Instrumental Approach of Stakeholder Theory

The view regarding Strategic Stakeholder Management, described by Berman, Wicks, Kotha, Jones using earlier work of Edward Freeman is an Instrumental Approach.  Stakeholder theory plays a very important part in the modern business ethics. It is a theory of organizational management and business ethics that emphasis on morals and values required in managing the organization. In order to maximize the shareholder value in an uncertain period, managers need to lay attention to key stakeholder relationships. Good stakeholder management has in fact, a clear instrumental value for the firms as wise management of firms’ operating environments, which also includes the relationships with their stakeholders, is generally a part of proper management. Stakeholder theory as a reference underlines both, correlation between facts and certain conceptualization, and is also trying to develop the required shift from “panoptic” analysis akin to panoramic vision of the texts and positions, and to an in-depth geared towards understanding of the foundations. The theory of organizations essentially makes use of the Instrumental Approach of Stakeholder Theory. This theory helps in nourishing the relational model of organizations by returning to the questions of who actually is working with and in firm. Stakeholder theory is part of comprehensive project that visualizes the organizational-group relationship as both foundation and norm. Stakeholder management is part of company’s strategy but it does not drive that strategy. The two versions of the Strategic Stakeholder Management approach are namely, the direct effects model and the moderation model. The direct effects model, defines the attitudes and actions of managers towards stakeholders and are perceived to have direct effect on firm’s financial performance, and independence from the corporate strategy. In the moderation model, managerial orientation towards stakeholders largely affects the corporate strategy just by moderating the relationship between the strategy and financial performance.

Instrumental Approach of Stakeholder Theory is a method to reach the end where something has to be done in order to obtain something else. However, the firm’s goal is generally not to attain welfare of stakeholders but advancement of interests of its shareholder.

Instrumental approaches towards stakeholder theory hold that: To maximize shareholder value over an uncertain time frame, managers ought to pay attention to key stakeholder relationships.

Firms have a stake in the behavior of their stakeholders. Prudent management of firms’ operating environments, including relationships with their stakeholders, is a part of proper management in general. Therefore good stakeholder management has clear instrumental value for the firms.

A fundamental assumption of this type of model is that the ultimate objective of corporate decisions is marketplace success. Firms view their stakeholders as part of an environment that must be managed in order to assure revenues, profits, and ultimately, to provide returns to shareholders. Attention to stakeholder issues may help a firm avoid decisions that might prompt stakeholders to undercut or thwart its objectives. This possibility arises because stakeholders can control resources that can facilitate or enhance the implementation of corporate decisions (Pfeifer & Salancik, 1978); in short, Stakeholder Management is a means to reach an end; something what you have to do so that you can achieve something else. The end, or the ultimate result, is generally not the welfare of stakeholders. Instead, the firm’s goal is the advancement of the interests of only one stakeholder group: its shareholders. Employing the terminology used by Donaldson and Preston (1995) and Quinn and Jones (1995), we see the concern of the firm for stakeholder relationships as instrumental and contingent on the value of those relationships to corporate financial success. Quinn and Jones stated: “Instrumental [strategic] ethics enters the picture as an addendum to the rule of wealth maximization for the manager-agent to follow” (1995: 25). In this formulation, stakeholder management is part of a company’s strategy but in no way drives that strategy. Implicit in this perspective is the assumption that modes of dealing with stakeholders that prove upon adoption to be unproductive will be discontinued, as will those that involve resources that are no longer needed. The concerns of stakeholders only enter a firm’s decision-making processes if they have strategic value for the firm.

Two variants of the Strategic Stakeholder Management approach are the direct effects model and the moderation model. In the direct effects model, the attitudes and the actions of managers toward stakeholders (their stakeholder orientation) are perceived as having a direct effect on firm financial performance, independent of the corporate strategy. In the moderation model, the managerial orientation toward stakeholders does impact the corporate strategy by moderating the relationship between strategy and financial performance.

Business frameworks like Instrumental Approach of Stakeholder Theory are invaluable to evaluating and analyzing various business problems. You can download business frameworks developed by management consultants and other business professionals at Flevy here.

Receive our FREE Strategy Development Deck

This is a discussion deck template for a corporate strategy development session. In this discussion, we go through a 2-prong approach to growth and evaluate the merits of various growth drivers. This same document is available for purchase on Flevy here.
 
Have you used Instrumental Approach of Stakeholder Theory in your work? Please share your experiences and insights in the comments section below.

, , ,

© 2017, Marketing Mix Hub