Question

What, according to Heath, are the issues with stakeholder theory, as is commonly articulated? Is he right?

Answer 1

The stakeholder theory is a doctrine that ensures companies as organizations are accountable to their stakeholders, and balance divergent interests between stakeholders. There are three aspects of the theory: 1) instrumental power, 2) descriptive accuracy and 3) normative validity. The stakeholder theory has a very tight connection with social responsibilities, which means that the corporations’ social value. The theory tries to keep the ethics and economics together, and achieve a successful goal of corporations.

The main arguments in favor of the stakeholder theory are that the theory is not only a single model to resolve the problem of identifying the proper objective of corporations, but also considers economics and ethics issues that make companies take social responsibilities, and to presents fairness to everyone involved in business, with the result that directors will run corporations for benefiting all stakeholders. Thus, the theory can be called a good combination between economy and ethic that enables the corporations to growth and promotes social wealth as a whole. The issues with stakeholder theory are discussed below:

Determining the stakeholders: Under stakeholder theory, outside interests should be determined exogenously, i.e., irrespective of the views of the company board or management.

Measuring the "stake”: Shareholding is easily quantified. Employees' wage packets give some indication of their market values. In a sense, a 100% dedicated supplier has a livelihood as dependent on the company as an employee. By broadening the account from money to all human and social variables, stakeholder theory makes the "stakes" impossible to measure and thus to compare.

Litigation: The acceptance of stakeholder rights may set up expectations which cannot be fulfilled and can fuel litigation, as in the USA, distracting management from achieving commercial success and consuming resources that would otherwise be available to shareholders and employees.

Distribution of Power: Stakeholder theory does not indicate how stakeholders can be represented or how power to protect their interests should be provided. Today they achieve a voice through the purchase of a few shares (an application of classical theory) or through the media. Might it be simpler to recognize the powers that stakeholder groups such as customers and employees have in their own right?

International interests: As we have seen, stakeholder theory is based on wider obligations to society than simply the payment of taxes. Conventionally the local community deserves first consideration, with interest diminishing as the circle widens to national interests. In today's "global village" it should not stop there. Stakeholder theory is imprecise about which society's interests apply and where boundaries lie.