MBA Stakeholder Theory

Stakeholder Theory

Business and management ethics encompasses numerous theories which provide adequate explanations on how moral and ethical issues in business can be addressed. They are important in management of businesses organizations because they set up the outline on which managers should monitor the distinctive operations in their organizations (Hasnas, 2013,112, p47-57). These theories are important in managing entities since they work towards establishing avenues that are important in guiding human beings in their daily activities. Theories like normative theory have been identified to be important in business management and organization control because it offers focus to managers and all other important stakeholders in the entity (Miles, 2012, 108, p285-98).

These theories attend to distinctive aspects in an organization which enables effective running of these entities. They have certain specifications which differentiate them from other theories and aid in outlining their purpose in a business setting. For instance, a theory like the normative theory is identified by its prescriptive nature and its ability to give direction on how certain actions should be done. It is known for its concerns about moral issues in an entity. This differentiates it from other theories like the philosophical ethics theory and many others. This paper therefore is focused towards establishing validity of stakeholder theory as an ethical theory which has been largely used in the business and organizational settings for long (Parmar, Freeman, Harrison, Wicks & Purnell, 2010, p10)

History of Stakeholder Theory

The stakeholder theory is an organization oriented as well as business focused theory which points out importance of shareholders in an entity, the rights that they deserve as well as benefits that they should get. These it explains based on the argument of maximizing shares of the shareholders their access to information as well as control on the issues of the organizations they are having shares in. the theory is said to have been established by Freeman in 1984 in order attend to ethical practices in business management (Purnell & Freeman, 2012, 108, p285-98.)

Understanding this theory it is significant to establish who these stakeholders are and what qualifications one have to be a stakeholder. This is important because it will help in ascertaining whether the arguments that the theory puts forth are valid or not. This in turn helps the study to identify the levels of ethics in this theory (Purnell & Freeman, 2012, 108, p285-98.)

.Stake holders are considered to be individuals or groups that have legal claims in the operation of an organization. These individuals or groups ranges from the local community where the business is situated to its suppliers, the people it employs, people possessing the organization`s stocks, its customers and all parties which plays important part in its existence (Wempe, 2008, 18, p549-53). The coordination of these groups is significant for development and growth of a company. Their interactions and coexistence will possibly determine the extent to which such a business entity can move in terms of prosperity, and it is due to exclusion that freeman noticed in his time that perpetuated development of stakeholder’s theory.

Stakeholder Theory Ethics

The theory can be considered ethical on different ground, first, ethics in the theory is identified by fact that it advocates for consideration of other parties which have important contribution in a firm. In this way it tries to disengage the ancient belief that operations in a business entity are directed towards increasing the profits of the stockholders while ignoring other groups like employees,  customers and local community which have numerous parts to play in the well-being of the business. Stakeholder theory stipulates that apart from stockholders other parties should be given adequate attention and their priorities should not be neglected. In this way the theory advocates for selflessness, which is an ethical aspect in the society. It tries to decentralize benefits of businesses to everyone and ensure equity in gains of business outcomes (Parmar, Freeman, Harrison, Wicks & Purnell, 2010, p10). It also has an active campaign against high preferences on profits rather than on their stakeholders who ensure that these profits are generated. It does this by pointing out and explaining the values of every stakeholder in operation and sustenance of a business entity. Every constituency in a business has an important role they play to ensure that the objectives and goal of the firm are met. It is therefore not the efforts of the shareholders which generate quality outcomes in a business but a combination of different parties which serves different purposes. This makes ideas that business is a moral involvement where people who do not work benefit at the expense of those who bear larger part of responsibility to lack relevance (Purnell & Freeman, 2012, 108, p285-98.)

Human beings are not means to an end but rather the end itself, groups` contributions towards prosperity of any entity cannot be considered means to an end. By addressing this fact stakeholder theory is justified as an ethical theory. This is because it tries to address issues of exploitation of human capacities, creativities and potentials in a way that will not be egalitarian (Miles, 2012, 108, p285-98). The theory argues that every stakeholder groups needs to be awarded its share of contribution in promoting future of the entity they are associated with. This becomes ethical since it tries to prevent instance of exploitation and greed which might be making some entities in a business better off while others are getting worse off.

By addressing how operations in modern organizations which do not take interests like basic needs of its stakeholders in accounts is a moral foundation on which this theory is built on. The theory identifies issues such as safety and health of the employees and other stakeholders to be equally important in the process of generating profits for the stakeholders. In this way an ethical working environment is facilitated where activities from economic entities which might be having adverse effects on those who contribute to growth of such an organization can be attended to and compensated adequately (Purnell & Freeman, 2012, 108, p285-98.)

In establishing fundamental moral principle in any business operation the theory advocates for equality in sharing of benefits of a business involvement. It is more directed to the universal moral attribution of human personality which Charles Taylor advocated for in his time. This means that everyone who is actively contributing to any process is bound to be considered relevant and significance participant in the process. Such parties have to receive shares of the outcome of the productive process that they took part in minus any form of exclusion. As a result of this the theory addresses need to ethical appreciation of human agents as important component in production. This he theory explains that it should be on an equal level without any form of inequality (Miles, 2012, 108, p285-98).

Pragmatism also emerges as another reason for the theory to be accepted as an ethical postulation. This is based on notion that, by managing stakeholders the entity is not only operating on ethical grounds but promotes its capacities to succeed since stakeholders are important people that an organization cannot operate without. In the same way world is controlled by principles of ethics and it is these principles that help to create order in all sought of interaction and engagement. This calls for need to establish explanation of the world, what is in it and how it operates. This creates the ethical basis of the theory, since it helps in creating order by establishing what constitutes business management and the expected relations in the business relations.

The theory also calls for coexistence and establishing of strong relationships between the participants of a business organization. This proves ethics in the theory since it implies that there is no business which cans operate in evacuee. In the same way the stakeholders depend on the business is the same way the business relies on the well-being of stakeholders. This makes these two parties to be inseparable hence the need to cordially coexist.

Summary of normative and stakeholder theory

Normative theories basically judges whether an action is moral or immoral based on two aspects and these are the consequences that an action causes as well as based on the characteristics of the actions themselves, their nature and manner in which they are carried out. The theory argues that an action can be right or wrong provide that it is promoting and individual`s long-term gain or it undermines it respectively. This argument is founded on the concept of egoism, these can be personal impersonal or psychological. All of these aspects have a common argument in that they advocates for taking particular decisions and courses in life that benefits one self.

On the contrary the utilitarian aspect argues differently, since it tries to address its concern a way from individualism. In this way it advocates for business decisions and activities to be done in a way that don’t benefit oneself but a greater number of people. Human actions should be directed towards creating the greatest welfare of human person in a universal way so as to ensure that people are at the same level and that others do not get disadvantaged while others are benefiting (Wempe, 2008, 18, p549-53).

Therefore according to normative theory net worth of happiness and well-being of human beings should be given first priority in enacting decisions. People should also be presented with equal opportunities to help them discover their full potentials and also to help the gain from whatever activity they are being involved in. in so doing greater degree of morality and ethics will be achieved.

The martin Friedman’s view that business entities do not have any form of moral obligation or social responsibility if not increasing the profits  that they generate in their operations is what is being referred to as shareholder theory. The theory argues that the shareholders are the main drivers of any business entity this calls for needs to be socially responsible to the shareholders and not their exclusion as it happens in most cases. The theory stipulates that business organization will not adequately attend to the society if it starts to concern itself with it. In this way it advocates for a society where the businesses ensure that the only responsibility they have on the society is to ultimately utilize their profits in a way that it does not operate outside set regulations and standards.

Stakeholder Theory
Stakeholder Theory

Critical analysis of both the normative and the shareholders theories provides imperical evidence can be established the shareholders theory is part of normative theory. This is because normative theory explains the importance of moral action to undertake when making certain decision. In the same way shareholder theory seems to be stressing on the same issue based on what should an organization do so that it does not make profit only but increase welfare of those who contributes to its growth.

Issues identified in the literature

There is issues of diversity in the stakeholder theory, the study realized that more than one variety of stakeholder theory do exist this is clearly presented by Goodpaster in his stakeholder analysis and stake holder synthesis. Therefore goes ahead to refute the idea of using stakeholders issues to introduce ethics in business management activities (Purnell & Freeman, 2012, 108, p285-98.). This issue can be resolved by identifying ethical practices which business institutions are supposed to incorporate in their operations so as to avoid contradictions which arise due to dualism in the theory. The other issue that the study has presented is absence of justifications for certain claims in the theory, this can be seen in Donaldson and Preston`s study which argues that the theory cannot be depended upon since it lacks proper justification for claim and postulations it makes. The other reason that the two give for inability to justify stakeholder theory is fact that the theory itself is a prescription of what is expected in an organizational setting and not description of what should be done to attain the expected ethical standards.

The theory is also divided between instrumental and normative theories. This makes its classification difficult undertaking since it bares characteristics of the two types of theories. It also deals with importance of managers and their contributions in a business. The theory points out reasons as to why stakeholders has to be given attention in an organization due to their financial contributions they make to business as well as other significant contributions. The work also focused on conflict within the stakeholder theory which makes it contradicts itself hence giving validation to the critics’ perspectives on why the theory should be applied as basis of ethics evaluation in an organization (Purnell & Freeman, 2012, 108, p285-98.)

Application of Stakeholder Theory

The theory was widely practiced in Australia in the period after the post-war, this practices was associated with increase and escalation of entities which called for managerial controls. Growth of huge corporations owned by the Americans as well as the increased bureaucracies in these periods to a large extent facilitated the development of this theory and its application. The need for its use was voiced by vast number of stakeholders in Australia at that time that seemed to possess limited influence on issues of management of entities where they were stakeholders (Wempe, 2008, 18, p549-53).


When establishing a theory it is significant to address all the aspects it is advocating for in a clear and precise way. This is to help avoid contradictions an inability to establish ethics in such postulations. Despite this collective inclusion of people who are an important part of a process is significant. This is because it promotes the sense of ownership and ethical values in the operations of such entities.


Hasnas, J 2013, Whither stakeholder theory? A guide for the perplexed Revisited. Journal of Business Ethics, 112, p47-57.

Miles, S 2012, Stakeholder: Essentially contested or just confused? Journal of Business Ethics, Prentice Hall, New York.

Parmar, B, Freeman, R, Harrison, J, Wicks, A &Purnell, 2010, Stakeholder theory: The state of the art. Academy ofManagement Annals, Prentice Hall, New York.

Purnell, L & Freeman, R, 2012, Stakeholder theory, fact/value Dichotomy, and the normative core: How Wall Street stops the ethics Conversation. Journal of Business Ethics, 108, p285-98.

Wempe, B 2008, Understanding the Teparation thesis: Precision after the Decimal point? Business Ethics Quarterly, 18, p549-53.

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