institution, social group or individual who has expectations of the organisations and the influence to support them.”
So stakeholders have both interest in the decisions that are being made and that they have the power to influence them. However, both interest and power are variables – there can be a lot of interest in the organization or a little and a lot of power over the organization or a little.
Stakeholders have different objectives and sometimes their objectives conflict. Cyert and March said that organizations make decisions by trading off the interests of various groups. Later on, Herbert Simon said that decision makers seek acceptable outcomes rather than the absolute best ones. He called it “satisficing”. These decisions are affected by constraints and the influence of powerful stakeholders. So the amount of power that a stakeholder has is important.
Stakeholders who want to influence decisions will seek to increase their power. So shareholders vote together, employees join unions and pressure groups talk to the press. The “stakeholder map” isn’t static – it’s dynamic with different stakeholders moving around over time.
Stakeholders that have a lot of power are compulsory. The directors must respond to the influence that they can exert. Stakeholders that have little power are optional. The directors can respond to them – or not. That leads to the idea of corporate social responsibility, which is when organizations choose to make decisions that they don’t have to. So, for example, they accept responsibility for the environment.
The idea of stakeholders is really important. Because it’s about decision-making it’s connected to strategy. It’s about decisions about corporate social responsibility and in a later student article we’ll show that it’s the basis of corporate governance.