Stakeholder theory and Corporate Ethics

Stakeholder theory and Corporate Ethics

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Stakeholder theory and Corporate Ethics

Edward Freeman states that an organization cannot exist on its own. It needs different stakeholders to perform its activities and ultimately achieve its objectives. Those stakeholders also fulfill their individual goals through their engagement with the organization. The role of the managers, therefore, is to align the organization’s interests with those of its stakeholders for all parties to derive maximum benefit from their interaction. However, priority is given to those relationships with the lowest cost and highest benefit to the organization. The main reason for the direction is always profit and increasing the value of shares. Other objectives are secondary.

All stakeholders have their interests, which can only be fulfilled through activities carried out with the organization they are affiliated to. For most stakeholders, their primary interest is usually financial, thus expect to save more or spend less. For instance, suppliers require timely payment, creditors expect to make interest from their loans, and shareholders expect regular dividend payments and rising share values. They also expect to derive non-monetary benefits from the affiliate institution on account of their importance to the survival of the organization. For example, loyal customers want affordable, but quality products and long-serving employees want better pay and the right working conditions. Stakeholders, therefore, want managers to take great care of their interests to the same extent they have helped them achieve their interests.

Ethics refers to the moral principles that govern the behavior of people as they conduct their activities. These principles are implied, derived from the behavior of people taught or passed down to others. Business ethics, on the other hand, are usually laid down a framework that is set to protect the interests of stakeholders of a concern in case one party acts mischievously. It includes the business policies that an organization has to implement to make sure it discharges its responsibility towards various stakeholders.