The Stakeholder Theory

The Stakeholder Theory is a theory of organizational management and business ethics that addresses morals and values in managing an organization. First of all, Freeman thinks shareholder are not equal to stakeholder. Stakeholders have a moral claim on the corporation because the corporation has the potential to harm or benefit them; Shareholders has a moral claim on the corporation is the people who own shares of the stock.

For stakeholders, they are vital to the survival and success of the corporation, their relationship with the corporation enables them to be benefited by the corporation’s actions and operations, the relationship also makes it possible for the corporation to harm them or to violate their rights. Freeman defines stakeholder theory as redistributing benefits to stakeholders and redistributing important decisions.

In Freeman’s the there are two arguments:

1. The “legal argument” – Society has substantially limited the unrestricted pursuit of profit via laws and regulations.
2. The “economic argument” – In its criticism of government regulation, management support the “invisible hand”. It contends that it creates the greatest good for the greatest number, and therefore, government need not intervene.

In Freeman’s theory, corporations have to take all of the stakeholder groups into account when making a decision. He has six groundrules as a doctrine which would guide actual stakeholders in devising a corporate constitution:

1. The Principle of Entry and Exit: Clearly defined entry, exit and renegotiations conditions
2. The Principle of Governance: Rules of the game set by unanimous consent
3. The Principle of Externalities: If effected person want can be renegotiated
4. The Principle of Contracting Costs: Shared cost of contracting
5. The Agency Principle: Must act in the interest of all stakeholders
6. The Principle of Limited Immortality: Continued existence of Corporation is in all stakeholders’ interests