What Is Stakeholder Theory

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In his work on the stakeholder theory of the modern corporation, R. Edward Freeman argues that the theory of shareholder value maximization has become inherently irrelevant, given the legal advancements in the contemporary economy. He proposes an alternative view of the modern corporation by extending the range of groups having a moral claim on the organization (Freeman, 2001). The following sections discuss the particulars of the stakeholder theory.
1. Issue Under Discussion
The major issue put forth by Freedman argues that at whose expense and in whose interest a corporation should be managed. Freedman tries to explain the peripheral nature of pursuing the sole goal of profit maximization. He asserts that legal and economic
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Personal Viewpoint of Author’s Conclusion
In my opinion, Freeman offers a valid and practical theory in response to the privileged position of shareholders. The theory is based on values and moral grounds, thus making it a better alternative than managerial capitalism. Managerial capitalism and shareholder wealth maximization have repeatedly led to ethically opprobrious business management. Thus, the all-inclusive theory of stakeholders provides an opportunity to remedy the ethical failures of organizations.
Although, theoretically it makes sense to include the input of a wide range of groups when determining the future of an organization, it might not be that simple in reality. Given that shareholders have invested significant financial resources in the organization, why would they ever trust management, if there were a slight possibility that it might be in pursuit of something other than the welfare of the financiers. I personally think that Freeman’s view of the stakeholder theory requires further research and development, in a manner that aligns the goals of all stakeholders and provides efficient conflict resolution
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It ensures that management takes into account the interest and welfare of the greatest number of people, rather than focusing only on shareholders. Similarly, Kantian ethics deem the stakeholder theory to lead to moral decisions. It requires the management to consider all stakeholders as an end in themselves, rather than as a means to achieve profit maximization for the shareholders. Thus, all stakeholders hold a right to be respected and treated as an end on their own. This further justifies the stakeholder theory on the normative grounds of rights theory, as it empowers the management to uphold the moral rights of all individuals, having a stake in the organization.
From an economic perspective, it is important to note that while managerial capitalism assumes perfect market conditions, the reality is quite different. As explained before, imperfections in the market emphasize the importance of recognizing the impact of stakeholder actions. Being responsive to the stakeholder needs enables organizations to achieve a competitive by forming strong relationships. Such a competitive advantage can prove to be crucial for organizational
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