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Stakeholder theory

In document Empirical evidence from Sri Lanka (Page 136-142)

Theoretical framework

5.3. Theoretical perspectives of CSR practice

5.3.2. Stakeholder theory

5.3.2.1. Introduction to stakeholder theory

Stakeholder theory is a theory concerned with the relationship between an organisation and its stakeholders. Although Ansoff (1965) was considered as the first to use the term “stakeholder theory” (Roberts, 1992), the evidence suggests that the term “stakeholder”, the fulcrum of the stakeholder theory, was used way back in 1947 (Johnson, 1947). However, it was mostly embraced after the mid-1980s. The works of Freeman (1984, 1994; 2005) and some other scholars (for example, Branco

& Rodrigues, 2007; Carroll & Buchholtz, 2009; Clarkson, 1994; Clarkson, 1995;

Donaldson & Preston, 1995; Harrison & Freeman, 1999) addressed most of the core ideas related to the stakeholder theory. Freeman (1984) defines a stakeholder as “any group or individual who can affect or is affected by the achievement of the firm's objectives” (Freeman, 1984, p. 49). While retaining Freeman’s definition of a stakeholder as a foundation, some scholars tried to be more specific on the definition by categorising stakeholders in different ways. For example, strategic and moral stakeholders (Goodpaster, 1991); external and internal stakeholders (Carroll, 1989; Pearce, 1982); latent, expectant, and definitive stakeholders (Mitchell, Agle,

& Wood, 1997); subgroups of stakeholders such as shareholders, employees, and customers (Preston & Sapienza, 1990); single issue, and multiple issues stakeholders (Wood, 1994); supportive, marginal, nonsupportive, mixed blessing stakeholders (Savage, Nix, Whitehead, & Blair, 1991); voluntary and involuntary stakeholders (Clarkson, 1994); and primary and secondary stakeholders (Clarkson, 1995) were identified. The main aspect of these categorisations is to emphasise that there are various stakeholder groups with different and sometimes conflicting expectations.

In accord with the stakeholder perspective, an organisation has to meet these multiple expectations of its various stakeholder groups, rather than only the expectations of shareholders as in traditional shareholder theories, because

“stakeholder theory highlights organisational accountability beyond simple

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economic or financial performance” (Guthrie, Petty, & Ricceri, 2006, p. 256).

Stakeholder theory suggests that the management of an organisation is expected to perform its accountability towards its stakeholders by undertaking activities deemed important by its stakeholders, and by reporting information. Thus, the term, “accountability” frequently relates to this theory and the literature considers how one focal organisation delivers its accountability to its various stakeholders (Smith, 2008).

Some assumptions have developed around stakeholder theory. They appear throughout the stakeholder literature in a number of different fields such as strategic management, CSR, business and society, and business ethics discipline (Belal, 2008; Smith, 2008) . Smith (2008) summarises these assumptions to indicate their scope and to provide overall insight for this theory; these assumptions are illustrated in Table 5.3-1.

Table 5.3-1: Assumptions of stakeholder theory

1 Stakeholders are defined and understood from the vantage point of one focal organ-isation

2 An organisation must be able to manage its stakeholders effectively in order to achieve its goals.

3 Stakeholders can be categorised in a variety of ways and often such categories have competing interests.

4 Stakeholders pressure an organisation because they want something or have a stake in something.

5 The ability of a stakeholder to pressure an organisation comes from organisational attributes of the stakeholder.

6 An organisation must balance the conflicting interests of those stakeholders in its external environment with those stakeholders in its internal environment.

7 An organisation has financial as well as social responsibilities to its stakeholders.

Source: (Smith, 2008, p. 19)

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Based on the above assumptions, different kinds of interpretations and classifications for stakeholder theory are evident in the literature. For example, Donaldson and Preston (1995) introduced a taxonomy for stakeholder theory:

normative, instrumental, and descriptive. Another example comes from Berman (1999) who proposed two models, namely, the strategic stakeholder management model and the intrinsic stakeholder commitment model. Although there are many other interpretations and classifications, two major branches of stakeholder theory stand out in the literature; these are the ethical (moral or normative) branch, and the managerial (positive) branch (An et al., 2011; Belal, 2008; Belal & Owen, 2007; Deegan, 2009; Gray et al., 2010; Gray, Owen, & Adams, 1996; Guthrie et al., 2006).

5.3.2.2. Ethical perspective of stakeholder theory

The ethical branch of stakeholder theory suggests that irrespective of the stakeholder power, all the stakeholders have the same right to be treated fairly by an organisation (Deegan, 2009). Seemingly, the ethical perspective of stakeholder theory is grounded in Critical Accounting Theory (CAT) which is broadly concerned with the approach to accounting research that focuses on the role of accounting or on the particular accounting method that should be employed. Rather than considering only specific privileged parties (or powerful stakeholders) of those in control of providing critical resources to the organisation (Deegan & Unerman, 2006), the ethical perspective calls for consideration all its stakeholders.

Within the ethical perspective, managers of an organisation are expected to manage the business for the benefit of all stakeholders, irregardless of whether management of stakeholders leads to improved financial performance (Hasnas, 1998). In this perspective, the organisation is not viewed as a mechanism which drives the maximisation of shareholders’ wealth, but, rather, as one which meets the

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expectations of all stakeholders. Stoney and Winstanley (2001) in explaining the ethical branch of stakeholder theory emphasise the ethical treatment of stakeholders which “may require that the economic motive of organizations – to be profitable – be tempered to take account of the moral role of organizations and their enormous social effects on people’s lives” (p. 608).

This ethical perspective relates directly to the accountability model of stakeholder theory proposed by Gray et al. (1996). Thus, in the ethical perspective, “the organisation owes an accountability to all its stakeholders” rather than only to more powerful or financial stakeholders (Gray et al., 2010, p. 25). The main limitation of the ethical perspective is the managers’ challenge to treat all stakeholders fairly, especially when the stakeholders have different and contradictory interests.

However, Hasnas (1998) suggests that when these interests conflict, the business should manage “to attain the optimal balance among them” (p. 32). According to Gray et al. (2010), the ethical perspective of stakeholder theory or normative approach to accountability has limited descriptive or explanatory power in a social accounting context.

5.3.2.3. Managerial perspective of stakeholder theory

On the other hand, the managerial (positive) perspective of stakeholder theory asserts that managers of an organisation attempt to meet the expectations of stakeholders who control the critical resources required by the organisation. The more critical the stakeholder resources to the organisations (thus, more important – salient, according to Mitchell et al. (1997) – the stakeholders to the organisation), the greater the effort of the management of the organisation to meet the expectations of those stakeholders should be (Deegan, 2009). According to Gray et al. (2010), this perspective may be employed in an “organisation-centred” way. In addition, the stakeholders are identified by a focal organisation on the basis of “the extent to which the organisation believes the interplay with each group needs to be managed

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in order to further the interests of the organisation (The interest of the organisation need not be restricted to conventional profit-seeking assumptions)” (Gray et al., 1996, p. 45). In the managerial perspective, an organisation is expected to be accountable to its economically powerful stakeholders, rather than all stakeholders as in the ethical perspective. In this managerial perspective, stakeholder activism or involvement is considered of paramount importance to the organisation, which can positively or negatively affect the firm (Murray & Vogel, 1997). The main challenge here is the task relating to how organisations should decide to whom they are responsible, and to what extent that responsibility extends (O’Riordan &

Fairbrass, 2008). Thus, the managerial perspective of stakeholder theory focuses mainly on managing the relationship between an organisation and its critical stakeholders. Unlike the ethical perspective, the organisation-centred managerial perspective of stakeholder theory can be, and frequently is, tested by empirical studies (Deegan, 2009).

5.3.2.4. Linking stakeholder theory to CSR practice

Stakeholder theory emphasises the accountability of the organisation as well as the rights of stakeholders. According to Mulgan (1997), the term “accountability”

is derived from the broader concept of “responsibility”. Accountability is referred to as the responsibility of one party to another who has entrusted the first party to perform certain duties (Mulgan, 1997). In the process of performing the accountability to the stakeholders, the disclosure of information plays an important role in accounting. The provision of information should not only include financial or regulated information of a company, but also nonfinancial or unregulated information (Gray et al., 1996), because, in line with the stakeholder theory, the community has a “right-to-know” about certain aspects of a company’s operations.

In regard to the stakeholders’ rights to information, Gray et al. (1996) emphasise that the disclosure of information should be responsibility-driven instead of demand-driven. In applying their accountability model in CSR reporting, Gray, Owen and

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Maunders (1991) contend that, “the role of corporate social reporting is to provide society-at-large (the principal) with information (accountability) about the extent to which the organisation (the agent) has met the responsibilities imposed upon it”

(p. 15). Here the ‘society-at-large’ is represented by an organisation’s stakeholders, in performing its accountability.

Many CSR empirical studies related to stakeholder theory exist, but, as mentioned by Deegan (2009), unlike the ethical perspective, the managerial perspective of stakeholder theory is frequently tested by empirical studies. For example, Roberts (1992) tested the ability of stakeholders to impact on CSR disclosures using stakeholder theory and found that the information needs of stakeholders and their measures of power provide some explanations about the levels and types of CSR disclosures. Similar kinds of results were found in Neu, Warsame and Pedwell’s (1998) study which analysed annual reports of publicly trading environmentally sensitive Canadian companies. According to the results, the companies were more responsive to the concerns of powerful stakeholders such as financial stakeholders and government regulators than to other stakeholders such as environmentalists.

In an engagement-based study of CSR reporting, Belal and Owen (2007) used stakeholder theory to interpret a series of interviews with senior managers from 23 companies in Bangladesh, representing multinational, domestic, private and public sectors. They found that the main motivation of CSR disclosure lies in the desire to manage the most powerful stakeholder groups. Islam and Deegan (2008) in another study examined how the power of stakeholder groups influences the managerial decisions of CSR disclosures by investigating CSR reporting practices of the Bangladesh Garments Manufacturing Enterprise Association (BGMEA) and its member firms. The BGMEA is the government authority that provides export licences to garment manufacturers. Through the interviews of the BGMEA’s senior management, they found that CSR disclosure policies of BGMEA and its garment-manufacturing member firms were mainly driven by their foreign buyers, whom they considered as their most powerful stakeholders.

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5.3.2.5. Stakeholder theory’s predictions about CSR disclosure motivations In line with stakeholder theory, an organisation might engage in CSR activities and reporting in order to discharge its accountability towards its stakeholders: in the ethical perspective, towards all stakeholders, and in the managerial perspective, towards economically powerful stakeholders. By engaging in the disclosing of CSR information an organisation clearly accepts its stakeholders’ right-to-know about certain aspects of its operations. The provision of CSR information reduces the information asymmetry and places different kinds of stakeholders on a level playing field. In return, an organisation could expect or bring certain benefits such as improving its image/reputation, attracting investors, lowering the cost of capital, improving the retention of existing employees, attracting prospective employees, and improving the relationship with stakeholders in order to gain their support and approval (Deegan, 2009; Gray et al., 1996). All these benefits could be an indirect motivation for CSR disclosure. In a direct, abstract form, according to the managerial branch of stakeholder theory, the CSR disclosure motivation of an organisation is driven by the desire to manage its powerful stakeholders, whereas for the ethical branch, the CSR disclosure motivation is driven by the desire to be accountable to all stakeholders irrespective of their economic power.

In document Empirical evidence from Sri Lanka (Page 136-142)