1.1.

THE HISTORY OF CORPORATE GOVERNANCE

Corporate governance refers to the system of rules, practices, and processes by which
corporations are directed, controlled, and operated. It encompasses the relationships
between various stakeholders, including shareholders, management, employees,
customers, suppliers, and the wider community. The history of corporate governance can
be traced back to ancient times, but its modern framework has evolved over several
centuries.

The origins of corporate governance can be found in ancient civilizations such as

Mesopotamia, Greece, and Rome. In these societies, merchants and traders formed
partnerships to conduct business, and they developed informal systems of governance to
manage their affairs. These early forms of governance were often based on personal trust
and reputation rather than formal rules.

The modern concept of corporate governance began to take shape during the emergence
of joint stock companies in Europe. In the 17th century, companies like the Dutch East
India Company and the British East India Company were established to facilitate
overseas trade. These companies, which were funded by multiple shareholders, faced
new challenges in terms of management and accountability.

During the 18th and 19th centuries, governments began issuing corporate charters to
regulate the activities of joint stock companies. Charters established the legal framework
for corporations and defined their rights and responsibilities. Another important
development during this period was the introduction of limited liability, which protected
individual shareholders from personal liability for the company's debts.

In the 20th century, the ownership structure of corporations started to shift with the rise
of institutional investors. Pension funds, mutual funds, and other institutional investors
began acquiring significant stakes in companies, which led to the separation of

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ownership and control. This separation created new challenges in terms of aligning the
interests of shareholders and managers.

During the 1980s and 1990s, there was a growing emphasis on shareholder activism and
corporate governance reforms. Shareholders started demanding greater accountability,
transparency, and shareholder rights. High-profile corporate scandals, such as the Enron
and WorldCom collapses, highlighted the need for stronger corporate governance
practices to protect investors' interests.

In response to the demand for improved governance, many countries introduced

corporate governance codes and regulations. These codes set out principles and
guidelines for good governance practices, including board composition, audit processes,
executive compensation, and risk management. Examples include the Sarbanes-Oxley
Act in the United States and the Combined Code in the United Kingdom.

With the increasing globalization of markets, the importance of international standards

in corporate governance grew. Organizations such as the Organisation for Economic Co-
operation and Development (OECD) and the International Corporate Governance
Network (ICGN) have developed global principles and guidelines to promote good
governance practices worldwide. These standards aim to enhance transparency,
accountability, and the protection of shareholder rights.

Corporate governance continues to evolve as new challenges and issues arise. Recent
trends include a focus on environmental, social, and governance (ESG) factors, the
recognition of the importance of board diversity, and the growing influence of
technology on governance practices. There is also an increasing emphasis on stakeholder
engagement and the long-term sustainability of corporations.

In conclusion, the history of corporate governance reflects a gradual development from

informal practices to formalized frameworks aimed at promoting transparency,
accountability, and the protection of shareholder rights. The journey of corporate

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 governance is an ongoing one, as societies and economies evolve, and new challenges
and expectations emerge for corporations and their stakeholders.

1.2. CORPORATE GOVERNANCE AS A PRACTICE

Corporate governance as a practice has evolved over time, shaped by various historical
events and developments. It encompasses the mechanisms, processes, and relationships
through which corporations are directed and controlled. This section will provide an
overview of the history of corporate governance, highlighting key milestones and
influences.

The origins of corporate governance can be traced back to ancient civilizations such as
Mesopotamia, Ancient Greece, and Ancient Rome, where laws and regulations were
established to govern business transactions and protect stakeholders' interests. However,
the modern concept of corporate governance gained prominence during the late 19th and
early 20th centuries, with the rise of large corporations and the separation of ownership
and control.

One of the notable influences on corporate governance was the formation of the joint-
stock company model, which allowed for the pooling of capital from multiple investors.
This development led to the need for mechanisms to ensure the protection of
shareholders' rights and interests. In the early 20th century, countries like the United
States and the United Kingdom introduced legislation to enhance corporate governance
practices, such as the Companies Act 1929 in the UK and the Securities Act of 1933 and
the Securities Exchange Act of 1934 in the US.

The post-World War II period saw a shift towards a more stakeholder-oriented approach
to corporate governance. In Japan, the concept of "Keiretsu" emerged, involving close
relationships between corporations, banks, and suppliers. Similarly, in Germany, the
model of "Deutschland AG" fostered collaboration between corporations, banks, and
institutional investors. These models emphasized the importance of long-term
relationships and the interests of multiple stakeholders.
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 The late 20th century witnessed several corporate scandals and financial crises that
prompted significant reforms in corporate governance practices. The collapse of Enron
in 2001 and subsequent scandals like WorldCom and Tyco exposed weaknesses in
corporate governance mechanisms, particularly in terms of transparency, accountability,
and board oversight. These events led to the passage of legislation such as the Sarbanes-
Oxley Act in the US and the UK Corporate Governance Code in the UK, which aimed to
enhance corporate governance standards and restore public trust.

In recent years, corporate governance has increasingly focused on sustainability and

responsible business practices. There is a growing recognition that corporations should
not only be accountable to shareholders but also consider the interests of a broader range
of stakeholders, including employees, customers, communities, and the environment.
This has led to the emergence of frameworks such as the United Nations Global
Compact and the adoption of sustainability reporting and responsible investment
practices.

In summary, the history of corporate governance reflects a progression of ideas and

practices that have evolved to address the changing needs and challenges of the business
world. From ancient civilizations to modern reforms, corporate governance has been
shaped by legal and regulatory developments, corporate scandals, and a growing
emphasis on stakeholder interests and sustainability.

1.3. CORPORATE GOVERNANCE AS AN ACADEMIC LEGAL TERM

Corporate governance, as an academic legal term, refers to the study and application of
legal principles and frameworks that govern the relationship between various
stakeholders within a corporation. This section will provide an overview of the history
of corporate governance as an academic discipline, highlighting key developments and
influential works.

The academic exploration of corporate governance began to gain prominence in the mid-
20th century, with scholars delving into the legal, economic, and ethical dimensions of
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corporate behavior. The concept of corporate governance started to emerge as a distinct
field of study, driven by the need to understand and address the complex issues
surrounding the relationship between shareholders, management, and other stakeholders.

One of the foundational works in corporate governance was Adolf Berle and Gardiner
Means' book "The Modern Corporation and Private Property," published in 1932. Berle
and Means explored the separation of ownership and control in modern corporations,
highlighting the agency problems that arise when managers have discretionary power
over shareholders' assets.

During the 1970s and 1980s, corporate scandals and concerns about managerial
accountability led to increased academic interest in corporate governance. Influential
scholars such as Michael Jensen and William Meckling published their seminal paper
"Theory of the Firm: Managerial Behavior, Agency Costs, and Ownership Structure" in
1976, which provided a theoretical framework for analyzing the relationship between
shareholders and managers.

The 1990s marked a significant turning point in the academic study of corporate
governance. The Cadbury Report, published in the UK in 1992, laid down principles of
good governance for corporations, emphasizing the role of independent directors, board
accountability, and transparency. This report, along with subsequent reports like the
OECD Principles of Corporate Governance, provided a foundation for research and
policy development in the field.

In the early 2000s, corporate scandals such as Enron and WorldCom sparked further
interest in corporate governance, leading to increased scholarly focus on the role of
boards, executive compensation, and the effectiveness of governance mechanisms. This
period witnessed the development of various theoretical perspectives and empirical
studies exploring the impact of governance structures and practices on corporate
performance and shareholder value.

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 The field of corporate governance has continued to evolve, incorporating
interdisciplinary perspectives from law, economics, management, and ethics. It has
expanded to encompass issues such as sustainability, social responsibility, and
stakeholder engagement, reflecting the growing recognition of the broader societal
impact of corporations.

1.4. THE IMPORTANCE OF CORPORATE GOVERNANCE

Corporate governance is a crucial aspect of business operations that encompasses the
mechanisms, processes, and relationships by which a company is directed and
controlled. It provides a framework for achieving organizational objectives, ensuring
accountability, and protecting the interests of various stakeholders. The importance of
corporate governance can be understood through the following key points:
1. Accountability and Transparency
Corporate governance promotes accountability by establishing a system of checks and
balances within an organization. It delineates the roles, responsibilities, and decision-
making processes of the board of directors, management, and other stakeholders.
Transparent disclosure of information regarding financial performance, strategic
decisions, and potential risks fosters trust among stakeholders, including shareholders,
employees, customers, and the wider public.
2. Protection of Stakeholder Interests
Effective corporate governance safeguards the interests of stakeholders, ensuring that
they are treated fairly and their rights are protected. Shareholders rely on corporate
governance mechanisms to ensure their investments are managed responsibly and to
minimize the risk of mismanagement or fraud. Employees benefit from fair employment
practices and a healthy work environment. Customers and suppliers also depend on
strong corporate governance to ensure ethical business conduct and fair dealings.
3. Risk Management
Corporate governance plays a critical role in identifying and managing risks within an
organization. It establishes robust internal controls, risk assessment processes, and
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compliance frameworks to mitigate the likelihood and impact of various risks, including
legal, financial, operational, and reputational risks. Effective risk management helps
companies anticipate potential challenges and make informed decisions to navigate
uncertainties successfully.
4. Long-Term Sustainability and Value Creation
Companies with sound corporate governance practices are more likely to focus on long-
term sustainable growth rather than short-term gains. By prioritizing ethical conduct,
responsible decision-making, and stakeholder engagement, they build trust and
reputation, which are essential for attracting investment, retaining talent, and fostering
long-term customer loyalty. Moreover, effective corporate governance encourages
strategic planning, innovation, and efficient resource allocation, which contribute to the
creation of long-term shareholder value.
5. Compliance with Legal and Regulatory Requirements
Corporate governance ensures compliance with applicable laws, regulations, and
industry standards. By adhering to legal requirements and ethical guidelines, companies
can avoid legal disputes, reputational damage, and financial penalties. Compliance with
corporate governance principles also enhances a company's ability to adapt to regulatory
changes and minimize potential disruptions to business operations.
6. Attracting Investment and Capital
Companies with strong corporate governance practices are more likely to attract
investment and capital. Institutional investors and shareholders value transparent
decision-making processes, effective risk management, and accountability mechanisms.
They are more inclined to invest in companies that demonstrate good corporate
governance, as it provides them with confidence in the company's management and
potential for sustainable growth.
In summary, corporate governance is of paramount importance as it ensures
accountability, protects stakeholder interests, manages risks, promotes sustainable
growth, ensures compliance, and enhances a company's ability to attract investment. By
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 fostering trust, ethical conduct, and responsible decision-making, effective corporate
governance contributes to the overall success, stability, and longevity of organizations.

1.5. THE BASIC PRINCIPLES OF CORPORATE GOVERNANCE

Corporate governance refers to the set of rules, practices, and processes that guide and
control how a corporation is directed, managed, and operated. It establishes the
framework for the relationship between a company's management, its board of directors,
shareholders, and other stakeholders. The basic principles of corporate governance
include:
1. Accountability: Corporate governance emphasizes the importance of accountability,
ensuring that individuals and entities responsible for corporate decisions and actions are
answerable for their behaviour and performance. This includes accountability towards
shareholders, employees, customers, and the wider society.
2. Transparency: Transparent corporate governance requires companies to provide
accurate and timely information about their financial performance, corporate structure,
policies, and decision-making processes. Transparency helps stakeholders make
informed decisions, promotes trust, and reduces the potential for unethical behaviour.
3. Fairness: Corporate governance should promote fairness in the treatment of all
stakeholders, including shareholders, employees, customers, suppliers, and the broader
community. This involves ensuring equitable access to information, opportunities, and
benefits, and preventing conflicts of interest.
4. Responsibility: Responsible corporate governance means that companies should act in a
manner that takes into account the interests of various stakeholders, including
shareholders, employees, customers, and the environment. It involves considering long-
term sustainability, ethical practices, and social and environmental impacts.
5. Independence: Corporate governance emphasizes the importance of independent
decision-making and oversight. This includes having independent directors on the board
who can provide objective judgment and prevent conflicts of interest. Independent audits
and transparent processes help maintain the integrity of corporate governance.
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 6. Board of Directors: The board of directors plays a crucial role in corporate governance.
They are responsible for overseeing the management, setting strategic direction, and
protecting the interests of shareholders. The board should be composed of qualified
individuals with diverse expertise and experience.
7. Shareholder Rights: Corporate governance should protect the rights and interests of
shareholders. This includes ensuring shareholders have the ability to participate and vote
in important decisions, access information, and receive fair treatment and returns on
their investments.
8. Ethical Behaviour: Corporate governance requires companies to adhere to high ethical
standards in their operations. This involves promoting integrity, honesty, and responsible
decision-making throughout the organization.
These principles help promote effective corporate governance, enhance investor
confidence, and contribute to the long-term sustainability and success of the corporation.
Different countries and organizations may have specific codes, guidelines, and
regulations to ensure compliance with these principles.
1.6. RESPONSIBILITIES OR DUTIES OF THE BOARD OF DIRECTORS IN A
CORPORATE
The board of directors in a corporate entity has several responsibilities and duties to
fulfill. While the specific responsibilities can vary depending on the jurisdiction and the
company's bylaws, here are some common duties of the board:
1) Strategic Planning: The board plays a crucial role in setting the company's strategic
direction and long-term goals. They review and approve the company's mission, vision,
and strategic plans, ensuring alignment with the interests of shareholders and other
stakeholders.
2) Corporate Oversight: The board provides oversight of the company's operations,
including monitoring performance, evaluating management's decisions, and ensuring
compliance with laws, regulations, and internal policies. They review financial

9
 statements, assess risk management practices, and monitor the company's financial
health.
3) Appointment and Supervision of Executive Management: The board is responsible
for appointing and, if necessary, replacing the CEO and other key executive positions.
They oversee executive compensation, succession planning, and performance
evaluation, ensuring that the company has capable leadership.
4) Risk Management: The board oversees the company's risk management processes,
ensuring that appropriate risk assessment and mitigation strategies are in place. They
monitor risks related to operations, finance, reputation, and compliance, and work with
management to develop and implement risk management policies.
5) Shareholder Relations: The board represents the interests of shareholders and acts as a
link between shareholders and management. They ensure effective communication with
shareholders, address their concerns, and consider their input on significant matters.
6) Legal and Ethical Compliance: The board ensures that the company operates in
compliance with applicable laws, regulations, and ethical standards. They establish and
monitor the effectiveness of internal control systems and ethical codes of conduct.
7) Disclosure and Transparency: The board is responsible for ensuring timely and
accurate disclosure of material information to shareholders and regulators. They oversee
the company's communications, including financial reporting, annual reports, and other
disclosures.
These duties are based on general corporate governance principles, but it's important to
note that the specific responsibilities of the board may vary depending on factors such as
the company's size, industry, and legal requirements.

2.1. STAKEHOLDER THEORY OF CORPORATE GOVERNANCE

As a development of the agency theory the stakeholder theory rises up. The term
"stakeholders" refers to all persons, groups or organizations that have an impact on the
company’s activity or are influenced by the company. It's about: the owners,
shareholders, investors, employees, customers, suppliers, business partners, competitors,
10
the government, local government, NGOs, pressure groups, communities, media and so
on. Each of these parts somehow interacts and influences the business of a company.
In the years 1980 -1990, Stakeholder Theory has changed the shareholders paradigm of
Milton Friedman (1970) who considers that maximizing the financial results for
shareholders is the highest concern of a company. Stakeholder theory was developed by
Freeman (1984) and it is focused on the corporate responsibility’s view related to
various categories of stakeholders.

Stakeholder theory is a conceptual framework that emphasizes the importance of

considering the interests and concerns of various stakeholders in the decision-making
and management processes of organizations. Unlike traditional theories that primarily
focus on maximizing shareholder value, stakeholder theory suggests that organizations
should take into account the needs of all individuals or groups who have a stake in or are
affected by the organization's actions.

The concept of stakeholder theory emerged in the 1980s and has since gained significant
attention and relevance in the field of business and management. The theory recognizes
that organizations have a broad range of stakeholders, including employees, customers,
suppliers, shareholders, communities, governments, and even the natural environment.
These stakeholders contribute to and are impacted by the organization's operations, and
their interests should be given due consideration.

One of the seminal works on stakeholder theory is R. Edward Freeman's book "Strategic
Management: A Stakeholder Approach" (1984). Freeman argues that managers have a
fiduciary responsibility not only to shareholders but also to other stakeholders. He
proposes a stakeholder model in which organizations should identify and manage
relationships with key stakeholders to achieve long-term success.

In recent years, stakeholder theory has gained prominence due to increasing societal
awareness of corporate social responsibility and ethical concerns. Organizations are

11
 recognizing that they must go beyond profit maximization and actively address the
interests of stakeholders to build trust, enhance reputation, and ensure long-term
sustainability.

Several empirical studies have explored the implications and benefits of adopting a
stakeholder perspective. For instance, a study by Donaldson and Preston (1995)
examined the relationship between stakeholder management and organizational
performance across 200 firms. The results indicated a positive correlation between
effective stakeholder management and financial performance, suggesting that
considering stakeholder interests can lead to better organizational outcomes.

Furthermore, research by Jones and Wicks (1999) demonstrated that organizations that
engage in proactive stakeholder management are more likely to receive support and
cooperation from their stakeholders. This, in turn, can result in improved operational
efficiency, increased innovation, and enhanced organizational resilience.

The stakeholder theory has also influenced the development of frameworks and
guidelines for corporate governance. For example, the Global Reporting Initiative (GRI)
provides a set of sustainability reporting standards that encourage organizations to
disclose information about their environmental, social, and governance performance,
thereby promoting transparency and accountability to stakeholders.

Overall, stakeholder theory offers a holistic and inclusive approach to organizational

management, recognizing the significance of stakeholders beyond shareholders. By
considering the diverse interests and perspectives of stakeholders, organizations can
better navigate complex business environments, foster trust and collaboration, and
contribute to sustainable development.

2.2. STAKEHOLDERS CONCEPT BY RODRIGUES

In corporate governance, stakeholders refer to individuals or groups that have an interest
or stake in a company and can be affected by its actions, decisions, or performance.

12
 Rodrigues, a fictional company, would also have its own set of stakeholders. These
stakeholders can include various parties such as shareholders, employees, customers,
suppliers, lenders, government authorities, and the local community. Let's explore the
stakeholders’ concept in the context of Rodrigues' corporate governance:

1. Shareholders: Shareholders are the owners of the company who have invested their
capital in exchange for shares. They have a financial stake in Rodrigues and are
primarily interested in maximizing their return on investment. Shareholders have the
right to vote on important matters, such as the appointment of directors, and expect the
company to generate profits and increase share value.

2. Employees: Employees play a vital role in Rodrigues' operations. They include

executives, managers, workers, and staff members who contribute their skills and labour
to the company. Employees are stakeholders as their livelihoods and job security depend
on the company's success. They may also be concerned with fair treatment,
compensation, and career development opportunities.

3. Customers: Customers are individuals or other businesses that purchase Rodrigues'

products or services. They have a stake in the company's ability to deliver high-quality
products, provide excellent customer service, and maintain competitive prices. Satisfied
customers are more likely to remain loyal to Rodrigues, which can impact its reputation,
market share, and long-term profitability.

4. Suppliers: Suppliers provide goods, raw materials, or services to Rodrigues. They have
a stake in the company's success as their business depends on maintaining a good
relationship with Rodrigues and receiving timely payments. Suppliers may also be
concerned with fair treatment, transparency, and ethical business practices.

5. Lenders: Lenders, such as banks or financial institutions, provide financing or loans to

Rodrigues. They have a financial stake in the company's ability to repay the borrowed

13
 funds and generate sufficient cash flow. Lenders may monitor Rodrigues' financial
performance, adherence to loan covenants, and overall creditworthiness.

6. Government Authorities: Government authorities at various levels, such as regulatory

bodies and tax agencies, have a stake in Rodrigues' compliance with laws, regulations,
and reporting requirements. They may monitor the company's operations, ensure fair
competition, and collect taxes.

7. Local Community: The local community surrounding Rodrigues' operations can be

considered stakeholders. The company's activities can impact the community's
environment, employment opportunities, and overall well-being. Rodrigues may be
expected to contribute to local development, engage in corporate social responsibility
initiatives, and maintain positive community relations.

Managing stakeholders effectively is an essential aspect of corporate governance.

Rodrigues' board of directors and management should consider the interests and
expectations of these stakeholders when making decisions and formulating strategies.
By addressing stakeholders' concerns and balancing their diverse interests, Rodrigues
can foster trust, enhance its reputation, and achieve sustainable long-term success.

2.3. HOW STAKEHOLDERS’ THEORY LINK TO GOOD GOVERNANCE

Stakeholder theory and good governance are closely interconnected concepts, as
stakeholder theory provides a framework for understanding and implementing good
governance practices within organizations. Here's an explanation of how stakeholder
theory relates to good governance:

1. Stakeholder Theory: Stakeholder theory suggests that organizations should consider

the interests of all stakeholders who are affected by or have an interest in the
organization's activities, decisions, and outcomes. Stakeholders can include
shareholders, employees, customers, suppliers, local communities, and the environment,

14
 among others. The theory emphasizes that organizations should aim to create value for
all stakeholders rather than focusing solely on maximizing shareholder value.

2. Good Governance: Good governance refers to the processes, structures, and behaviours
through which organizations are directed, controlled, and operated to achieve their
objectives, while considering the interests of various stakeholders. It encompasses
principles such as accountability, transparency, fairness, responsibility, and ethical
behaviour. Good governance ensures that organizations operate in an effective, efficient,
and ethical manner, while also safeguarding the interests of stakeholders.

Linking Stakeholder Theory to Good Governance: Stakeholder theory contributes to

good governance in several ways:

1. Stakeholder Engagement: Stakeholder theory emphasizes the importance of engaging

and involving stakeholders in decision-making processes. Good governance requires
organizations to actively seek input and feedback from stakeholders and consider their
perspectives when making decisions. By incorporating stakeholder voices, organizations
can enhance transparency, inclusiveness, and accountability in their governance
processes.

2. Accountability and Transparency: Stakeholder theory promotes accountability and

transparency by encouraging organizations to disclose information about their
operations, strategies, and performance to stakeholders. Good governance requires
organizations to provide clear and accurate information to stakeholders, enabling them
to hold the organization accountable for its actions and outcomes. Transparent
communication builds trust and enhances the legitimacy of governance processes.

3. Balanced Decision-making: Stakeholder theory challenges the traditional view that

organizations should prioritize the interests of shareholders above all else. Instead, it
emphasizes the need for organizations to consider and balance the interests of all
stakeholders. Good governance incorporates this balanced approach by ensuring that

15
 decision-making processes weigh the potential impacts on different stakeholders and
strive for fair outcomes.

4. Long-term Value Creation: Stakeholder theory promotes a long-term perspective on

value creation rather than focusing solely on short-term financial gains. Good
governance aligns with this principle by encouraging organizations to adopt sustainable
practices that consider the interests of stakeholders, including future generations. It
involves strategic planning, risk management, and responsible decision-making to
ensure the organization's long-term viability and success.

2.4.HOW STAKEHOLDERS’ THEORY LINKS TO CORPORATE SOCIAL

RESPONSIBILITIES (CRS)
In this era of globalization, Corporate Social Responsibility (CSR) has managed to
integrate itself into the corporate culture and has evolved as an integral aspect of
corporate performance reviews. It is a voluntary concept to be adopted by organizations.
It integrates the social and environmental dimensions of a business in its operational
activities. CSR and stakeholder theory both highlight the significance of conducting
business operations by taking into consideration the larger societal benefits.

The scope of CSR has now evolved to become a more inclusive concept involving
various stakeholders, and ensuring that businesses are operating in an ethical and
sustainable manner (Tsutsui & Lim, 2015). With customers becoming more socially and
environmentally aware, companies increasingly getting more customer-centric. A key
tool towards superior customer service is to integrate CSR in bringing about radical
changes and benefits to the company and the overall socio-environmental arena (Carey,
2019).

2.4.1.The Stakeholder Theory Approach To CRS

Stakeholder theory is a concept that emphasizes the interrelationship between a business
and its various stakeholders, including investors, customers, employees, suppliers, etc as
shown in the figure below (Jansson, 2005).

16
 The stakeholder theory stresses the fact that an organization should create value for its
various stakeholders who are affected by its business actions and decisions, and not only
its shareholders. The theory talks about the necessity of managers to be held liable to the
various stakeholders for safeguarding stakeholder interests. It works from the point of
three perspectives for a business:

 stakeholders who have an impact on the business operations of the firm

 how such interconnections have an impact on key stakeholders and the organisation; and

 how the viewpoints of key stakeholders have an impact on the success of the firm’s
strategic measures (Bonnafous-Boucher & Rendtorff, 2016).

Businesses should hence plan strategies to deal with key stakeholders in an appropriate
manner to improve efficiency and effectiveness in carrying out business operations
successfully over the long term.

2.4.2. The interrelationship between stakeholder theory and CSR

The stakeholders are a critical aspect of the success of CSR initiatives. Organizations
would not be able to achieve their CSR goals without the participation, expertise, know-
how, and loyalty of their various stakeholders. One important aspect of CSR is that the
business is accountable to all its stakeholders who have a valid interest in it and the
business d Still, there are similarities between the two concepts. CSR emphasizes the
benefit to society at large whereas stakeholder theory works on building relationships
and value between a business and its various stakeholders (Freeman & Dmytriyev,
2017). Though there are certain differences between the two concepts, they can be
aligned to work for the betterment of the company and society.

The various challenges in implementing CSR initiatives can be mitigated by aligning the

concept with stakeholder theory as this enables leaders to have a more pragmatic
approach considering the interests of all its stakeholders and planning their actions
accordingly. Stakeholder theory addresses the issue of a lack of awareness of the

17
 benefits of CSR (Harrison, et al., 2019). CSR aligned with stakeholder theory generates
the maximum benefits in the form of societal development as well as creating a
motivated workforce, better company branding, larger sales and profitability, satisfied
customers, etc (Nikolova & Arsić, 2017). Thus, CSR is an integral part of corporate
responsibility which involves the participation of various stakeholders for its successful
implementation.

However, there are several key ways in which stakeholder theory and CSR intersect:

1. Stakeholder Identification: Stakeholder theory provides a systematic approach for

identifying and mapping the various stakeholders that a company should consider in its
CSR efforts. This process helps identify the diverse groups that may be impacted by the
company's activities, ensuring that their concerns are addressed.

2. Stakeholder Engagement: Engaging stakeholders is a crucial aspect of both

stakeholder theory and CSR. By involving stakeholders in the decision-making process,
companies can gain valuable insights, build trust, and foster collaboration. This
engagement helps ensure that CSR initiatives are relevant, meaningful, and responsive
to stakeholder expectations.

3. Stakeholder Value Creation: Stakeholder theory recognizes that businesses can create
long-term value by meeting the needs of their stakeholders. Similarly, CSR initiatives
aim to generate positive social and environmental impacts. By aligning CSR efforts with
stakeholder interests, companies can enhance their reputation, strengthen relationships,
and achieve sustainable business growth.

4. Accountability and Transparency: Stakeholder theory promotes accountability by

emphasizing the responsibility of companies to be transparent and responsive to
stakeholder concerns. CSR initiatives provide an avenue for companies to demonstrate
their commitment to stakeholders and society. By reporting on CSR activities and

18
 outcomes, companies can be held accountable for their social and environmental
performance.

2.5. THE IMPORTANCE OF THE STAKEHOLDER'S THEORY AND THE

GAP/ISSUES BEING ADDRESS.
Stakeholder theory is of great importance in modern business practices due to several
reasons. Here are some key reasons why stakeholder theory is significant:

1. Holistic Perspective: Stakeholder theory encourages businesses to take a broader and

more comprehensive view of their operations. It recognizes that businesses operate
within a complex web of relationships and interactions with various stakeholders. By
considering the interests of multiple stakeholders, companies gain a more holistic
perspective on their impact and can make more informed decisions.

2. Long-term Sustainability: Stakeholder theory emphasizes the long-term sustainability

of businesses. By considering the interests of stakeholders, including employees,
customers, suppliers, local communities, and the environment, companies can address
potential risks, manage relationships effectively, and ensure the long-term viability and
success of the organization.

3. Ethical Considerations: Stakeholder theory aligns with ethical considerations by

promoting fairness, transparency, and accountability. It recognizes that businesses have a
moral obligation to consider the well-being of all stakeholders affected by their actions.
Ethical behaviour and responsible decision-making are essential components of
stakeholder theory.

4. Reputation and Trust: By actively engaging with stakeholders and addressing their
concerns, businesses can build trust and enhance their reputation. Stakeholder theory
acknowledges that stakeholders' perceptions and trust in a company can significantly
impact its success. A positive reputation and strong stakeholder relationships contribute
to customer loyalty, attracting and retaining talented employees, and fostering beneficial
partnerships.
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5. Innovation and Adaptability: Stakeholder theory encourages businesses to be
responsive and adaptive to changing stakeholder expectations. By considering the
diverse perspectives and needs of stakeholders, companies can identify new
opportunities, drive innovation, and develop products and services that better meet
societal needs.

However, despite its importance, stakeholder theory also faces some challenges and
gaps that are being addressed:

1. Stakeholder Identification and Prioritization: One challenge is accurately identifying

and prioritizing stakeholders due to their increasing diversity and varying levels of
influence. Stakeholder mapping and engagement processes are continually evolving to
ensure a comprehensive and systematic approach.

2. Conflicting Stakeholder Interests: Stakeholders often have diverse and sometimes

conflicting interests. Balancing these interests can be challenging for businesses,
requiring careful consideration, negotiation, and compromise to find mutually beneficial
solutions.

3. Implementation and Measurement: Translating stakeholder theory into practical

actions and measuring its impact can be complex. Developing effective strategies,
implementing CSR initiatives, and measuring outcomes require robust frameworks,
indicators, and reporting mechanisms.

4. Global Stakeholder Considerations: As businesses operate in a globalized world,

considering the interests and impacts of stakeholders across different countries, cultures,
and legal systems becomes more complex. Understanding and addressing the unique
challenges posed by global stakeholders are ongoing issues.

Efforts are being made by researchers, businesses, and organizations to address these
gaps and challenges. Ongoing discussions, research, and the development of guidelines
and standards for stakeholder engagement and CSR reporting are helping to improve the
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implementation and effectiveness of stakeholder theory in practice. Overall, stakeholder
theory plays a vital role in shaping more responsible and sustainable business practices
by considering the interests of various stakeholders and addressing the gaps and
challenges that arise in the process.

References:
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Coffee, J. C. (2012). Corporate governance: An overview. In M. Aoki, G. Jackson, & H.

Miyajima (Eds.), Corporate governance in Japan: Institutional change and
organizational diversity (pp. 29-43). Oxford University Press.

Roe, M. J. (2004). Political foundations of the American corporate governance system.

Oxford University Press.

Monks, R. A., & Minow, N. (2011). Corporate governance. John Wiley & Sons.

Clark, G. L., Feiner, A., & Viehs, M. (2015). From the stockholder to the stakeholder:
How sustainability can drive financial outperformance. Oxford University Press.

Berle, A. A., & Means, G. C. (1932). The modern corporation and private property.
Transaction Publishers.

Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior,
agency costs, and ownership structure. Journal of Financial Economics, 3(4), 305-360.

Cadbury, A. (1992). Report of the Committee on the Financial Aspects of Corporate

Governance: The Code of Best Practice. Gee Publishing.

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Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Cambridge
University Press.

Donaldson, T., & Preston, L. E. (1995). The stakeholder theory of the corporation:
Concepts, evidence, and implications. Academy of Management Review, 20(1), 65-91.

Jones, T. M., & Wicks, A. C. (1999). Convergent stakeholder theory. Academy of

Management Review, 24(2), 206-221.

Clarkson, M. B. (1995). A stakeholder framework for analyzing and evaluating

corporate social performance. Academy of Management Review, 20(1), 92-117.

Global Reporting Initiative (GRI). (n.d.). Retrieved from

https://www.globalreporting.org/

Sneha Gaonkar & Priya Chetty (2020), The stakeholder theory of Corporate Social

Responsibility

Carroll, A. B., & Buchholtz, A. K. (2014). Business and society: Ethics, sustainability,
and stakeholder management. Cengage Learning.

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