A Stakeholder Theory of The Modern Corporation

Stakeholders are the groups who have a stake or claim in the firm. Specially included suppliers, customers, employees, stockholders, and the local community, as well as management in its role as an agent for these  groups. Each of these stakeholder groups has a right not to be treated as a means to some end, and therefore must participate in determining the future direction of the firm in which they have a stake.

 

The Attack on Managerial Capitalism

The legal argument

The result of such changes in the legal system can be viewed as giving some rights to those groups that have a claim on the firm. It raises the question, at the core of the theory of the firm: in whose interest and for whose benefit should the firm be managed? The answer proposed by managerial capitalism is clearly “stockholders”, but the law has been progressively circumscribing the answer.

 

The economic argument

The avoidance of competitive behavior on the part of firms, each seeking to monopolize a small portion of the market and not compete with one another. In a number of industries, oligopolies have merged, and while there is questionable evidence that oligopolies are not the most efficient form in some industries, suffice it to say that the potential for abuse of market power has again led to regulation of managerial activity.

Externalities, moral hazards, and monopoly power have led to more external control on managerial capitalism. There are de facto constraints, due to these economic facts of life, on the ability of management to act in the interests of the stockholders.

 

A Stakeholder Theory of the Firm

The stakeholder concept

The concept of stakeholders is a generalization of the notion of stockholders, who themselves have some special claim on the firm.

 

Stakeholders of the modern corporation

The stakes of each are reciprocal, since each can affect the other in terms of harms and benefits as well as rights and duties. The stakes of each are not univocal and would vary by particular corporation.

 

The role of management

Management plays a special role, for it too has a stake in the modern corporation. On the one hand, management’s stake is like that of employees, with some kind of explicit or implicit employment contract. But, on the other hand, management has a duty of safe-guarding the welfare of the abstract entity that is corporation.

A stakeholder theory of the firm must redefine the purpose of the firm, claims that the purpose of the firm is to maximize the welfare of the stockholders, perhaps subject to some moral or social constraints, either because such maximization leads to the greatest good or because of property rights.

 

Example : Firm produce some good green-products that good for environment of our earth right now. So the firm get profits through the social responsibility and customer satisfaction by carrying environmental issue.