Stakeholder groups have connections with the firm and

Stakeholder theory expects board of directors to take care of
the wealth of many different stakeholder groups, including interest groups
linked to social, environmental and ethical considerations (Freeman, 1984;
Donaldson & Preston, 1995; Freeman et al., 2004). Stakeholder theory views
that “companies and society are interdependent and therefore the corporation serves
a broader social purpose than its responsibilities to shareholders” (Kiel &
Nicholson, 2003a, p. 31). Likewise, Freeman (1984), one of the original
proponents of stakeholder theory, defines stakeholder as “any group or
individual who can affect or is affected by the achievement of the organization’s
objectives” (p. 46)

There is considerable argument among academics whether to
take a broad or narrow view of a firm’s stakeholder. Freeman’s definition (1984,
p. 46) cited above proposes a broad view of stakeholders covering large number
of entities including almost all types of stakeholders. Donaldson and Preston (1995,
p. 85) identify stakeholders as “persons or groups with legitimate interests in
procedural and/or substantive aspects of corporate activity.” For Example,
Wheeler and Sillanpaa (1997) identified stakeholder as varied as investors,
managers, employees, customers, business partners, local communities, civil society,
the natural environment, future generations, and non-human species, many of
whom are unable to speak for themselves. Mitchell, Agle and Wood (1997) argue
that stakeholders can be identified by possession of one, two or all three of
the attributes of: (1) power to influence the firm, (2) the legitimacy of
relationship with the firm, and (3) the urgency of their claim on the firm. This
typology allows managers to pay attention and respond to various stakeholder
types.

Stakeholder theory claimed that many groups have connections
with the firm and are affected by firm’s decision making. Freeman et al. (2004)
suggest that the idea of value creation and trade is intimately connected to
the idea of creating value for shareholders; they observe, “business is about
putting together a deal so that suppliers, customers, employees, communities,
managers, and shareholders all win continuously over time.” Donaldson and
Preston (1995) refer to the myriad participants who seek multiple and sometimes
diverging goals. Manager’s view of the stakeholders’ position in the firm
influences managerial behavior However, Freeman et al. (2004) suggests that managers
should try to create as much value for stakeholders as possible by resolving existing
conflicts among them so that the stakeholders do not exit the deal.

Carver and Oliver (2002) examine stakeholder view from
non-financial outcomes. For example, while shareholders generally define value
in financial terms, other stakeholders may seek benefits “such as the
satisfaction of pioneering a particularly breakthrough, supporting a particularly
kind of corporate behavior, or, where the owner is also the operator, working
in a particular way” (p. 60). It means stakeholders have ‘non-equity stakes’
which requires management to develop and maintain all stakeholder relationships,
and not of just shareholders. This suggests the need for reassessing performance
evaluation based on traditional measures of shareholder wealth and profits by
including measures relating to different stakeholder groups who have non-equity
stakes.

Nonetheless many firms do strive to maximize shareholder
value while, at the same time, trying to take care of the interest of the other
stakeholders. Sundaram and Inkpen (2004a) argue that objective of shareholder
value maximization matters because it is the only objective that leads to
decisions that enhance outcomes for all stakeholders. They claimed that
identifying a myriad of stakeholders and their core values is an unrealistic
task for managers (Sundaram & Inkpen, 2004b). Suggestion of stakeholder
perspective also argue that shareholder value maximization will lead to discovery
of value from non-shareholders to shareholders. However, Freeman et al. (2004) focus on two core
questions: ‘what is the purpose of the firm?’ and ‘what responsibility does
management have to stakeholders?’. They posit that both these questions are
interrelated and managers must develop relationships, inspire their stakeholders,
and create communities where everyone strives to give their best to deliver the
value the firm promises. Therefore, the stakeholder theory is considered as a
good equipment for managers to articulate and foster the shared purpose of
their firm.

2.2.5 Resource
Dependence Theory

Resource dependence theory argues
that the elements of corporate governance mechanisms, such as board of
directors and its sub-committees, are not enough to ensure effective monitoring
of managers. These mechanisms play a crucial role in connecting the company and
the needed resources to increase corporate performance (Pfeffer, 1973).
However, corporate governance mechanisms have essential sources that companies
need. First, the board of directors and especially its independent
non-executive directors have experience, expertise, knowledge and skills, which
firm needs (Haniffa and Cooke, 2002). Second, the presence of these directors
builds the reputation of the firm and provides the firm with necessary business
network (Haniffa and Hudaib, 2006). Third, the directors on the board have
their own personal relationships, which they can use to access extra
information from business and political elites (Nicholson and Kiel, 2007).
Last, the board of directors is regarded as the most important link to outside
resources such as creditors, suppliers, customers and institutional investors.
Consequently, as Nicholson & Kiel (2007) argue, a strong relationship with
outside resources has a positive impact on the corporate performance.

Corporate governance mechanisms aim to mitigate
the agency problem and ensure that directors act in the best interests of
shareholders (e.g., Jensen and Meckling, 1976, Fama, 1980, Netter et al.,
2009). In this regard, the most important component of any corporate governance
system is the board of directors (Lipton and Lorsch, 1992, John and Senbet, 1998,
Filatotchev and Boyd, 2009). The board’s chief task is to monitor the managers
and ensure that a firm’s obligations to shareholders and others are met. To
this end, the board of directors advises and supervises managers, chooses
strategy, and ensures the optimal use of resources, and supervise management,
all the while being accountable to shareholders for its actions (Demsetz and
Lehn, 1985, Brennan, 2006). Given these many duties, and their importance to
firm success, it is necessary that the board act effectively and efficiently
(Jensen, 1993, Brennan, 2006). Prior studies suggest that there are several
characteristics that affect board of director performance, including, for
example, the presence of independent directors, size of the board, and directors’
experience (e.g., Yermack, 1996, Baranchuk and Dybvig