Description

Stakeholder Theory is thus one of the popular theories in the field of finance, business ethics and management which was developed by “Dr Edward Freeman”, a renowned professor in the “University of Virginia.” This particular theory as developed by Freeman contradicts the “Shareholder Theory” as developed by “Milton Friedman” in the 20^th Century which states that a company must look after the interest of the shareholders only. According to the “Shareholder Theory”, a business organisation at all times should look enhance the profits and restore and protect the interest of its owners only. However, the “Stakeholder Theory” does not agree to the theory as developed by economist, “Milton Friedman” where it states that a company must not only look after the interests of the shareholders but also should take all eminent steps to protect and enhance the wealth of all relevant stakeholders (Freeman, 2016). The relevant stakeholders according to Dr Freeman are not only the shareholders as owners but also covers other eminent or related parties to a business such as the employees, management, vendors, suppliers, creditors, debtors, customers, government agencies and the general public and the community at large. So, according to the “Stakeholder Theory”, a business organisation must look after the interests of these related stakeholders and not just the shareholders. The aim of this essay is to provide a thorough synopsis on one of the popular theories in the field of management, accounting and finance in general, the “Stakeholder Theory” in close consideration to a recent journal article.

The stakeholder theory which was developed Dr Freeman stresses on the welfare and protection of interest of all parties associated with a business organisation and not just protection and enhancement of wealth of the owners of the business as stressed by the “Shareholder Theory.” So, according to Dr Freeman, a business is liable to protect the interest and maximise the well-being of all parties being affected by the business operations. According to the “Stakeholder Theory’, the parties which are directly and indirectly linked to a business organisation firstly comprises of its employees who work for the organisation (Freeman, Phillips & Sisodia, 2020). If the organisation does not consider the interest of the employees who ultimately makes thinks work for the organisation, then the overall productivity and quality of the work or service delivered would be hampered thereby affecting the customers who buy the products or services and the owners who reap the profits earned by the company after deduction of all expenses. The other eminent stakeholders those are needed to be discussed over and above the ones discussed above are the creditors who are mostly the suppliers who supply raw materials to the company or any finished products which are either directly used by the company on credit or resold in the market to generate revenue. The other eminent stakeholders include the lenders who are in common sense, bankers or providers of the much-needed capital using which the business conducts its daily and strategic operations. Government agencies are yet another eminent stakeholder who is greatly interested in the operations of a business organisation may it be for tax purposes or legitimacy of the business itself along with its operational impact on the environment and the society in general. The last eminent stakeholders are the community or the society at large who are directly impacted through the business operations conducted by any business organisation. So, a business organisation must take into consideration the well-being of all these related stakeholders in order to successfully stay alive in this ever-competitive business world and thrive and growth in it. Now, specifically discussing about the role of the theory in the development of accounting in general, it can be said that this particular theory has contributed a lot in development of the modern accounting and reporting which now takes into account all the relevant stakeholders of a business organisation. The modern sphere of accounting have diversified a lot from the traditional accounting where the specific concepts of “Integrated Reporting” that circumferences the “sustainability accounting” has taken shape where the companies now report as well as account for all of its operational impact to the relevant stakeholders along with the steps and measures the organisation has been taken or will take in near future to combat the negative effects imposed on the relevant stakeholder owing to its operations.

The Role of Stakeholder Theory in the Development of Modern Accounting

In order to justify the aim of this study, a proper critical review of a recent journal article is a prime condition. Thus, in order to fulfil the aim of this study a renowned journal article authored by “Dr Edward Freeman” and another well-known author in the field of management namely, “Sergiy Dmytriyev” under the title, “CSR and Stakeholder Theory” has been taken into consideration (Freeman & Dmytriyev, 2017). The aim of this article authored by the above-mentioned well-known scholars, one of which is the developer of the “Stakeholder Theory” itself, is to explore the relationship which exists between the two primary concepts of business ethics, corporate finance and management namely the “CSR’ or “Corporate Social Responsibility” and the “Stakeholder Theory.” According to Freeman and Dmytriyev (2017), both the concepts of “CSR” as well as the “Stakeholder Theory” is interlinked and forms an eminent part of the corporate finance, business management and business ethics. The authors states that the Stakeholder Theory stresses on the fact that a business organisation should not only consider the well-being and enhancement of wealth of the shareholders but should consider the well-being and protection of interests of all related stakeholder of the organisation. CSR on the other hand is a part of the corporate initiative and responsibility of the company as a business organisation to look after and protect the interest of all of its related stakeholders as stressed by the Stakeholder Theory itself.

The chosen article authored by Freeman and Dmytriyev which was published in 2017 began with illustrating the concept of CSR itself and its need in the corporate sphere. The authors stated that there exists a burning controversy about the real need and impact of CSR where different people perceive CSR from two different angles, positive and negative. According to Freeman and Dmytriyev (2017), some people consider CSR as a good corporate initiative where the company acknowledges and makes use of the Stakeholder Theory in doing good or protecting the interests and wealth of all related stakeholders. According to this positive perspective, the positivists who are the direct supporters of this CSR initiative, thinks that an organisation tries to do something good for all related and relevant stakeholders in return to the impact which these stakeholders have to bear owing to the business operations run by the company. So, according to these positivists, the CSR initiative is a direct implementation of the “Stakeholder Theory” developed by Dr Freeman (Freeman & Dmytriyev, 2017). On, the other hand, the article also states that there are some people who beholds a negative perspective about the CSR where the company either tries to coverup brainwash the stakeholders by falsifying the impact of company operations or coverup the wrongdoings of the company through some minor initiatives and by spreading false dichotomies. The paper the progressed to the well-laid out description of the critical review of the concept and implementation of CSR itself where the authors have pointed out three main negative arguments of CSR namely the “Violation of obligation to the shareholders” which states that the CSR implementation violates the traditional economics theory of enhancing the wealth of the shareholders only, followed by “Covering wrongdoings” where the CSR initiatives by a business organisation tries to coverup the wrongdoing by the business owing to its operation which directly affects all its related stakeholders. The final argument against the CSR initiative and implementation is the “Creation of false dichotomies” by the business organisation through CSR where a company through its sustainability and CSR reports tries to supress the negative effects of its operation and portray a flowery picture of its vast efforts and initiatives to rectify the negative impacts of its operations which in actuality may or may not happen completely. The article then progressed to the phase where the authors tried to establish the relationship between the CSR and the Stakeholder Theory (Freeman & Dmytriyev, 2017). The authors consider the Stakeholder theory and CSR to be distinct concepts having some overlapping bindings and interconnection. The authors stated that CSR initiative implementation which is a part of business ethics can only be possible through proper implementation of the Stakeholder Theory within the holistic business process and activities. So, the authors finally conclude that there should be a proper alignment of the CSR with the Stakeholder Theory in order to promote a holistic sustainable growth.

Conclusion

The Stakeholder Theory which was coined and developed by Dr Edward Freeman portrays that a business organisation should consider the well-being and protection of interests of all related stakeholders and not just the shareholders thereby contradicting the “Shareholder Theory.” On a concluding note, after a thorough review of a recent journal article bearing the title “CSR and the Stakeholder Theory” published by Freeman and Dmytriyev in 2017, it can be said that the article established a direct positive relationship between the CSR and the Stakeholder Theory as developed by Dr Freeman. Though the article began with the criticism of the CSR initiatives itself, the article later portrayed that both the concepts of CSR and the Stakeholder Theory is interconnected and a proper CSR initiative cannot take place without a proper implementation of the Stakeholder Theory within the holistic business process of any business organisation. Finally, the article concluded that the business organisations should create and enhance value to all related stakeholders and not just the shareholders and in doing so there should be a proper alignment of the CSR and corporate objectives with the Stakeholder Theory which will assist the organisation in accomplishing a holistic sustainable growth.

References and bibliography

Barney, J. B., & Harrison, J. S. (2020). Stakeholder theory at the crossroads. Business & Society, 59(2), 203-212.

De Gooyert, V., Rouwette, E., Van Kranenburg, H., & Freeman, E. (2017). Reviewing the role of stakeholders in operational research: A stakeholder theory perspective. European Journal of Operational Research, 262(2), 402-410.

Freeman, R. E. (2016). A stakeholder theory of the modern corporation. In The corporation and its stakeholders (pp. 125-138). University of Toronto Press.

Freeman, R. E., & Dmytriyev, S. (2017). Corporate social responsibility and stakeholder theory: Learning from each other. Symphonya, (1), 7-15.

Freeman, R. E., Harrison, J. S., & Zyglidopoulos, S. (2018). Stakeholder theory: Concepts and strategies. Cambridge University Press.

Freeman, R. E., Phillips, R., & Sisodia, R. (2020). Tensions in stakeholder theory. Business & Society, 59(2), 213-231.