The ongoing hot debate in the corporate world has been polarized on the issue of whether corporates need to take care of the shareholders or the stakeholder interests. The stakeholder and the shareholder perspectives provide different and unique ways of justifying and understanding fundamental questions related to the purpose of corporations and their associated structure of arrangements and governance (Jensen, 2009). On the one hand, the traditional shareholder perspective argues that the corporations have their sole purpose of fulfilling the interests of the shareholders, who are the owners of the corporations. The key solution to fulfilling the interests of the shareholder is for the company to maximize its profits regardless of the means used to achieve the profits. On the other hand, the stakeholder’s perspective argues that corporations need to have the stakeholders’ interests in their structure, rather than just investments return for shareholders (Hörisch et al., 2014). In this case, the stakeholders of an organization refer to employees, customers, local communities, suppliers and creditors.
Consequently, contemporary organizations have been at crossroads regarding which paradigm to follow in their structure to ensure their survival. While profits are essential for the running of the company, it is also imperative that the needs of the stakeholders are taken care of for a company cannot survive without them (Taghian et al., 2015). For instance, a company with unhappy employees may make profits, but it may always be in the limelight for ethical issues, have high turnover, and thus always on its toes to find other employees. Similarly, those companies that do not take regard for their local communities may have to fight negative publicity and legal pursuits and hence need to use the money to make amends. As a result, it makes it crucial for the companies to try and maintain a balance of the interests of the shareholders as well as that of the stakeholders (Keay, 2010). The big question in contemporary society that is characterized by throat-cutting competition is how do companies make the balance, and this makes a majority of the companies forego the stakeholder’s interests for the profits of the company (Mainardes et al., 2011). The following paper seeks to identify whether it is the duty of companies to promote the interests of the stakeholders. The paper will have a special interest in the case of Nike inc. and seek to answer the question, why did Nike inc. chose to implement community support programs and encourage its employees to participate in giving back to society?
Chapter 1: Description of the challenge
Corporate social responsibility (CSR) refers to the voluntary actions that organizations take in order to benefit environmental and social causes. These actions are communicated to the key stakeholders and shareholders of the organization. Studies have found that CSR activities have an influence on the reputation of the company, which directly influences the performance of the firm either positively or negatively, based on the type of CSR action the company took (Ayuso et al., 2014). A majority of the firms that engage in CSR activities do so to be perceived as socially responsible, while those that do not have been referred to as socially irresponsible. Apart from being referred to as socially responsible, it is ethical for companies to take accountability for their actions, a majority of which have led to environmental degradation by acquiring resources from the environment or releasing gases and other pollutants into the surroundings (Silva et al., 2019). So engaging in CSR gives them a chance to take care of the environment which they take part in destroying. However, the fact that CSR is voluntary should not be taken as the only means of addressing the social consequences of organizational operations.
There has been an ongoing debate regarding the voluntary actions that businesses should engage in and how they impact the profitability that a company should satisfactorily meet for its shareholders. Some studies argue that engaging in CSR may reduce the profitability of the company. According to the agency theory, the managers are the representatives or agents of the shareholders, and they should selflessly represent the interests of the shareholders in the company (Bosse and Phillips, 2016). Failure to do this reduces the profits of the company, which affects the general operations of the company since the external lenders would not invest in companies that are making losses (Jensen, 2010). This conflicts with the managers’ role of protecting the stakeholders such as employees, and suppliers, who are their subordinates, and hence expect the managers to take care of their interests. It is worth noting that corporations’ operations are of broad concern that their impact is felt by many, and hence corporations cannot only be managed for the benefit of the shareholders only.
Despite the need to take care of the shareholder’s interests, the profits may go down when that of the stakeholders is ignored. Yet, a majority of companies chose to ignore that of the stakeholders over that of the shareholders (Freeman et al., 2021). In return, negative publicity follows the company, and this affects the returns of the company largely. Traditionally, through personnel management, employees were tools for achieving organizational goals, but in the contemporary business environment, the needs of the employees need to be taken care of. Akin to this Justice (2002), argued that happy employees are capable of producing happy customers, which in return affects the productivity of the company positively. The question that this paper seeks to answer is, are organizations responsible for taking care of the interests of the employees? If the answer to the question is yes, then the managers need to accommodate the stakeholder’s interests too and balance them with those of the shareholders. If the answer is no, the paper should answer who should be responsible for taking care of the stakeholders. The work will focus on the stakeholder’s theory and the agency theory to understand if it is the responsibility of the firm to take care of the stakeholders’ interests.
Chapter Two: Analysis of the challenge using the stakeholder’s theory
A stakeholder is anyone who affects or is affected by the operations of an organization. According to Jensen (2010), stakeholder’s theory argues that when businesses adopt the relationships between business and stakeholders as units of analysis, then there are better chances of solving problems of value creation and trade, ethics of capitalism and managerial mindset. Further, he argues that business is better understood as a set of relationships between customers, employees, communities, suppliers, managers, and the shareholders where they all interact to jointly create and trade value. A better understanding of the relationship and how they change over time helps businesses to thrive. According to the author, the role of the management is to manage the relationships and in case there are conflicting interests among the stakeholders, the managers should rethink and ensure that the needs of the broader group of stakeholders are addressed (Silva et al., 2019). This also creates more value for each group. However, since all the stakeholders do not have an equal interest in the corporation, another role of the manager is to balance which stakeholders get what, while engaging with all stakeholders in a mutually respectful manner.
According to Podnar and Golob, (2007), the stakeholder’s theory is an organizational management theory that purports to show the purpose of corporations. They then express three aspects of the theory; normative, instrumental, and descriptive aspects. The normative view of the stakeholder’s theory is a moral basis theory that guides corporations on how stakeholders should be treated, arguing that they are ends and not means to achieve the end. Their value is inherent to the corporation, and hence the firms cannot do without the stakeholders, hence the need to treat them with the respect they deserve (Liu and Zhang, 2017). As such, the normative view disagrees with the shareholder primacy, which argues the role of corporations is to maximize the wealth of the shareholders, treating the rest of the non-shareholders stakeholders as means to achieving the wealth without regard for their concerns and needs (Carroll and Buchholtz, 2014). The instrumental view offers s framework used to examine the links between corporation performance and the practice of stakeholder management, and it is concerned with how proper management of stakeholders can lead to productivity and success of the corporation. Lastly, the descriptive view explains the specific corporate behavior. The normative view is the core of the theory, and it is what this paper will put much emphasis on.
The stakeholder theory does not ignore the shareholders, but it recognizes them as one of the many diverse stakeholders who compete for the interests of the corporation (Wang et al., 2012). It seeks to have an inclusive approach toward all participants from a social, political, and economic perspective (Wang et al., 2016). Further, the theory argues that all the participants work together for a common interest, and shared benefits, hence focusing on ensuring that all the parties have their full potential fostered to ensure the common good is achieved. As a result, the theory argues that value should be created for all those who contribute or are affected by the operations of the corporation (Martínez et al., 2016). Further, the theory condemns the acts of externalities, where companies make their employees and other non-shareholding stakeholders pay the cost of the corporations, while all the resulting benefits such as dividends and increased cost of shares are transferred solely to the shareholders.
According to Keay (2010), the main idea of the stakeholder’s theory is viewing the groups of interest as stakes. He goes on to define a stake as a real or an asserted interest be it moral or legal. Asa result, a stake in a corporation is someone who has something that is at risk because of any action undertaken by the corporation. Consequently, the management of the corporation has a moral obligation to spend resources and time on such a person. According to Freeman (1984), a stakeholder has morally valid claims on the corporation and not just economic claims. This then calls for action-oriented relationships from the corporation toward the stakeholders. With this, managers would be aware of the impacts of every decision they make on the stakeholder groups.
While contrasting the shareholder and communitarianism perspectives, the stakeholder’s theory does not separate ethics from business but rather embraces ethics in every aspect of the corporation. The theory is used as a basis for corporations to translate business ethics to management strategy and practice. It is this view that allows the stakeholder’s theory to embrace other values such as trust in its operations other than efficiency only as it is with the shareholder’s theory. Eskerod and Huemann (2013) agree that trust is a valuable element of the theory where the stakeholders need to trust the corporation where each of the groups accepts the optimism and vulnerabilities of each other. In so doing, the involvement of the stakeholders in the decision-making process is priceless.
The theory has been criticized, where some studies argue that it has been put in place to act as an excuse for managerial opportunism. In so doing, the critics argue that the theory grants the firm managers a chance to engage in self-dealing defense, making it difficult to judge their performance. This is in contrast to those managers who have the sole purpose of serving the interest of the shareholders. However, in response to the criticism, Freeman (2010) argues that the managers have increased obligations hence making it difficult to self-deal due to the increased constituencies that require the managerial responsibility of the managers.
Chapter Three: Reflection on the challenge
Nike Inc. is an American corporation that specializes in making sportswear in the form of shoes, apparel, and other athletic accessories globally. The company was founded in 1964 as Blue-Ribbon and later named Nike Inc. in 1978. The major competitors for the brand include Adidas, New balance, and ASICS America, among others (Nike, Inc. 2021). The company is said to have a global market share of 37%in the sales of athletic footwear, making it one of the best businesses in its industry. Nike Inc is directly involved in the marketing, designing, and development of its products.
However, the manufacturing of its products has been left to the independent contractors, a majority of who are based overseas. The company was in the limelight, especially over the issue of having its manufacturing done overseas. This is because they have majored the operations in countries like China, Indonesia, and Pakistan, which are made of collectivist societies and hence do not put profits first, but group cohesion. Nike had then been accused of taking advantage of the cheap labor in these countries and also prolonging the working hours, yet the wage was below the living wage of those countries. Additionally, the company was accused of having neglected the working conditions of the employees in those countries, where drinking water was a problem, toilets were not available to the employees, and the cleanliness of the environment they worked in was poor. The decision to move to cheap labor countries can be said to be a way for the company to reduce its cost and maximize its profits. In line with this, the company paid for very expensive celebrity endorsement advertisements as a way of increasing their profits while neglecting the employees and the local communities. The company was also faced with the environmental issue of using chemicals that are harmful to the surroundings.
From the aforementioned activities, Nike can be said to have acted under the shareholder’s theory, where the interest was to maximize the profits and have the shareholders satisfied, while the rest of the stakeholders acted as means to achieving the profits. However, in so doing, the ethical aspect was left out, but the company concentrated on efficiency alone. According to utilitarianism, people are called to do good that brings happiness to everyone or a majority of the affected by the outcome (O’Neill, 2017). This was definitely not the case for Nike, but rather, the company chose the Kantian view that argues people should do their obligation, in this case, the employees performed their duties as required.
A reflection of the stakeholder issue, while using the stakeholder’s theory.
The following analysis will base its argument while focusing on Nike Inc.
The shareholder’s theory has been said to destroy the interests of the non-shareholding stakeholders, hence forming the basis for these stakeholders to legitimately claim consideration and protection in how corporations’ affairs are managed (Kaptein and Van Tulder, 2017). Similarly, Nike, which from the described events seems to be following the shareholder’s theory, forms a basis for the non-shareholding stakeholders such as the employees and the local communities in this case to call for consideration and protection. It is evident that corporations require a number of coordinated contributors if they are to thrive and maximize their profits. In the traditional management of the personnel, corporations would have thrived despite treating employees as a means to an end. However, in the contemporary environment, all stakeholders have grown wary of what is right, and how they should be treated. Additionally, employees have been termed by studies as the most valuable assets that a company can have. Consequently, those companies who mistreat their employees expose them to pouching by competing firms, who treat them well, increasing their competitive advantage. The same would happen to consumers, for there are other products that are readily available if their preferred company chooses to ignore their interests.
According to the stakeholder’s view, if a certain group of stakeholders feels that their interests are neglected by the corporation, then their commitment to the company ceases to be hence withdrawing their support or investment. As such, since a company needs its key stakeholders, the absence of one affects the productivity of the company and in return affects the profits given to the shareholders. For instance, a company must have its suppliers, employees, and customers, and an absence of any jeopardizes the operation of the corporation. As a result, it can be argued that it is through stakeholding that a company achieves efficiency, competitive advantage, profitability, and economic success. It is worth noting that by promoting the interests of all the stakeholders, then the shareholder gets the largest share of the perceived benefits, unlike when the shareholder’s interests are taken into consideration and those of the rest of the stakeholders are neglected.
Further, the stakeholder’s view holds that the non-shareholders stakeholders require protection for they have the inability to negotiate because there exist inequalities in the bargaining power while they are signing contracts (Jensen, 2001). The theory hence calls for organizations to protect all their stakeholders to ensure that their legitimate expectations are fulfilled.
In the case of Nike, the stakeholder’s theory would argue that the company had failed in protecting its stakeholders and chose to protect those of the shareholders. The outcome was negative publicity concerning the unethical practices of the company, forcing it to reconsider its strategy. The company adopted the stakeholder’s theory by trying to incorporate their interests into their organizational strategy. This included the creation of a code of ethics that necessitated their contractors to observe the necessary right that should be accorded to their employees and grant them (Kissinger, 2017). This included access to clean drinking water, pay not less than the living wage of the country of interest, access to toilets, allowing the workers to work voluntarily and leave freely when they need to, and access to toilets, among others.
Additionally, the company adopted the community support program, which was meant to support the communities around where the corporation operates. For instance, the company disbursed over $89milion in support of at least 17 million needy children (Nike, Inc. 2021). Further, the company introduced a feedback program, where customers can provide their feedback regarding the products they get from Nike and the services they received as well. In so doing, the company prioritizes the interests of the stakeholders as well as those of the shareholders. As a result, the company has improved from its negative publicity, and increased its market share, evidence that positive publicity affects the profitability of a corporation positively, unlike negative publicity, where the sales go down.
In conclusion, Nike Inc. resulted to having a community support program, code of ethics, and a feedback program for customers as a way of including the interests of the crucial stakeholders in the company’s strategy. This comes in handy with the stakeholder’s theory that argues that corporations are responsible for taking care of their stakeholders interests. The theory argues that companies have more than shareholders to fulfill the objectives for, but rather, there are other contributors to the company’s successes, and ignoring their interests could jeopardize the operations of organizations. By taking care of the interests of all the stakeholders, corporations have high chances of increasing their profits, which means more benefits to the shareholders, unlike when the interests of the shareholders are the sole objectives that corporations seek to fulfill.