Stakeholder Theory:

 

1.Stakeholder approach to Corporate Governance:

Agency theory is based on the assumption that the main objective of a company should be to maximize the wealth of shareholders.Management should therefore act and take decisions in the best interests of the shareholders.Corporate governance should therefore be concerned with minimising agency cost,by improving the monitoring of management and by bringing the self-interests of management more into the line with the interests of the company's shareholders.

 

The stakeholder view is that thepurpose of corporate governance should be to achieve as far as possible,the aims of all key stakeholders-employees,investors,major creditors,customers,suppliers,the government,local communities and the general public.A role of the company's directors is therefore to consider the interests of all the major stakeholders.However some stakeholders(for example,employees) might be more important than others,so that management should give priority to thier interests above the interests of other stakeholder groups.

 

In the introduction to its principles of corporate governance,the OECD commented that an aim of government policy("public policy") should be 'to provide firms with the incentives and discipline to minimize divergence between private and social returns and to protect the interest of stakeholders.

 

The OECD principles themselves recognise the role of stakeholders in corporate governance and state that the corporate governance framework should:

• recognize the rights of stakeholders that are recognised in law or through mutual agreements and also

• encourage active co-operation between corporations and stakeholders in creating wealth,jobs and the sustainability of financially sound enerprises.

 

2.Definition of stakeholder Theory:

The theory states that a company's managers should take decisions that take into consideration the interests of all the stakeholders.This means trying to achieve a range of different objective,not just the aim of maximizing the value of the company for its shareholders.This is because different stakeholders each have their own(different) expectations from the company,which the company's management should attempt to satisfy.

 

It has been suggested that in stakeholder theory,the company should have an individual set of values that provide an environment in which the interests of different stakeholders can co-exist,and stakeholders can co-operate to achieve their differing objective.

 

Stakeholder theory can be seen as a mix of a variety of disciplines which produces a blend of sociological and organizational ideas.As companies are so large,they have an impact and not just on their own shareholders,but on many more sectors of society.

 

3. Rights for Stakeholders:

Supporters of stakeholder approach to corporate governance recognise that only the senior managers and directors of a company,and the shareholders,have any significant power within the framework of corporate governance.

 

A stakeholder approach to corporate governance can therefore be implemented only by:

• negotiation and co-operation betwwen management and employees,and

• legislation giving rights to stakeholders or protecting stakeholder rights.

 

4.Stakeholder theory and agency theory:

Stakeholder theory,that a company has obligations to other stakeholders in addition to shareholders,is based on different assumptions from agency theory, which is based on the view that managers should act in the best interests of the shareholders.However,the two approaches to governance(and ethical theory)are not necessarily inconsistent.

 

Companies and their managers can act in the best interests of shareholders and at the same time attempt to satisfy interests of other stakeholders.For example,shareholders themselved might not have an objective of wealth maximization.They might want to obtain satisfactory returns,but at the sametime might want the companies they invest in to shown suitable concerns for society and the environment.

In other words,best practice in corporate governance and corporate social responsibility might be consistent with each other.