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Theories of the Firm

Theories of the Firm. Stakeholder Theory. Introduction. Answer to shareholder (owner) dominance of governance Inspired by social/egalitarian view Views firm as having value created not only by shareholders Employees invest in the firm by developing firm-specific skills. The theory.

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Theories of the Firm

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  1. Theories of the Firm Stakeholder Theory

  2. Introduction • Answer to shareholder (owner) dominance of governance • Inspired by social/egalitarian view • Views firm as having value created not only by shareholders • Employees invest in the firm by developing firm-specific skills

  3. The theory • Left to the market, individuals do not develop optimal firm-specific skills • Holders of skills should be rewarded in proportion to the importance of those skills to the firm • Institutions of governance should be changed to ensure this

  4. Advantages • Encourages more cohesion within firms – argument that more cohesion means more profitable • Creates incentives for learning • If applied generally, will lead to greater social cohesion nation-wide

  5. Critique • Based on neoclassical idea of incentives through returns to individual • Arguably, learning is an organisational rather than individual process • The role of unions – rather than firm-specific learning by individuals – has resulted in promotion

  6. Writers on Stakeholding • Ciaran Driver and Grahame Thompson (2002) Corporate Governance and Democracy: The Stakeholder Debate Journal of Management and Governance; 6(2): 111-30. • Will Hutton et al (1997) Stakeholding and its Critics, Institute of Economic Affairs • RE Freeman and R Phillips (1999) Stakeholder Theory: A Libertarian Defense • Mary O’Sullivan, pp.52-58

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