Stakeholder Theory
THE STAKEHOLDER THEORY
ABSTRACT
The theme or the background of this article is to explain the Stakeholder Theory detailed by R. Edward Freeman in his book Strategic Management: A Stakeholder Approach. This article will also highlight about the other business ethics theory like the Shareholder theory and will also draw a comparison between the two broad theories wiz. The Stakeholder Theory and The Shareholder Theory. The article also includes an analysis of the stakeholder theory based on some case studies. By the end of this article one should be able to understand the Stakeholder Theory and also should get a brief idea about my views on the Stakeholder Theory.
BACKGROUND
Who are the stakeholders and what do you understand by the stakeholder theory? Stakeholders are those groups who are interested in the performance of the company rather than just the profits of the company. The Stakeholder Theory was first explained by R. Edward Freeman in his book Strategic Management: A Stakeholder Approach. The theory explains the concept of which group of people in an organization need to be grouped as stakeholders and also how the company can work towards the interest of the stakeholders. In short, it addresses “the principle of who and what really counts”. Stakeholders can be grouped as internal and external stakeholders. Internal stakeholders are the employees, managers, board of directors. They are internal because they directly affect the operations of the company. On the other hand, external stakeholders include suppliers, society, government, creditors. The article will highlight the cases of two companies to explain the stakeholder theory in a better way. The first company will be Grameen Bank which is a Bangladesh based microfinance company. It works for the well being and development of the poor and underprivileged section of the society. The other company is Eros International which is an Indian based motion picture production and distribution company having offices in India, US, UK, Australia, Dubai and Fiji.
ANALYSIS
The first company I would like to discuss is about Grameen Bank. Grameen Bank was founded by Md. Yunus in 1983 with the main objective to provide small loans especially to women to help them come out of poverty. This was because the situation in Bangladesh was such, that private lenders were exploiting the poor by providing them loans at a very high interest rate. The bank did not want to commercialize their operations as Md. Yunus felt that this would deviate them from their main objective. The reason for this was once a company is listed on a stock exchange or has a large amount of private players involved, the company needs to concentrate more on the shareholder’s interest in order to raise funds. But Grameen Bank had a completely different approach. They did not rely on any funding from private institutions or trusts. Instead they depended on the funds which were deposited by their own customers in form of deposits. By this way, they could keep the interest rate low and could provide loans to the needy at a much reasonable rate. The profits made by providing such loans were distributed and returned to their customers in the form of dividends. For Grameen Bank, their main stakeholders were their customers and to protect and value the interest of their stakeholders was the first priority.
The second company which I will be discussing is a company from the media sector. The company is Eros International. Over the past few decades, Eros has dominated the Indian Film Sector with a market share of over 50%. The company was listed on the NYSE a couple of years back. On October 2015, when the company released its quarterly financial data, profits had increased over 90% and receivables from its Dubai business had increased by about 20%. This raised some serious questions and doubts in the minds of the analysts. When the financials and management were audited by an external company, it was found that to keep the share prices increasing and to keep its shareholders happy, the company had been releasing exaggerated financial data. Due to these reports, the share price of the company jumped from Rs.200 (Jan 2015) to Rs.600(June 2015). This jump attracted a lot of private investments, DIIs (Domestic Investors) and FIIs (Foreign Investors). The company had also launched a mobile app which was called Eros Now. To show the app’s success, the company had released false figures of its new user registrations. The top level management and the company’s auditor Grant Thornton India LLP were held responsible for this fraud. By this case, we can clearly understand that Eros International not only violated the principles of the Stakeholder Theory but also violated many other business ethics theories and practices. In order, to keep its shareholder happy and also to attract fresh investments, the company released false and misleading financial statements. Another example of a company violating the Stakeholder Theory is Kodak. Kodak was one of the leading photographic film producers in the US and had a market share of about 90%. In 1975, a 26-year old Kodak employee named Steve Sasson, developed the first digital camera. When he presented this business model to the higher managers, they declined it. They said that it would impact their core business of photographic film production and also this risk could lead to a fall in the company value. It can be said, at that time, Kodak did not value the interests of its employees (who are considered as stakeholders).