Stakeholder theory expects board of directors to take care ofthe wealth of many different stakeholder groups, including interest groupslinked to social, environmental and ethical considerations (Freeman, 1984;Donaldson & Preston, 1995; Freeman et al., 2004). Stakeholder theory viewsthat “companies and society are interdependent and therefore the corporation servesa broader social purpose than its responsibilities to shareholders” (Kiel &Nicholson, 2003a, p. 31). Likewise, Freeman (1984), one of the originalproponents of stakeholder theory, defines stakeholder as “any group orindividual who can affect or is affected by the achievement of the organization’sobjectives” (p.
46)There is considerable argument among academics whether totake a broad or narrow view of a firm’s stakeholder. Freeman’s definition (1984,p. 46) cited above proposes a broad view of stakeholders covering large numberof entities including almost all types of stakeholders. Donaldson and Preston (1995,p. 85) identify stakeholders as “persons or groups with legitimate interests inprocedural and/or substantive aspects of corporate activity.” For Example,Wheeler and Sillanpaa (1997) identified stakeholder as varied as investors,managers, employees, customers, business partners, local communities, civil society,the natural environment, future generations, and non-human species, many ofwhom are unable to speak for themselves. Mitchell, Agle and Wood (1997) arguethat stakeholders can be identified by possession of one, two or all three ofthe attributes of: (1) power to influence the firm, (2) the legitimacy ofrelationship with the firm, and (3) the urgency of their claim on the firm.
Thistypology allows managers to pay attention and respond to various stakeholdertypes.Stakeholder theory claimed that many groups have connectionswith the firm and are affected by firm’s decision making. Freeman et al. (2004)suggest that the idea of value creation and trade is intimately connected tothe idea of creating value for shareholders; they observe, “business is aboutputting together a deal so that suppliers, customers, employees, communities,managers, and shareholders all win continuously over time.” Donaldson andPreston (1995) refer to the myriad participants who seek multiple and sometimesdiverging goals. Manager’s view of the stakeholders’ position in the firminfluences managerial behavior However, Freeman et al. (2004) suggests that managersshould try to create as much value for stakeholders as possible by resolving existingconflicts among them so that the stakeholders do not exit the deal.
Carver and Oliver (2002) examine stakeholder view fromnon-financial outcomes. For example, while shareholders generally define valuein financial terms, other stakeholders may seek benefits “such as thesatisfaction of pioneering a particularly breakthrough, supporting a particularlykind of corporate behavior, or, where the owner is also the operator, workingin a particular way” (p. 60). It means stakeholders have ‘non-equity stakes’which requires management to develop and maintain all stakeholder relationships,and not of just shareholders.
This suggests the need for reassessing performanceevaluation based on traditional measures of shareholder wealth and profits byincluding measures relating to different stakeholder groups who have non-equitystakes.Nonetheless many firms do strive to maximize shareholdervalue while, at the same time, trying to take care of the interest of the otherstakeholders. Sundaram and Inkpen (2004a) argue that objective of shareholdervalue maximization matters because it is the only objective that leads todecisions that enhance outcomes for all stakeholders. They claimed thatidentifying a myriad of stakeholders and their core values is an unrealistictask for managers (Sundaram & Inkpen, 2004b).
Suggestion of stakeholderperspective also argue that shareholder value maximization will lead to discoveryof value from non-shareholders to shareholders. However, Freeman et al. (2004) focus on two corequestions: ‘what is the purpose of the firm?’ and ‘what responsibility doesmanagement have to stakeholders?’. They posit that both these questions areinterrelated and managers must develop relationships, inspire their stakeholders,and create communities where everyone strives to give their best to deliver thevalue the firm promises.
Therefore, the stakeholder theory is considered as agood equipment for managers to articulate and foster the shared purpose oftheir firm.2.2.5 ResourceDependence TheoryResource dependence theory arguesthat the elements of corporate governance mechanisms, such as board ofdirectors and its sub-committees, are not enough to ensure effective monitoringof managers. These mechanisms play a crucial role in connecting the company andthe needed resources to increase corporate performance (Pfeffer, 1973).However, corporate governance mechanisms have essential sources that companiesneed.
First, the board of directors and especially its independentnon-executive directors have experience, expertise, knowledge and skills, whichfirm needs (Haniffa and Cooke, 2002). Second, the presence of these directorsbuilds the reputation of the firm and provides the firm with necessary businessnetwork (Haniffa and Hudaib, 2006). Third, the directors on the board havetheir own personal relationships, which they can use to access extrainformation from business and political elites (Nicholson and Kiel, 2007).Last, the board of directors is regarded as the most important link to outsideresources such as creditors, suppliers, customers and institutional investors.Consequently, as Nicholson & Kiel (2007) argue, a strong relationship withoutside resources has a positive impact on the corporate performance.Corporate governance mechanisms aim to mitigatethe agency problem and ensure that directors act in the best interests ofshareholders (e.
g., Jensen and Meckling, 1976, Fama, 1980, Netter et al.,2009). In this regard, the most important component of any corporate governancesystem is the board of directors (Lipton and Lorsch, 1992, John and Senbet, 1998,Filatotchev and Boyd, 2009). The board’s chief task is to monitor the managersand ensure that a firm’s obligations to shareholders and others are met.
Tothis end, the board of directors advises and supervises managers, choosesstrategy, and ensures the optimal use of resources, and supervise management,all the while being accountable to shareholders for its actions (Demsetz andLehn, 1985, Brennan, 2006). Given these many duties, and their importance tofirm success, it is necessary that the board act effectively and efficiently(Jensen, 1993, Brennan, 2006). Prior studies suggest that there are severalcharacteristics that affect board of director performance, including, forexample, the presence of independent directors, size of the board, and directors’experience (e.g., Yermack, 1996, Baranchuk and Dybvig