Stakeholder Capitalism Model

Stakeholder capitalism model says that company should make decisions by taking into account the interests of all the stakeholders in the firm. Stakeholders include all individuals or groups who can significantly affect the welfare of the firm in the aspects of not only the financial claimants, but also employees, management, customers, local community, supply chain members, local or national government and creditors. One of the important variables in this model is considering all stakeholders’ interest as they are people who support and sustain the company.

In the stakeholder capitalism model, it is argued that firms should pay attention to all their supporters that can affect the firm. Managers and boards of directors of company have vital roles on making decisions that suit multiple competing and inconsistent constituent interests. However, there are different demands and interests from stakeholders. Customers want low prices, high quality, expensive service and so on. Employees want high wages, high quality working conditions, and fringe benefits including vacations, medical benefits, pensions and the rest. Suppliers of capital or known as shareholders want low risk and high returns. Communities want high charitable contributions, social expenditures by firms to benefit the community at large such as build hospital, donation, stable employment provided, increased investment, and so on. In making these critical decisions, company must specify how to make the trade-offs between these often conflicting and inconsistent demands from various stakeholders.

Many managers and directors of organizations still embrace stakeholder capitalism theory even will be failed at last if they are competing with firms that are behaving so as to maximize value. The theory allows managers and directors to manage company resources in the way they like because the management of the resources in stakeholder capitalism model is inexplicable. Therefore, this allows self-interested managers to pursue their own interests at the expense of society and the firm’s financial claimants. It may permit managers and directors to invest in their favorite projects that diminish firm value. As a result, agency cost increases because management of company does not act in shareholders’ interest. Management is given free authority to do almost whatever they want to. So, they may not follow or implement what shareholders require them to do. The other variable is free power. Managers are empowered to exercise their own preferences in spending the firm’s resource. If the management uses the authority given wisely, company will sustain growth and vice versa.

Stakeholder capitalism model is an ideal business objective model because not only owners, investors, and managers able to share profits but also employees, suppliers and other individuals or groups that related to firm. In stakeholder capitalism model, employees are involved in management decisions and profit distribution. The benefit of the stakeholder capitalism model is cooperative relationship between employees and management that allows steady productivity for sustainability of the firms.

If there is few goals such as maximize profits, market share, growth in profits, and others, this will make management has no idea what to achieve. The management cannot focus on a single goal thus makes the firm inefficient. As to solve this, firm can specify the tradeoffs among different groups of stakeholders. Effects of the decisions no matter good or bad that are affecting firm are listed out. For example, cash flow, operating and financial risk which are the main concerns of every corporation. Another variable is single goal. Single goal set allows company to concentrate on accomplishing single purpose as to satisfy stakeholder’s interest and it requires a deep knowledge on choosing the single goal to achieve.