3.7.1 Stakeholder theory

The stakeholder theory takes a larger group of constituents into account rather than only shareholders. The term stakeholder is defined in various ways, in which respect narrow and broad definitions can be distinguished (Mitchell et al. 1997: 856-857). Examples of stakeholders are employees, providers of credit, customers, suppliers, government and the local community (Mallin 2007: 16). The most well known definition is given by Freeman: ‘A stakeholder in an organisation is (by definition) any group or individual who can affect or is affected by the achievement of the organisation’s objectives’ (Freeman 1984: 46). This view on the stakeholder theory is visualised in Figure 3-2, where the interaction between the company and the different stakeholders is reflected by the two-way arrows.

Figure 3-2: A stakeholder theory model. The stakeholders affect or are being affected by the achievement of the company (Donaldson and Preston 1995: 69).

The definition by Freeman is very broad, because ‘it leaves the notion of stake and the field of possible stakeholders unambiguously open to include virtually anyone’ (Mitchell et al. 1997: 856). Broad definitions include groups and persons among stakeholders who affect, or are being affected by the achievement of the objectives of the company. Narrow definitions only include groups and persons among stakeholders who have invested some form of financial or human capital (stake) in the company and have direct relevance to the economic interests of the company.1

Table 3-7: Summary of the different views within the stakeholder theory.

There is not just one view of the stakeholder theory. The different views of the theory are described below and summarised in Table 3-7. In the stakeholder theory a difference exists between stakeholder analysis and stakeholder synthesis (Goodpaster 1991: 55-57). Stakeholder analysis comprises only the identification of constituents in a certain transaction or decision and the determination of positive and negative consequences for these certain constituents. Stakeholder synthesis goes beyond these steps and considers the interests of the identified constituents in the decision-making process as well. Two different interpretations can be distinguished within stakeholder synthesis: the strategic interpretation and the multi-fiduciary interpretation (Freeman 1994: 410). The strategic interpretation views stakeholder management as a means to achieve shareholder and managerial ends. The reason to consider the interests of stakeholders has nothing to do with ethics, but with the anxiety that offended stakeholders might resist or create negative publicity (Goodpaster 1991: 57-58). In the interpretation of the strategic stakeholder, the other stakeholders are considered instrumental in order to fulfil the goals of the most important stakeholder group: the shareholders. In contrast, the multi-fiduciary interpretation has the view that managers and directors have a fiduciary obligation to act in the interests of all stakeholders, because it is morally required (Freeman 1994: 410). Jensen remarks that the multi-fiduciary interpretation is hard to implement, because making a trade-off between the interests of more than one group of stakeholders is nearly impossible (Jensen 2002: 237-238). The strategic interpretation is referred to as business without ethics and the multi-fiduciary approach is referred to as ethics without business (Freeman 1994).

Goodpaster adds the new stakeholder synthesis to this framework of strategic interpretation and multi-fiduciary interpretation (1991: 67-69). This new stakeholder synthesis only regards the obligation the board bears to shareholders as a fiduciary one, while the obligations to other parties are non-fiduciary, but morally significant. These morally significant non-fiduciary obligations towards other stakeholders cannot be neglected by managers or directors, because certain reasonable community standards of ethics must be met. This is called the Nemo Dat Principle, which is defined as ‘[i]nvestors cannot expect of managers (more generally, principals cannot expect of their agents) behaviour that would be inconsistent with the reasonable ethical expectations of the community’ (Goodpaster 1991: 68).

Donaldson and Preston have identified three parts of the stakeholder theory: the descriptive/empirical part, the instrumental part and the normative part (1995: 66). The descriptive/empirical part of the stakeholder theory describes and explains characteristics and behaviour of companies. This comprises the nature of the company and how directors think about the interests of stakeholders and management, and the manner in which a company is run (Donaldson and Preston 1995: 70). The stakeholder analysis fits in the descriptive/empirical part of the stakeholder theory. The instrumental part uses stakeholder management, which is determined by the information derived from the descriptive/empirical part, in order to achieve traditional corporate objectives (Donaldson and Preston 1995: 71). This instrumental part covers the strategic shareholder synthesis, as described by Goodpaster (1991) and Freeman (1994). The third part is the normative stakeholder theory part, which is used to define the function of the company. It uses moral and philosophical guidelines of society (Donaldson and Preston 1995: 71). The normative stakeholder theory part applies to the multi-fiduciary interpretation and the new stakeholder synthesis.

In sum, there is not just one interpretation of the stakeholder theory. The interpretation differs from perspective to perspective. However, they all share the view that all stakeholders must be taken into account, instead of shareholders only. How these views are incorporated in the composition of the board is described in the next subsection.