Stakeholder theory states that the objective of a business is to create as much value as possible for stakeholders. Hence, it is the responsibility of the business heads to keep the interests of customers, suppliers, employees, communities and shareholders aligned and moving in the same direction so that organization can succeed and be sustainable for a long time.
However, Vinten (2000) argues the feasibility of stakeholder approach as it hints upon the sacrifice of sound business objectives i.e., profits to morally acceptable but supposedly economically unsustainable social goals. Stakeholder theory accepts profitability as a corporate purpose and also widens the shareholder model. On one hand, it recognizes the legitimate claim of shareholders, but also challenges shareholders for being the only claimants or the privileged ones with reference to interests of other legitimate claimants (Hummels, 1998; Emiliani, 2001). Even Clarkson (1995) claim that organizations which do not include their primary stakeholders’ concerns within their strategy, post a strict challenge for their long-term survival. In words of Jones and Wicks (1999, p.209; Scholl, 2001), stakeholder approach does not ‘shift the focus of firms away from marketplace success toward human decency but to come up with understandings of business in which these objectives are linked and mutually reinforcing’. This led to the development of ‘balanced scorecard’ (Vinten, 2000) model which assesses strategic performance of an organization on grounds of customer, business processes, finance, learning and growth.
2.2.1 Shareholder Theory vs Stakeholder approach
According to the Stakeholder theory, managers are agents of stakeholders who must ensure that the ethical rights of stakeholders are not violated and their legitimate interests are balanced while making decisions.
Stakeholder theory lays a lot of emphasis on moral values and idealism which focusses on creation of long term relationships on the foundation of trust, faith, loyalty, justice and empathy so that all stakeholders are committed to the benefit of the organization, society and community in which they exist.
On the other hand, shareholder theory asserts that shareholders give capital to a company’s managers, who are supposed to spend corporate funds only in ways which have been authorized by the shareholders. In words of Milton Friedman, “There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition, without deception or fraud.”
Stakeholder theory demands that interests of all stakeholders should be considered even if it reduces company profitability i.e. in shareholder theory, non-shareholders can be viewed as “means” to the “ends” of profitability but under the stakeholder theory, the interests of many non-shareholders are also viewed as “ends.”
Unfortunately, shareholder theory is often misrepresented as urging managers to “do anything you can to make a profit,” whereas it actually obligates managers to increase profits only through legal, non-deceptive means.Similarly, the stakeholder theory is sometimes claimed to be not focusing on company’s profitability. Stakeholder theory ultimately aims for company’s continued existence, and it must be achieved by balancing the interests of all stakeholders, including the shareholders, whose interests are usually addressed through profits.