Question

Analyse the difficulties usually associated with stakeholder theory

Answer 1

The Stakeholder Theory addresses the different values and morals associated with the management of an organization. These may include corporate social activity, social contract theory, and market economy among others. It relates to both business ethics and organizational management and points out the different constituencies that are impacted by various business entities including local communities, suppliers, employees, creditors, and others.

In a nutshell, the stakeholder theory emphasizes that the stakeholders should get special consideration (in certain ways) just like the shareholders get. The theory, therefore, does not aligns will be the classical view of corporations, which emphasizes that the purpose of a business organization is to make a profit for the shareholders. Developed by Freeman (1983), the stakeholder theory points out that the task of the manager is to protect the rights of stakeholders. The classical view emphasizes that the organization should strive for increasing profits in an ethical way, by indulging in the right set of activities, and by proper utilization of resources. In contrast, the stakeholder theory turns a business organization into a social institution has responsibilities going well beyond the fiduciary responsibility to the employees, directors, and shareholders.

Difficulties of Stakeholder Theory

General welfare is the responsibility of the Government and not the business organizations. Neo-classicists also point out that a business organization may not have the resources for solving social problems and society should not expect them to operate in this way. Scholars like Bowie (1991) point out that organizations take a central position. They pursue their profits while trying to solve social problems through their CSR (corporate social responsibility) activities. But the CSR activities and the percentage of profit an organization gives towards fulfilling social goals and objectives is limited. The organization undertakes these duties of gratitude for societal benefits. The focus, purpose, and the vision of an organization of attaining success may be marred and spoiled when it starts to prioritize the interests of the stakeholders over and above its basic goals. There are also other difficulty and problematic areas of stakeholder theory.

Determination of Stakeholders

The stakeholder theory says that the outside interests should only be determined exogenously. The views of the board or management of the company are not relevant in this regard. The legitimate identification of these groups or the fixation of a range is problematic here and no clear path is present. The company may not be able to deduce the mutual rights and obligations of the stakeholder groups.

No Clear Purpose

Proponents of the stakeholder theory say that the companies should try to benefit the stakeholders even if there is a competitive disadvantage. This may not be possible for a business organization. Also, different stakeholder groups have different interests and commercial purposes. For instance, while some of the stakeholders may want the company to maintain its size, others would like it to grow further. The multi-fiduciary policy may create confusion and the purpose and direction would be absent.

Ambiguity about Success

The stakeholder theory does not have the same criteria of success. The corporate affairs may be entirely frustrated with the implementation of the stakeholder theory.

No Quantification Possible

It is easy to quantify shareholding in a company. A company may not be successful in accounting and quantifying the social and human variables (necessary for the implementation of stakeholder theory).

No Litigation Possible

No litigation can be applied if the stakeholder rights are accepted and implemented. The stakeholder theory only distracts the management from attaining commercial success.

Improper Distribution of Benefits

A business is formed by different individuals who co-operate with each other to meet their financial and other objectives. The benefits are also distributed accordingly and in-lieu of the market forces. The stakeholder theory says that benefits should be distributed in accordance with the social forces. There are no criteria through which the objectives of the stakeholder theory can be attained.

The stakeholders do have certain rights in the existing business models, but stakeholder theory does not provide how the stakeholders will be actually represented or how their interests would be protected. It also says that competitors are also stakeholders of the business as they are affected by how a business performs. These views do not make sense in the current market scenario, and there is also a lot of ambiguity about what the stakeholder purports or how its objectives can be met.