Importance of Stakeholders Essay Example

Importance of Stakeholders Essay Example Importance of Stakeholders Essay Importance of Stakeholders Essay The importance of stakeholders has increased over recent years. Previously, shareholders were deemed as the main consideration for organisations. After all, these are the people that invest in the company. This is known as stockholder theory and is closely associated with Milton Friedman (1970). Friedman believed that an organisations primary responsibility is to increase its profits for the benefit of shareholders. This was demonstrated in the Dodge v Ford Motor Company case in 1919. Henry Ford deemed that the company had made too much profit, and wanted to share these profits with the public (stakeholders potential customers) by reducing the cost of vehicles. However, shareholders challenged this development and won the case in the Supreme Court, when the court ruled that a business was for the purpose of making profit for its investors. This view has changed in the past 80+ years since this case. Whilst shareholders are an important element to an organisation, they are only one group of stakeholders that organisations have a duty to. It is now recognised that organisations have obligations to other groups that have a vested interest its operations. This change in thinking has led to the development of the stakeholder theory, advocated by Freeman (1984). This theory argues that there are a number of groups to whom businesses are accountable to when determining strategy and pursuing objective(s). The traditional belief is that only direct links to a business, such as shareholders, customers and employees have an input into organisational decisions. But as previously mentioned, stakeholders are not just internal to the organisation itself. When commenting on the importance of stakeholders, Halal (1996:64) referred to a stakeholder model of the organisation. This model views the organisation as a socio-economic system composing of various equally important groups, a view which links in with Freemans theory. Halal believes in the theory of the nature of the firm. In this theory, its stated that managers are dependent on stakeholders and have a need to combine the unique resource each stakeholder contributes, such as investor capital, talents of employees etc. This is a valid viewpoint and builds on the stakeholder theory by identifying the importance of such groups. An organisation that embraces the stakeholder theory is the ING group. In a speech at the Georgetown Business Ethics Institute in 2002, Ewald Krist, the CEO of ING stated: Greater influence is now put on organisations by external stakeholders, such as society itself. Shell fell foul of this in the early 1990s with its Brent Spar plant. The plant, decommissioned in 1991, was due to be dismantled by Shell and disposed of via Deepwater disposal. This created outrage from environmental groups with a belief that the seas should be kept clean. This led both Shell and the UK Government to look at alternate options, with Shell abandoning the deepwater plans in 1995. The plant was finally disposed of in 1999 after long discussions with various stakeholders, and the majority of the construction was used to form a new quay in Norway, a solution acceptable to environmental groups, along with other stakeholders. This showed that even large global companies had important stakeholders to answer to. Shareholders are still an extremely powerful stakeholder. Investors primarily concentrate on profit maximisation but this is not the most important consideration for other stakeholders such as customers, contractors or the local community. There have been numerous occurrences of shareholders ousting directors and chairmen. The most recent one occurred this month, when the chief executive of Deutsche Telecom, Kai-Uwe Ricke resigned after losing the support of key shareholders in the organisation (the German government and private equity firm, Blackstone). FT.com reported that support was lost due to poor results and plans to move 45,000 jobs to lower paid areas. This shows the difficulty in keeping all stakeholders happy. By moving the jobs, it should have increased the profitability of the organisation, and therefore would please shareholders. However, this conflicts with the unions viewpoint, which looks after the workforce and did not want to see profits increase at the expense of employees. Many organisations hit problems when trying to change their strategy. Even basic changes can be met with disdain from certain stakeholders, e. g.