Stakeholders & the social contract: a broader view of corporate governance


It is becoming increasingly common to take a very wide view of what corporate governance is all about. In this chapter we consider it in the context of all stakeholders to the business. We show the evidence of this approach by firms and the limits of the approach.

The Social Contract

In 1762 Jean-Jacques Rousseau produced his book on the Social Contract which was designed to explain - and therefore legitimate - the relationship between an individual and society and its government. In it he argued that individuals voluntarily give up certain rights in order for the government of the state to be able to manage for the greater good of all citizens. This was the idea of the Social Contract which has been generally accepted.

More recently the Social Contract has gained a new prominence as it has been used to explain the relationship between a company and society. In this view the company (or other organisation) has obligations towards other parts of society in return for its place in society.

This can be depicted thus:

The Social Contract

Fig 4.1 The Social Contract

This in turn led to the development of Stakeholder Theory, which we will consider in the next section.

What is a stakeholder?

There are several definitions. The most common ones are:

o Those groups without whose support the organization would cease to exist

o Any group or individual who can affect or is affected by the achievement of the organization's objectives

We can see from these definitions that a lot of people can be a stakeholder to an organisation. The most common groups who we consider to be stakeholders include:

o Managers

o Employees

o Customers

o Investors

o Shareholders

o Suppliers

Then there are some more generic groups who are often included:

o Government

o Society at large

o The local community

Many people consider that only people can be stakeholders to an organisation. Some people extend this and say that the environment can be affected by organisational activity. These effects of the organisation's activities can take many forms, such as:

o the utilisation of natural resources as a part of its production processes

o the effects of competition between itself and other organisations in the same market

o the enrichment of a local community through the creation of employment opportunities

o transformation of the landscape due to raw material extraction or waste product storage

o the distribution of wealth created within the firm to the owners of that firm (via dividends) and the workers of that firm (through wages) and the effect of this upon the welfare of individuals

o pollution caused by increased volumes of traffic and increased journey times because of those increased volumes of traffic

Thus many people also consider that there is an additional stakeholder to an organisation, namely:

o The environment

As we will see in the next chapter the actions of an organisation have a big effect upon future possibilities. It is for this reason that we also add one extra stakeholder:

o The future

It should be noted however that others do not generally include the future as a stakeholder.

Multiple stakeholdings

It is normal to consider all of these stakeholder groups separately. It should be noted however that each person will belong to several stakeholder groups at the same time. For example a single person might be a customer of an organisation and also an employee and a member of the local community and of society at large. He or she may also be a shareholder and a member of a local environmental association and therefore concerned about the environment. Most probably that person will also be concerned about the future also, on their own behalf or on behalf of their children.

We can therefore see that it is often not helpful to consider each stakeholder group in isolation and to separate their objectives. Reality is more complex.

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