Stakeholder Theory in Business Ethics and Management

Stakeholder theory 1
Stakeholder theory is the conceptual structure of business ethics as well as organizational
management which raises concerns on morals and ethical values in the running of an
organization (Harrison and Wicks, 2013). The shareholder theory was first addressed in the
strategic management book which is a stakeholder approach by R. Edward Freeman and it
provides a guide on the way management can fulfill the desires of the stakeholders in an
enterprise (Brower and Mahajan, 2013). Stakeholder theory aims at ensuring that individuals
have a broad understanding of the concept of stakeholder and can perceive how this concept may
aid in changing management practices. According to Harrison and Wicks (2013) the stakeholder
theory enables individuals in the corporate part of the organization to have a precise study of
how the business operates as part of its diverse environment and the way its routine process of
operation affects the stakeholders. This theory perceives the corporation as a portion of an
extensive social body rather than a particular entity and has responsibilities to individuals and
groups besides the owners.
The Stakeholder Theory can be defined as a conceptual framework that involves business
management and ethics, which are essential for addressing ethical and moral values, which
governs the management of the organization. The stakeholder theory also focuses on the
relationship that an organization has with other people, belonging to the internal and external
environment of the business. These relationships influence the working of an organization. The
stakeholder theory recommends a core purpose for every business, which is to increase its
stakeholders, as it will increase the value of the organization. For an organization to succeed, it is
crucial that the interest of the stakeholders, customers, employees, suppliers, and communities
should be aligned appropriately and in the same direction. Thus, for the alignment of these
interests, innovation should be practiced in an organization (Harrison, Freeman and Cavalcanti
Sá de Abreu, 2015).
Principles of Stakeholder Theory
There are six core principles of stakeholder theory –
 Principle of entry & exit
According to this principle, there should be clear guidelines for hiring and terminating an
employee.
 Principle of Governance

Stakeholder theory 2
This aspect focuses on the rules that govern the relationship between the stakeholder and the
organization and the possibility of amending them.
 Principle of Externalities
This principle offer right to a person to become a stakeholder, if the person suffers due to the
business. For example, a person who has to pay the losses of a stakeholder.
 Principle of Contract Cost
This principle states that every party who has a contract should bear the cost which should be
directly proportionate to the benefits gained from the organization (Bhasin, 2018).
 Agency principle
This principle states that the manager of the organization is an agent and the manager has
responsibilities towards both shareholders and stakeholders.
 Principle of limited immorality
This principle is concerned with only one aspect which is the longevity of the organization.
The research on the stakeholder theory emphasizes on the need of stakeholders to embrace
ethical skills at all their respective workplaces. The first action to consider would be to reveal as
well as to question the managerial assumptions concerning stakeholders to take part in planning
and in the process of deciding for the firm (Brower and Mahajan, 2013). It is essential for the
corporation to utilize the stakeholders in overviewing the outside environment of the firm as well
as in assisting in tactical planning and control.
Example
The Toyota brake pedal recall incident, in which Toyota has to bear a fine of $16 million for
hiding and ignoring a defect from the US transportation safety agency. The stakeholder who was
responsible for the product safety and also the one who identified the problem way before the
recall in the year 2009, should have rectified the problem.
In this case, the stakeholders have to bear the losses. Also, the fact that the safety agencies, who
are the external stakeholders were not informed about the problem in advance, which is a
violation of a stakeholder principle.
Inclusivity of the stakeholders in the process of decision making in the firm assists in a wide
variety of perspective approaches that will assist in solving complex problems in the firms
(Harrison and Wicks, 2013). Stakeholder analysis is an essential technique to integrate into the