Stakeholder theory

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Source: Tilling, 2004

Again, social acceptance of a firm is not just abstract or psychological; a key motivation for firms pursuing legitimation is to gain access to resources. Resources are “all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by the firm”

(Barney, 1991: 101), which includes subsidies, property rights, and contracts from the public sector, patronage from customers, investment from the financial sector, and much more.

Moreover, Hearit (1995) emphasizes that these resources that are “necessary for survival” are key indicators for measuring legitimacy. For example, the legitimacy of a business might be loosely calculated based on levels of consumer support, political approval, and other assets at a firm at different points in time or between multiple, comparable firms at the same point in time.

Suchman (1995: 575-6) defines legitimacy itself as a resource that businesses need to operate.

Finally, Hart (1995) broadens traditional notions of limited corporate resources by focusing on environmental resources and environmental services in the firm; during a crisis of legitimacy, for example, a business might lose its privileges to use local environmental services (like water for waste disposal).

Legitimacy theory helps to conceptualize how and why firms seek societal approval. The following paragraphs explain stakeholder theory, which explores the constituents of societal approval and how businesses keep track and prioritize which societal cues merit a response.

While many of the examples of CSR, corporate citizenship and legitimation described above involve disclosure, philanthropy and public relations work, this research focuses on initiatives that require less superficial measures; investment into environmental technology and

environmental practices take capital, expertise, and operational adjustments, and only the most significant stakeholders and pressures to legitimize will bring about this level of commitment.

3.4 Stakeholder Theory

Stakeholder theory explains more deeply the makeup of groups with the power to grant or deny societal approval and thereby control the flow of crucial resources to and away from the firm. In Freeman’s (1984) groundbreaking work on the subject, he defines stakeholders as groups or individuals that are affected by corporate actions and may affect the corporation in turn. He also quotes the Stanford Research Institute in an international memorandum that states that stakeholders are “those groups without whose support the organization would cease to

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exist.” The term “primary stakeholder” is typically reserved for those groups that interact directly with the firm and control the resources on which it depends, while “secondary stakeholders”

make no transactions with the firm but still feel its impact (Mitchell et al., 1997; Moir, 2001).

Still, regardless of their primary or secondary status, all stakeholders are also said to have

intrinsic value in that their needs and concerns warrant consideration regardless of the effects on a business (Donaldson & Preston, 1995).

According to stakeholder theory, corporate environmental behavior results from a nexus of contracts between companies and their stakeholders, especially when the success of the

corporation hinges on fulfilling these formal or informal contracts.⁷⁷ In other words, corporations have the duty to respect the rights of stakeholders as a matter of legal and moral principle. First, with respect to legal contracts, an increasing number of stakeholder groups can point to laws that defend their interests (and counteract the corporate mode of prioritizing shareholder interests).

For instance, EPA emissions standards constrain companies by holding them accountable for polluting externalities and help to protect the valuable natural resources on which communities depend. Labor laws that uphold a minimum wage and counteract discriminatory practices also take care of employee stakeholders. By contrast, informal contracts based on a moral obligation follow the same logic as firms’ search for congruence with societal norms, i.e., the legitimation process. Given the diversity of primary and secondary stakeholders, however, as well as the possibility that their desires and expectations may conflict, a key component of the literature involves identifying and evaluating the relative strength of different stakeholder groups.

Moir (2001) calls this important component of stakeholder theory research “stakeholder salience.” One theory of stakeholder salience focuses on three characteristics that different groups possess in unequal amounts: power, legitimacy and urgency (Mitchell et al., 1997; Agle et al., 1999). With respect to stakeholders with a sense of urgency, Huang and Kung (2010) suggest that stakeholders with strong economic interests affected by firm behavior are more likely to impact firm decision making. Thus, the most powerful campaigns to enhance corporate environmental investment might promote such investment as a matter of economic necessity.

Using a similar reasoning, Freeman (1988) identifies six critical stakeholders for corporate

77 Moir (2001) explains social contract theory as another theory of CSR decision making separate from stakeholder theory, but the same principles and even terminology are employed across the field of literature.

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management: owners (especially shareholders), suppliers, employees, customers, the local community, and managers. In this study, stakeholder groups fall into different categories based on which sector they belong to, and their relative salience in corporate decision-making is explored in the discussion section.

Legitimacy theory and stakeholder theory arguably involve some inherent theoretical limitations that hinder their usefulness in this study. In his 1988 essay about stakeholder theory, Freeman asserts that his idea has a “normative core” — it describes managerial capitalism as it ought to be rather than as it is. Thus, stakeholder theory is a useful idea for conceptualizing the societal potential of a corporation, but a normative theoretical focus is inherently unscientific if the question at hand pertains to the nature of the decision-making process in corporations.

Although a society with developed social and environmental consciousness may conceive of corporate behavior in this way, social and environmental values have relatively little impact in a corporate paradigm that — as a matter of fact and a matter of law — must prioritize maximum profitability. Legitimacy theory could fall victim to the same wishful thinking. Although the theory implies the more rational model of resources flowing from happy stakeholders to corporations, the theory still employs shades of normativity that fail to convincingly explain corporate behavior. At the heart of the matter, companies stay in business in order to make money, not in order to establish their legitimacy. If legitimacy, like stakeholder rights, enters into the minds of corporate managers at all, it is likely a secondary and supplementary concern to the impetus to make enough money to stay in business and prosper. Still, these theories — especially in their descriptive iterations — offer the most comprehensive and compelling explanations for corporate behavior in the literature.

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Figure 17: Evolution of stakeholder theory

Source: Elias et.al, 2001