Stakeholder theory (ST) and stakeholder approach are commonly associated with corporate ethics, strategic and ethical decision making, marketing, and accomplishment of financial objectives. It is considered that application of ST principles in practice can allow organizations to generate benefits and competencies leading towards long-term performance sustainability.
According to Parmar et al. (2010), ST and organizational “stakeholder thinking” are meant to target three major types of problems: value creation and trade, ethics of capitalism, managerial decision making and mindset (pp. 404-405). It means that by considering the needs of diverse stakeholder groups, and analyzing the relationships between these groups, organizational performance, and corporate goals, a firm acquires an opportunity to align its own corporate strategies and actions with stakeholder interests and, in this way, achieve significant improvement in addressing the mentioned problems.
As stated by Santana (2012), stakeholder legitimacy, regarding stakeholders’ claims and behaviors, is the major socially constructed component of ST, and it is rooted in management’s perceptions (p. 257). Like any other forms of social perceptions, the managerial perspectives on stakeholder legitimacy are highly subjective. It means that all stakeholder management processes, such as stakeholder analysis and stakeholder synthesis, are linked to individual firm’s cultural, functional, and operational characteristics, as well as managerial interpretations and values. Therefore, the perception of stakeholder legitimacy may significantly vary in different organizational contexts and domains of business performance as the value of claims of distinct stakeholder groups may be perceived differently by firm managers and may have the dissimilar degree of relevance to organizational operations and impacts.
Santana’s (2012) perspective on stakeholder legitimacy sets forward the necessity to identify the important – urgent, powerful, and legitimate, – stakeholder groups from less important ones (p. 257). Consideration of interests of those stakeholders who are regarded by management as having sufficient power, urgency, and legitimacy becomes a strategic priority. The most powerful and legitimate stakeholders are those who may have a direct impact on organizational performance and, at the same time, can be directly influenced by it. For instance, personnel and customers will be perceived as legitimate stakeholders in most of the retail organizations. It is possible to say that by addressing legitimate stakeholders’ needs and providing an added value for them, a company contributes to its own sustainability and profitability.
At the same time, the consideration of “dangerous stakeholders” needs is essential to organizational growth, because while lacking legitimacy, these type of stakeholders is associated with significant urgency and power which may negatively affect organizational performance and provoke harm (Santana, 2012, p. 257). The government can serve as a representative of dangerous stakeholder group because, in most of the cases, it has no direct link to organizational performance and is irrelevant to corporate productive outputs, but it, to some extent, regulates organizational operations through national policies, norms, taxation, and laws. The neglect of such dangerous stakeholders’ interests as the government may hinder organizational success. Therefore, while the evaluation of legitimate stakeholders’ needs can be considered a core component of stakeholder management, targeting the dangerous stakeholders’ concerns provides the ground for the security of organizational operations. Hence, compliance with the interests of both types of stakeholder groups is important.
The major stakeholder groups include shareholders, consumers or customers, employees, suppliers and other business partners. However, a modern tendency requires management to address “an extended web of stakeholder interests,” including the needs of the “silent” stakeholder groups – local communities and the environment, – in order to meet the stockholder needs and succeed in the fulfillment of organizational economic mission (Jamali, 2007, p. 217). In this way, stakeholder approach based on the concept of corporate social responsibility aims to increase shareholder wealth and, at the same time, add greater stakeholder values. In this way, as stated by Jamali (2007), the implementation of stakeholder management by a company is perceived as the demonstration of socially responsible behavior that has a purpose of satisfying stakeholder expectations and which results in the enhancement of value-creating capacity associated with the increase in customer attraction and customer loyalty, improved quality of business partnerships, and greater profitability (p. 217).
While the concept of corporate social responsibility is deeply interrelated with ethical decision making, it is argued that the processes of stakeholder management, i.e. stakeholder analysis, and stakeholder synthesis, do not contain any ethical implications but rather have the mere strategic meaning. According to Goodpaster (1991), the PASCAL sequence of ethical decision making is comprised of six major steps: perception, analysis, synthesis, choice, action, and learning (p. 56). The author also indicates that being only a component of the decision-making process, stakeholder analysis is “morally neutral” and can be regarded only as “practical matter” (Goodpaster, 1991, p. 57). Stakeholder evaluation implies the examination of impacts, roles, potential benefits and risks associated with particular stakeholder groups, and in the majority of the cases, analytical processes within organizations are driven by the strategic concerns and not ethical ones. The results of stakeholder analysis are integrated into a company’s strategies through the process defined by Goodpaster (1991) as “stakeholder synthesis” that involves the alignment of corporate economic mission and objectives with the consideration of the interests of key or powerful stakeholders (p. 57). In the context of strategic management that pursuits the fulfillment of the key stakeholders’ (shareholders’) needs, stakeholder analysis and the integration of the accumulated knowledge into the corporate culture are only instrumental and pragmatic while ethical approach requires the evaluation of an extended range of non-organizational concerns.
While the core principle of shareholder theory proposes that shareholder values are an organizational priority, ST emphasizes the importance of meeting all stakeholders’ interests. As mentioned by Rausch (2010), in ST, “stakeholder interests are considered as means to the end of the corporation’s profitability but also as ends in themselves” (p. 140). To achieve efficient alignment between the organizational objectives, shareholders’ and stakeholders’ claims, managers thus should strive to balance the organizational, economic interests and various stakeholder concerns (Cennamo, Berrone, & Gomez-Mejia, 2009, p. 491).
The potential conflicts in the decision-making process may occur due to managers’ explicit fiduciary relations with shareholders and their implicit “non-fiduciary duties to all stakeholders” (Rausch, 2010, p. 150). When attempting to fulfill the claims of a particular stakeholder group according to individual perceptions of legitimacy, a manager may worse off the organizational position of other stakeholders and, in this way, violate both strategic and ethical principles of stakeholder management. On the contrary, managers’ ability to act in the stakeholders’ interests is associated with the gain of managerial and organizational utility which leads to a sustainable value creation capacity (Rausch, 2010, p. 150). Based on this, it is possible to conclude that the compliance with ST principles that require the maximization and alignment of stakeholder and corporate values may lead to the reduction of stakeholder conflicts and support organizational survival and success.
The organization that serves as an example in this case study is a multinational enterprise that functions at the global market and runs its operations across borders. The company does not adopt a stakeholder approach in strategic decision making and management and, in the previous years, it was involved in the conflict associated with the failure to comply with the ethical principles of professional and social behavior. Every international enterprise employs personnel from a variety of cultural and social backgrounds, and the multicultural characteristics of human resources create new management challenges which are interrelated with differences in cultural perspectives on the norms of professional and social behavior.
As mentioned by McDonald (2010), “moral standards differ between groups, within a single culture, between cultures, and across time,” and such ethical relativism interferes with the possibility of the creation of unified standards of moral behavior in diverse circumstances and contexts (pp. 447-448). In this way, while in the most of the Western cultures the concept of facilitation payment or facilitation fee is commonly perceived as bribery, in some Arab and African countries it will be accepted as a norm. The differences in cultural perceptions of professional behavior inevitably entail controversies in ethical organizational policies because, on one hand, facilitation fees may be justified as a right and moral action by the members of a particular social group, and, on the other hand, such an action may contradict the commonly accepted standards of morality.
To resolve this ethical issue that may occur in the majority of international companies, McDonald (2010) suggests to distinguish between the notion of ethical relativism and “situational ethics:” while the first one recognizes the validity of ethical standards which, although, may be applied in different circumstances distinctly, the second one ignores the existence of moral standards and is interrelated with pragmatism and neglect of ethics in favor of individual benefits’ accumulation (p. 449). Based on this, it is possible to say that the consideration of ethical norms and principles in professional decision making is important, but it requires a thorough investigation of cultural, social, and organizational environments, as well as individual managers’ characteristics.
To expand business in the global market in an effective way and avoid potential leadership and ethical conflicts, organizational management needs to conduct a stakeholder analysis and implement the findings in the development of both internal and external organizational relationships. The theoretical frameworks provided by Cennamo et al. (2009), Goodpaster (1991), Parmar et al. (2010), Santana (2012), as well as other researchers who have investigated the practical and ethical implications of ST, can serve as the basis for the preliminary evaluation of ethical perceptions and environmental circumstances. The studies conducted by the mentioned authors help to achieve a better understanding of dynamic and complex relations between organizational operations and stakeholders, and their mutual impacts on each other’s well-being. Moreover, the evaluation of the given articles supports the research in the field of professional ethics. The literature review made it clear that the administration of stakeholder management has both ethical and pragmatic purposes which can be fulfilled through the alignment of corporate economic objectives with the interests of different stakeholder groups. These findings can be implemented in the action research aimed at the investigation of ethical relativity in the context of global business operations to deepen the understanding of how particular actions can be perceived by various stakeholder groups in different regions, what kind of reaction and effect they can provoke, and how it is possible to correct organizational behavior and develop ethical standards in order to foster positive stakeholder response.
Cennamo, C., Berrone, P., & Gomez-Mejia, L.R. (2009). Does stakeholder management have a dark side? Journal of Business Ethics, 89(4), 491-507.
Goodpaster, K.E. (1991). Business ethics and stakeholder analysis. Business Ethics Quarterly, 1(1), 53-73.
Jamali, D. (2007). A stakeholder approach to corporate social responsibility: A fresh perspective into theory and practice. Journal of Business Ethics, 82(1), 213-231. Web.
McDonald, G. (2010). Ethical relativism vs. absolutism: Research implications. European Business Review, 22(4), 446-464. Web.
Parmar, B. L., Freeman, R. E, Harrison, J. S., Wicks, A. C., Purnell, L., & de Colle, S. (2010). Stakeholder theory: The state of the art. The Academy of Management Annals, 4(1), 403-445.
Rausch, A. (2010). Reconstruction of decision-making behavior in shareholder and stakeholder theory: Implications for management accounting systems. Review of Managerial Science, 5(2-3), 137-169. Web.
Santana, A. (2012). Three elements of stakeholder legitimacy. Journal of Business Ethics, 105(2), 257–265.