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Stakeholder Theory of Corporate Governance

7. What is the “stakeholder theory” of corporate governance?

The stakeholder theory of corporate governance focuses on the effect of corporate activity on all identifiable stakeholders of the corporation. This theory posits that corporate managers (officers and directors) should take into consideration the interests of each stakeholder in its governance process. This includes taking efforts to reduce or mitigate the conflicts between stakeholder interests. It looks further than the traditional members of the corporation (officers, directors, and shareholders) and also focuses on the interests of any third party that has some level of dependence upon the corporation. Stakeholders are generally divided into internal and external stakeholders.

•    Internal Stakeholders – Are the corporate directors and employees, who are actually involved in corporate governance process.

•    External Stakeholders – May include creditors, auditors, customers, suppliers, government agencies, and the community at large.

These stakeholders exert influence but are not directly involved in the process. Key to the stakeholder theory is the realization that all stakeholders engage in some manner with the corporation with the hope or expectation that the corporation will deliver the type of value desired or expected. The benefits may include dividends, salary, bonuses, additional orders, new jobs, tax revenue, etc.

•    Discussion: How do you feel about the stakeholder theory of corporate governance? Should external stakeholders have rights or even be considered in the governance process? Why or why not? To what extent does the current state of corporate governance law focus on the external stakeholder? How, if at all, do you see this trend changing in corporate governance laws and practice?

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