What Is Stakeholder Theory? Case Study Example

According to stakeholder theory directors of a company must be responsible to stakeholders of the company as they all make contributions that are beneficial for the company. Joseph Johnston says that it is not possible to practice stakeholder theory though it sounds good in social theory. According to him corporate managers experience pressure from shareholders and stakeholders. It is not easy for managers to serve multiple masters at a time. If stakeholder theory is applied managers will have a duty to creditors, employees and other stakeholders of the company equivalent to their duty towards shareholders. Interests of stakeholders are shareholders might conflict on many occasions. For example, shareholders will always think of profit and hence might decide to close down an unprofitable plant of the company. But this will result in job lose for many employees as well as to the local community. If managers are to consider both these factors it will be difficult for them to take a decision. If the directors are forced to consider the interests of stakeholders with equal importance as theirs they might decide not to do anything or to go for a political compromise and not a business decision. Thus they will in a way serve their own interest (Johnston Jr 27-51). Thus Johnston states that it is not possible to practice stakeholder theory though it sounds good as a social theory.

I agree with the opinion of Johnston. Both stakeholders and shareholders demand the attention of managers. They need to make sure that the shareholder values keep on increasing but must at the same time ensure that the interest of stakeholders are also protected. Though it is important for companies to ensure social responsibilities, it is not possible under all circumstances. Shareholders are the ones who have took risk by entrusting their money on the company for gaining profit. Thus they are to be considered above stakeholders to an extent and at the same time managers must also take into consideration the legitimate interests of stakeholders. But there need to have a rational nexus between such actions. It is necessary for managements to consider environment and social concerns while making any decision related to business. No company can damage public goods or rights of people for a clean environment or other facilities like elementary education, right to sought relief etc. Though such rights are to be ensured by the government and not by companies, but companies also cannot act against such interests. This is why the fiduciary duty of managers needs to be towards shareholders and not stakeholders. If they are supposed to take care of stakeholders interests over shareholders’ interests it will cause a complete chaos and no company will be able to perform successfully (27-51). Thus managers must ensure the interests of shareholders above stakeholders’ interests, but directors must ensure that their policies are not harmful to public. Thus it is not possible for a company to practice stakeholder theory though it sounds good.

I agree with the cost-benefit analysis of Steven Kelman. In the economic context it is true that the benefit of an act must outweigh its cost, but as Kelman says this is not practical in many cases as in cases involving health, safety and environment. It is not possible to ascertain benefits of all actions under a common denominator, that is, all actions cannot be valued in dollars. This is because many actions are non-marketed ones and some of them might be of least value in the eyes of others while it might be of high value to some others. Some of the actions might have both positive and negative outcome. For example, when a person say a lie, it is likely to have both positive and negative effect. Person might be telling lie due to his circumstances and might be deriving some benefit from this, while the one to whom it is said might be facing issues which are far more severe than the benefit gained by the one who lied. Thus in such a case as the act is morally wrong but beneficial to someone on the cost incurred on other cannot be analysed merely on the basis of cost. But it cannot be said that he must not have lied as it is morally wrong. Thus such an act cannot be analysed on monetary basis which is a prime factor necessary for cost-benefit analysis. Thus it is not possible to value everything on the basis of cost and benefit (Kelman 33-40).

Sustainability considers cultural, social and economic environment and thus it need to address environment, health and safety aspects which are envisaged by Kelman. It is not always possible to insist that benefit must outweigh cost while ensuring sustainability as it usually lacks any monetary benefits. This is because benefits deriving out of acts ensuring corporate sustainability are usually non-monetary in character. It aims to attain satisfaction addressing health, environment and safety aspects. For example benefits preserved or achieved as part of sustainability practices for preserving the environment include fresh-smelling air, rivers that are free of pollution and is swimmable, quiet and peace environment and spectacular vistas. These cannot be traded in market and are hence cannot valued on the basis of dollars. In order to preserve such an environment sometimes actions outweighing cost might become necessary. Then it is the moral judgement that values and it cannot be based on money value. When some decision is taken as to what level of pollution is harmful to a section of people like those facing asthma related issues, officials cannot rely to the fact that pollution to a certain extent is not harmful to those who are not asthmatic and hence it can be allowed. It is the moral value that is considered here and not the cost incurred on reducing pollution to such a level which is not harmful for asthma patients (Kelman 33-40).

According to Edward Freeman “stakeholder theory is an idea about how business really works”. According to him for a business to be successful it needs to create value for all stakeholders like customers, suppliers, shareholders, employees and community. A business cannot protect the interest of one of these stakeholders in isolation and it need to make sure that the interest of these stakeholders go together. It is the duty of managers and business to make sure that the interests of all these stakeholders are moving in the same direction. All these stakeholders are equally important for a business. It is the shareholders who make investment in the business for its functioning. Hence it is important for the business to create profit for the shareholders and other financiers. It is the customers who purchase the products and services and ensure that the business is alive and successful. It is the employees who work to their maximum potential to bring success to the company. Suppliers help a business to be more creative and innovative. It is important for a business to ensure that they are following laws and customs, pays attention to the quality of community, corporate responsibility and sustainability. According to him if a business fails to satisfy any of these groups it will decline and stakeholder theory is the idea that “each one of these groups is important to the success of business and managerial task is to figure out whether the interests of all the stakeholders are going in the same direction. Thus if the focus is only on shareholders’, business will miss what other stakeholders can achieve together and this cannot be achieved by any one of them alone. If the company is able to protect the interests of all these stakeholders they will be successful in achieving corporate social responsibility (Freeman.

It cannot be said that Freeman’s model of Stakeholder Analysis conflicts with the fiduciary duties of management and board of directors to maximize the wealth of shareholders. According to him shareholders are also stakeholders and hence their interest also needs to be protected. But it must be done in such a way that the interest of other stakeholders is also protected. Managers need to make sure that the interests of all the stakeholders are in the same direction. When a company can protect the interests of their employees, the employees will put their maximum effort and skill in production while suppliers will help the company to become more creative and innovative. There will be increased demand for innovative products and this will prompt shareholders and financiers to invest more.  If a business is not violating the rules and laws of the community and is providing maximum benefit, the community will certainly support the company. Thus the company will become successful bringing in more profit for shareholders and thus will not conflict with the fiduciary duty of managers whereas it will make their duty easy and will help them to perform better.

Buyer of the gourmet food department of the department store chain will benefit by shipping the defective wafers to the inner city. If they decide to dump the wafers it will result in loss as the shipment was worth $9000 and only some of them were sold. By shipping them to the inner city, gourmet department will get their money back and as the sale is taking place though another convenience store, their reputation will not get affected.

It is the customers of convenient store that will get affected by this decision. But only those people who get infested wafers will be affected and even then they will not be affected like the customers of department store chain. This is because people there will be expecting some issues when they get luxury food items of this nature for low price and hence will not be harmed.

The rights of gourmet food department to get back the money they have invested will be exercised. This is because all stakeholders except customers and community are interested in the income gained by a business and if the wafers are dumped the money invested by investors and financiers will be lost. Company will also face loss of reputation which will have an impact on the interest of its employees, investors and financiers. The reputation of wafer manufacturing company too will be affected. Here it is not known whether the wafers were infested during shipment or from the warehouse of department store. Thus, in way the rights of all these groups are exercised by shipping the defective wafers.

Rights of those customers who buy infested wafers will be ignored through this shipment. This is because customers have the right to get quality food even if they are from ghetto. Though it is argued that they are paying low amount and are expecting some defect, no one has the right to ignore their right to have quality products. Reputation of convenient store and stakeholders associated with it will also be affected by this act as people from better areas will not make purchases from them.

When a store sell a product it is important for them to make sure that the product is of quality worth the amount paid by the customer. Here the moral issue is that the gourmet department store authorities think that people of ghetto are not worth enough to have quality products and is hence arranging someone to sell infested wafers to them at a price which is enough to will recover the money they have invested. Thus their right for quality product for the money they are paying is denied.

With this decision gourmet food department will be able to recover the amount they have invested and will thus be able to protect the interest of stakeholders and financiers. By deciding to sell the product and not to claim refund manufacturers and shipping company is also able to escape from any financial loss. Convenient store will also benefit from this as they will get luxury food item for sale at lower price and it will be sold out easily as the customers from ghetto will consider it as an opportunity to try luxury food item. Only those who will suffer loss are those customers who get infested wafers.

As the convenient store through which the sale is taking place is used to do this there won’t be much legal issues for the gourmet food department of department store chain. All they will have to do is to make sure that the fact that the product was sold to convenient store by them is kept a secret and for that they might create an agreement. At times this might have been happened earlier and might be an adjustment without causing any loss to both. Hence there is no legal complication in this trade.

Though it is known that the convenient store is used to such practices it is important for the department store to inform them that the product is infested. Department store is performing their moral duty to their customers by deciding not to sale damaged item. Like that convenience store too must inform their customers that some of the wafers are infested and there is a chance for some to get infested box. If possible they must replace the infested box with good ones if the consumer returns and if will not cause any financial burden to them.

Works Cited

Freeman, R. E. Corporateethics, What is Stakeholder Theory? (2009). Web. 2 April 2014.

Johnston Jr. Natural Law and the Fiduciary Duties of Business Managers. Journal of Markets and Morality. 8(1), (2005): 27-51.Print.

Kelman.  Cost-Benefit Analysis: An Ethical Critique (with replies). AEI Journal on Government and Society Regulation. (1981): 33-40. Print