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STAKEHOLDER THEORY

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									STAKEHOLDER THEORY

1.0    INTRODUCTION

Nowadays stakeholder concept became an important thing to the business, media,
academician and also to the related parties because the role of the business not just
only focus on the maximize shareholders wealth but also must protect the others related
parties‟ interests.

       It is very important to business to keep their business in sustainability. The
sustainability business will make sure their goals in making profits must in line with the
good relationship with customers and also the investors and must treating the
environment well. As a result sustainable business will create value added to the
business. So stakeholder theory can help business to get sustainability in their business
by reduce the ambiguity of the relationship between the business and the stakeholders.
As stated by Freeman and et. al (2010) stakeholder theory is about value creation and
trade and how to manage a business effectively. If the stakeholder is to solve the
problem of the value creation and trade, it must show how business can it fact be
described through stakeholder relationships.

       Definition of stakeholder theory posits that the focus on shareholders and firm
value is misplaced and managers should be concerned with all stakeholders of the firm.
Freeman (1984) said that stakeholder theory as a proposal for the strategic
management of organizations in the late twentieth century.

       Definition of stakeholder is Freeman (1984) that individuals or groups may
influence or be influenced by the scope of organizational objectives. Emerson W.M
(2011) stated that within this concept, a person, an informal group, an organization or
an institution may all be stakeholders. Stakeholders consist of employees,
shareholders,    government,   creditors,   suppliers,   trade   unions,   customers   and
community.




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      I am interested with this theory because in my opinion the stakeholder theory can
give guideline to me regarding my future research about the Islamic corporate
governance towards earning management.


      My research on this theory is organized as follows. First, I explain the definition of
stakeholder theory and who are the stakeholders based on the textbook. Second, I
review about the developments of the stakeholder theory. Next I examine 3 empirical
researches which implemented the stakeholder theory. And lastly the conclusion for the
stakeholder theory based on the previous researches.




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2.0   DEVELOPMENT OF STAKEHOLDER THEORY

The first ideas come from early 1708 until 1722 where Enterprise Oil Plc in their annual
reports includes among its objectives “nurturing an environment in which the best
people want to work towards delivering a strong in values”. In this time the company
already have an idea to look forward towards other than shareholders, but in this time
term of stakeholder did not exist but they use term as a bet and deposits that means to
have something to gain or lose in turn on events.

      In early 1918 until 1950, there were companies that already allocate their
interested parties in a group of customers, employees, stockholders and also
community. The companies were Johnson & Johnson, Sears and work by Follet.
(Charles F. and et. al, 2006)

      In year 1959, Penrose, published “Enterprise Growth Theory”. This theory
proposed that business is a collection of human assets and human relations. This
concept is being to be as a cornerstone to build a stakeholder theory.

      Based on Charles F. and et. al (2006) stated that in the mid-1980 a stakeholder
approach to strategy came up. One focal point in this movement was the publication of
Richard Edward Freeman. He is generally credited with popularizing the stakeholder
concept. The title of the work is – Strategic Management and only the subtitle is A
Stakeholder Approach and came out in 1984. Doing this he indicated that his view of
the stakeholder concept was done from the perspective of the company. He built on the
process work of Ian Mitroff, Richard Mason and James Emshoff. Actually the use of the
word stakeholder came from the pioneering work done at Stanford Research Institute
(SRI) in the 1960s. They further were heavily influenced by several concepts that were
developed in the planning department of the Lockheed Company and these ideas were
developed from the researching done by Igor Ansoff and Robert Steward. Ansoff was
around 1960s working for the SRI in association with Lockheed.




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       In the year 1995, Donaldson and Preston argue that the normative base of the
stakeholder theory, including the “identification of moral or philosophical guidelines for
the operation and management of the corporation”, is the core of the stakeholder
theory. Based from Charles F. and et. al (2006) stated that stakeholder concept gave
rise to heterogenic theoretical developments witch have been summarized in Donaldson
and Preston Article “The Stakeholder Theory of the Corporation: Concepts, Evidence,
and Implications” (1995). They suggested that the stockholder theory literature can be
seen as three branches. First descriptive, where the aims is to understand how
managers deal with stakeholders and how they represent their interests. The
corporation is viewed as a constellation of interests, some time competitive and some
time cooperative. The analytic theory will show how the MNC can deal with these
divergent interests of stakeholders.
       Second, instrumental approach, where study the organizational consequences of
taking into account stakeholders in management examining the connections between
the practice of stakeholder management and the achievement of various corporate
governance goals.
       The third branch is normative, where identification of moral or philosophical
guidelines linked to the activities or the management of corporations. Donaldson and
Preston argue that if these three approaches are combined without acknowledgement it
would result to confusion.
       In year 2007, Mitchell et. al derive a typology of stakeholders based on the
attributes power (the extent a party has means to impose its will in a relationships),
legitimacy (socially accepted and expected structures or behaviors), and urgency (time
sensitivity or criticality of the stakeholder‟s claims)
       In year 2002, explore the implications of contentious relationships between
stakeholders and organizations by introducing compatible/incompatible interests and
necessary/contingent connections as additional attributes with which to examine the
configuration of these relationships.
       During the year 2007, Edward Freeman and cooperation with Jeffrey Harrison
and Andrew C. Wicks publish latest books regarding stakeholder theory, title “Managing
for Stakeholders” published by Yale University Press. Freeman also provided the

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chapters on stakeholder theory and stakeholder management for the world‟s first
“Dictionary of CSR”, the institute for Corporate Culture Affairs “A to Z of Corporate
Social Responsibility”.
       In year 2010, Freeman and et. al latest book, “Stakeholder theory: The State of
the Art”. This book examines this body of research and assesses its relevance for the
understanding of modern business. Beginning with a discussion of the origins and
development of stakeholder theory, it shows how this corpus of theory has influenced a
variety of different fields, including strategic management, finance, accounting,
management, marketing, law, health care, public policy, and environment. It also
features in-depth discussions of two important areas that stakeholder theory has helped
to shape and define: business ethics and corporate social responsibility. The book
concludes by arguing that we should re-frame capitalism in the terms of stakeholder
theory so that we come to see business as creating value for stakeholders.
(http://books.google.com.my, 2011)




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3.0    THEORISTS




3.1    PERSONAL BACKGROUND

R. Edward Freeman was born at December 18, 1951 in Columbus, Georgia. He got his
education from Duke University for his B.A, studying in philosophy and matemathics in
year 1973. In 1978, he got his Ph.D from Washington University St. Louis.

       He is an American philosopher and professor of business administration at the
Darden School of the University of Virginia.

       From the book of The stakeholder theory: The state of the art, (2010) stated that
after finishing his study, Freeman accepted an appointment on the research staff at the
Wharton School, University of Pennsylvania with the group called the Busch Center, run
by Russell Ackoff, acknowledge as pioneer in operations research and systems theory.

       Freeman also is academic director of the Business Roundtable Institute for
Corporate Ethics. From 1987 until to 200, he was director of Darden‟s Olsson Center for
Applied Ethics, one of the world‟s leading academic centers for the study of ethics.
       From the book of The stakeholder theory: The state of the art, (2010), stated that
Freeman spent most of his time from 1978 until 1983 teachings executives and working
with them to develop very practical ways to understanding how they could be more
effective in the relationships with key stakeholders.




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3.2   CONTRIBUTIONS

Freeman is particularly known for his work on stakeholder theory (1984) and
on business works. In year 1984, he published his book title “Strategic Management: A
Stakeholder Approach” that be the basic for the development of stakeholder theory.

      He has co-edited recent editions of such standard business textbooks as The
Portable MBA and the Blackwell's Handbook of Strategic Management, and serves as
the editor for the Ruffin Series in Business Ethics from Oxford University Press.

      His latest book, Managing for Stakeholders with Jeffrey Harrison and Andrew C.
Wicks, was published by Yale University Press on October 17, 2007. Ed Freeman also
provided the chapters on stakeholder theory and stakeholder management for the
world's first "Dictionary of CSR", the Institute for Corporate Culture Affairs "A to Z of
Corporate Social Responsibility".

      In year 2010, Freeman and et. al latest book, “Stakeholder theory: The State of
the Art”. This book examines this body of research and assesses its relevance for the
understanding of modern business.




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4.0    THREE EMPIRICAL PAPERS

For the purpose for practicing this theory, I am selecting three empirical papers that
using stakeholder theory in addressing their hypothesis and findings. I am choosing the
three different papers that address in different issues as a result to get more clear for
me to applied this theory in my own research.

4.1    Employee treatment and firm leverage: A test of the stakeholder theory of
       capital structure. (By: Kee Hong Bae and et. al, 2011)

4.1.1 Purpose of this study:

This study is to investigate the stakeholder theory of capital structure from the
perspective of a firm‟s relations with its employees and also to investigate how a firm‟s
incentive and ability to offer fair employee treatment should be related to its capital
structure.

4.1.2 Contribution of this study:

The researcher want to fill a gap by investigating how a firm‟s incentive and ability to
offer fair employee treatment are relevant to its capital structure decisions and this study
stated that there are three arguments that give reasons that the quality‟s of a firm „s
employee treatment should be related to its capital structure.

4.1.3 Arguments on this study:

Based on the previous research this study concludes that there are three arguments
that employee treatment related to firm‟s capital structure.

       First argument based on capital structure choice model by Maksimovic and
Titman (1991) who show that firms that want to credibly commit themselves to providing
better employee benefits need to have lower debt ratios. The key insight of Maksimovic
and Titman model are customers, employees, and other stakeholders are reluctant to
do business with a highly levered firm because financial difficulties can affect the firm‟s
incentive to honor its implicit contracts with them. This argument predict that firms which



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place a higher value on their reputation for treating employees should limit their use of
debt.

        Second argument is based on Myers (1997), argues that the firm with high debt
outstanding has incentives to pass up valuable investment opportunities that could
make a positive net contribution to the market value of the firm. This underinvestment
problem is more severe for the firms with higher growth opportunity than those with
more assets in place, implying that the leverage ratio is negatively related to growth
opportunities. Thus, if a firm‟s investment in human capital is a positive net present
value project, then firms with high leverage underinvest in employee‟s benefits, resulting
in a negative relation between leverage and employee benefits.

        Third argument is based on free cash flow by Jensen (1986) stated that
managers with a large free cash flow have incentives to overinvest beyond the optimal
level and high leverage constrains managers from diverting free cash flow to obtain
private benefits. Because firms with higher free cash flow are likely to have more
resources to invest in employee benefits than those with lower free cash flow, these firm
are likely to treat their employee more generously even if investment in employee
benefits does not create a value for their shareholders. This argument predict that high
leverage can control over investment in employees benefits, resulting in negative
relation between leverage and employee benefits.

4.1.4 Research Methodology

The source data are taken from KLD Research and Analysis, Inc. The samples were
consists of the firms in United States that covered by the KLD SOCRATES database
between 2003 and 2007. Choose year 2003 until 2007 because the sample during this
period includes firm in Russell Indexes and thus provides the largest variation across
firms. This study take about 14,898 firm-year observations with rating on employee
relations.

        For the measurement, the researcher use Employee Treatment Index and also
Fortune Magazine list “100 Best companies to work for”.


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4.1.5 Results and Findings

This study find the strong evidence that firms with a higher score on the Employee
Treatment Index maintain lower leverage. This result support the argument by
Maksimovic and Titman, (1991) stated that firms which is place a higher value on their
reputation on treating employees should limit their use of debt.

      This study also support argument by Myers (1997), that firms with high leverage
underinvest in employee benefits, resulting in negative relation between leverage and
employee benefits.

      The third argument by Jensen (1986) about the high leverage can control over
investment in employees benefits, resulting in a negative relation between leverage and
employee benefits are also supported by this study.

4.1.6 Conclusion

It is important to managers to take care their relation with the employees regarding to
gain more benefits to the firm‟s value such as give a good reputation to the company
that will attract more investors and also contribute to produce loyal employees.




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4.2.   Exploring differences in social disclosures internationally: A stakeholder
       perspective (By: Joyce van der laan Smith & et. al, 2005)

4.2.1 Purpose of this study:

The purpose of this study is to attempt to explain the reasons for the observed
differences in Corporate Social Disclosure (CSD). This study also focused on the social
disclosures related to the areas of environment, employees, community, customers and
shareholders rights. This study also focus is on the stakeholder groups represented by
these disclosures areas.

4.2.2 Contribution of this study:

This study use stakeholder theory to explain the differences in Corporate Social
Disclosures among countries. This study also argues that the manner in which the role
of a corporation, and thus its stakeholders, is defined in a society will affect the extent
and quality of CSD provided by companies in their annual reports.

4.2.3 Literature review

4.2.3.1        Stakeholder theory

Based on this study stated that CSD are provides information on the impact of
corporation‟s activities on a broad range of constituencies. The stakeholder concept is
intended to broaden management‟s vision of its roles and responsibilities beyond the
profit maximization functions to include interests and claims of non-stockholdings group.
As a result from this approach, all the long-term survival and success of the corporation
requires the support of all its stakeholders.

       Disclosure about the risks and the contribution that will affect the stakeholders
are very important. This disclosure will help managers to supply open communication
with their stakeholders through annual report that includes financial and non financial
information.

       There is three situational factors that appears in the stakeholders‟ relationship
such as power, legitimacy and urgency depends on the level of the stakeholders. All this

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factors can affect the relationship between stakeholder and manager. As stated by this
study that the more critical the resources controlled by stakeholder group the more
responsive the organization will be in meeting the expectations of that stakeholders.
(2005)

         This study make prediction that the higher the chances the stakeholders‟ claims
are perceived to be by managers, the higher the chances that the stakeholder demands
will be addressed. Expect positive relationship between the level and quality of social
disclosures and the importance a corporation attaches to its stakeholders.

4.2.3.2          Corporate governance systems

This study defines corporate governance as the relationship between a firm and its
stakeholders.

         Two views of the corporate worldviews that are contractarianism which is the
objective of the manager is to maximize the value of the firms through maximize the
stockholders wealth. Example of the country that uses this view is United States.
Second view is communitarianism that defines the main goal of the company is through
the social responsibility for all the stakeholders. Denmark and Norway are the countries
that practice this view.

         As stated in this study, based on the discussion it seem like stakeholders in
countries with a communitarian oriented corporate governance system would have
more power and legitimacy than the countries with a contractarian influenced corporate
governance system. As a result, communitarian countries likely to perform and disclose
social    responsibility   activities   as   part    of   strategically   managing   stakeholder
relationships.




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4.2.3.3       Ownership structure

This study stated that difference ownership between the countries also may affect the
quality of CSD. This situation can be seen in Scandivanian ownership structure
compare to US. Scandivanian is non profit legal entity that main objectives are to
pursue the fairness and protect the society interests. So the foundation owned firms
would have pressure to perform and disclose social responsibility activities as part of
managing key stakeholder relationships.

       So this study argue that the unique of Scandivanian‟ s firm ownership structure
contributes to a strong stakeholder orientation stimulating CSD to a greater extent than
what we observed in the US.

4.2.3.4       Cultural factors

This study argue that stakeholder groups will have more power, posses greater
legitimacy and have their claims viewed with greater urgency based on societal values
are reflected in situational factors as well as management characteristics.

       Because the societal value will influences managerial value, managers in the
countries that exhibit strong concern with social issues would be more cognizant of and
attach greater importance to stakeholder claims.

       This study expect because the societal value will influence managerial values so
there will be different perception of the stakeholders‟ across different countries and their
influences on CSD practices.




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4.2.4 Hypothesis:

There are two hypotheses for this study as a conclusion for all the factors that discuss
above.

       First hypothesis is about firms in countries with a stakeholder orientation
(Norway/Denmark) will provide a higher level of CSD in their annual reports than firms
in countries with a shareholder orientation (US).

       Second hypothesis is about firms in countries with a stakeholder orientation
(Norway/Denmark) will provide higher quality of CSD in their annual reports reports than
firms in societies with a shareholder orientation (US).

4.2.5 Research methodology:

This study identified CSD through analysis of the contents of the annual reports of
electric power generation and distribution companies from Denmark, Norway and US.

       For data collection, 47 electric power generation and distributions companies in
Norway and Denmark were identified from the LEXIS-NEXIS database. Units analysis
for this study is annual reports from electric power generation and distribution
companies from Denmark, Norway and US for year 1998 and 1999.

4.2.6 Results and findings:

For the finding in hypothesis 1, this study found that the mean for words, sentences and
page is greater in Norway/Denmark than in the US for the large companies. This finding
supports the hypothesis 1.




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       For hypothesis 2, found that the CSD in US annual reports is presented from a
historical and promotional perspective such awards received and others, compare to
Denmark/Norway, their CSD is presented from proactive and forward looking
perspective and look at environmental issues. So this can conclude that quality CSD in
Denmark/Norway is better than US. So, hyphotesis 2 is supported.

4.2.7 Conclusion:

This study suggests that it may be important to consider the manner in which the role of
corporation and its stakeholders as defined in different societies.




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4.3   Environmental practices in the wine industry: An empirical application of
the theory of reasoned action and stakeholder theory in the United States and
New Zealand (By: R. Scott Marshall and et. al, 2010)

4.3.1 Purpose of this study:

To develop a set of hypotheses based in the theory of reasoned action and stakeholder
theory, regarding drivers of the adoption of environmental practices in the wine
industries of New Zealand and the United States.

4.3.2 Contribution of this study:

There are two contributions of this study. First, by applying theory of reasoned action
(TRA) and stakeholder theory (SHT), employ a multi-theoretical approach to examining
internal and external drivers of firms‟ environmental behaviors.

      Second, the multi-theoretic approach is utilized in two countries to examine the
potentially varied effects of different drivers of firms‟ environmental behaviors based on
country context.

4.3.3 Theoretical foundation:

This study looks at two theories that are the theory of reasoned actions and also
stakeholder theory. These theories are both used to examine managements‟ motivation
for implementing environmental practices.

      For the TRA, focused on the managerial attitudes and subjective norms stated by
previous research that linked the motivation in decision making regarding to the
environmental. This study use TRA for investigation of the drivers of managers‟
decisions to adopt environmental practices.

      For the SHT, previous study stated that this theory look at the roles and influence
of key stakeholder groups. This study investigate the managerial attitudes and norms
with a consideration of the roles of internal and external stakeholder pressures. SHT
posits that a firm‟s success depends on its ability to manage relationship with its
stakeholders.

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4.3.4 Environmental issues and practices in the global wine industry.

Based on this study stated that the issues arises from the intensified stakeholder
demands for improved environmental performance are focused on such issues as the
use of water, energy and pesticides and the pollution of water and soils.

       This study also stated that their two countries sample. New Zealand and US,
have different practices regarding the environment issues. For New Zealand, their
practices towards initially driven primarily at the national compare to US that their
practices driven for individual efforts.

       The differences and the similarities in the adoption of environmental practices in
these two countries‟ wine industries provide a good context for studying managerial and
stakeholder pressures in this regard.

4.3.5 Hypothesis development:

This study looks at the variety of attitudes relevant to winery managers‟ decisions to
implement environmental practices. TRA specifies and attitude variable as a person‟s
evaluation of a specific behavior. This study examines the attitude based on the benefits
of environmental initiatives that focus on their potential cost and benefits. This study
suggest that in both NZ and US, winery managers‟ positive expectations about the
benefits of environment initiatives will lead to the implementation of environmental
practices.

       So the H1 is in New Zealand and the United States, winery managers‟ positive
attitudes toward the benefits of environmental initiatives are positively related to the
implementation of energy reduction, recycling, and measurement and monitoring
practices.

       Based on the previous research findings, this study suggest that the existence of
subjective norms surrounding environmental stewardship lead managers in the wine
industry to adopt environmental practices.




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      So the H2 is in New Zealand and the United States, winery managers‟
perceptions of subjective norms supporting improved environmental performance are
positively related to implementation of energy reduction, recycling, and measurement
and monitoring practices.

      This study posits that the wineries in NZ and US will respond to internal and
external pressures by implementing environmental practices. Internal stakeholder
pressures are considered with regard to whether they arise due to commitment on
environment or an emphasis on resulting competitive advantage, or whether they are
linked to employee concerns around a safe working environment.

      The external pressures are disaggregated with regard to whether they emanate
from customers, community groups or regulatory organizations. So the H3 is in New
Zealand and the United States, winery managers‟ perceptions of increased pressures
by internal stakeholders for environmental performance improvements are positively
related to the implementation of energy reduction, recycling and measurement and
monitoring practices.

      H4 is in New Zealand and the United States, winery managers‟ perceptions of
increased pressures by external stakeholders for environmental performance
improvements are positively related to the implementation of energy reduction, recycling
and measurement and monitoring practices.

      This study mentioned that the environmental expectations of international
markets are prominent themes. Therefore, this study suggests that the degree of
winemakers‟ reliance on exports will have a positive effect on their environmental
practices. So H5 is in New Zealand and United States, wineries‟ exports sales as a
percentage of total sales is positively related to the implementation of energy reduction,
recycling and measurement and monitoring practices.




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4.3.6 Research methodology:

This study use samples of 1234 wineries in United States and 500 wineries in New
Zealand. This study use questionnaires as extensive interviews.

4.3.7 Results and findings:

For Hypothesis 1, the findings are not supported the hypothesis 1 because this study
found that there is not significant analysis amount of any three dependent variables.

       For H2, strongly supported because its found winery managers‟ perception of
subjective norms supporting the adoption of environmental practices are very significant
and positively related to all there dependent variables.

       For H3, have significant influences on energy but this is negative which are
counter to the relationship suggested in hypothesis.

       For the H4, partially supported that only respects to the role of customers and not
community groups and regulators.

       For the H5, supported only partial because the analysis shows that export sales
are very significant related only to energy.

4.3.8 Conclusion:

As a conclusion the institutional differences between the two countries are likely to have
influenced the cross-country role of attitudes and stakeholder pressures.




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4.4    CONCLUSION

As a conclusion, the stakeholder theory are widely being used nowadays specially in
research towards business ethics, corporate governance and also in corporate social
responsibilities.

       Many researches try to see the interests of stakeholders especially for minority
interests, employees and societies either being protected or violated by the others.

       I hope this theory will help me a lot with guiding me in a clear ways to help me to
completing my future research.




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REFERENCES


Charles F. (2006), The stakeholder theory: Stakeholder theory of MNC company.
Emerson W.M and et. al (2011), Management Decision, Vol. 49 No. 2, 2011 pp. 226-
252.
Freeman, R. (1984), Strategic Management: A Stakeholder‟s Approach, Pitman,
Boston, MA.

http://books.google.com.my/books?id=xF8WN1QlIMC&dq=development+of+stakeholde
r+theory&source=gbs_navlinks_s, 26 April 2011.

http://en.wikipedia.org/wiki/R._Edward_Freeman,10. april. 2011

http://www.google.com.my/search?q=development+of+stakeholder+theory+in+timeline
&hl=en&sa=X&biw=1280&bih=709&tbs=tl:1,tl_num:50&prmd=ivnsb&ei=e7ahTcetLc7Mr
Qeg4JSCAw&ved=0CKABE 10.04.11

http://www.thebrokeronline.eu/en/Magazine/articles/A-delicate-business/CSR-debate-
timeline 10.04.11

Joyce van der laan Smith & et. al, 2005, Exploring differences in social disclosures
internationally: A stakeholder perspective, Journal of Accounting and Public Policy,
v.24, pp 123-151.

Kee Hong Bae and et. al, 2011, Employee treatment and firm leverage: A test of the
stakeholder theory of capital structure, Journal of Financial Economics, v.100 pp130-
153.

R. Edward Freeman and et. al (2010) The stakeholder theory: The state of the art
Cambridge university press, new York.

R. Scott Marshall and et. al, 2010, Environmental practices in the wine industry: An
empirical application of the theory of reasoned action and stakeholder theory in the
United States and New Zealand, v.45, pp.405-414.




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