Impact of Corporate Governance Approaches on Organization Policies and Practices

3.2 Stakeholders approach to Corporate Governance and HRM

The corporate governance approach that has been established as a more favourable means of handling and supervising the performance of the managers is the stakeholder theory. The stakeholder approach of governance takes the interest of different stakeholders into consideration, holding the establishment of positive ties with the stakeholders as the primary area of focus. On the basis of this perspective, the human resource management practices and policies focus on the involvement of different groups of stakeholders, including the internal and external parties (Freeman and Evan, 1990) or the primary and secondary stakeholders (Parsa, 2010). Companies that have adopted this perspective as a part of the corporate governance structure and system stress the importance of maintaining positive relationship with the management, employees and the community members. This position is considerably different from the framework of corporate governance upheld by shareholder perspective.
The influence of stakeholder’s approach adopted by the board of an organization effect the human resource management practices and policies, shaping the means of handling the output of the managers in ways that are aligned with the ethical code of conduct (Jamali, Safieddine and Rabbath, 2008). Additionally, the members of the board focus on relationship optimization and establishing commitment among the internal stakeholders to work towards the success of the company. This objective can be achieved through using suitable human resource management strategies, related to the aspects of performance management, offering rewards to the employees and practices adopted for the purpose of supervising the performance of the employees and managers (Tyson, 2014). The corporate governance uses HRM as a means of creating long term dedication among the internal stakeholders, which ultimately becomes a source of benefit for the organization.

Konzelmann et al. (2006) has identified that monetary rewards and job security are two of the key tools used by HR practitioners working under the guidance of stakeholder governance system. The expected outcome of these mechanisms is employee dedication and focused effort on completion of the job related tasks. The stakeholder approach to corporate governance is considered as a more effective means of handling the managers by different scholars (Solomon, 2007), but there are some issues that can reduce the organization’s potential to gain benefit out of this perspective. Parsa (2010) has argued that the involvement of different stakeholders makes the performance management an intricate task for the human resource function as they are required to draw connections between the organizational objectives, stakeholder’s interest and performance of personnel at managerial performance. Moreover, Konzelmann et al. (2006) has stated that the stakeholder group that has a comparatively influential position than other groups sets the direction of the way human resources should be managed. For example, in a private organization, the owners may decide to expand the company operations, which requires the human resource management department to become a means of recruiting and selecting the human capital which serves the purpose of the management and owners. Furthermore, the emphasis of the owners on developing a corporate culture that fosters creativity, would result in the selection of managers that can implement this culture. Likewise, Goergen, Brewster and Wood (2009) have concluded that the training and development of the staff is carried out in accordance to the organizational direction identified by the dominant stakeholders, which in this case are represented by the owners of the firm. The stakeholder approach supports the long-term approach, using the human resource initiatives to establish positive relations with the managers and employees. Additionally, the relationship between shareholders and managers is also dominated by the objective of achieving long-term dedication from the staff members.

The application of stakeholder approach is relevant in countries that are identified as representing the coordinated market economies, such as Germany and Japan (Parsa, 2010), which excludes the nations dominated by liberal market structure. Another are which raises issues is the alignment of the stakeholder’s interest with organizational processes and employee output. The focus on main stakeholders would require the governing body to take the shareholder’s expectations and employee commitment into focus. In organizations where the span of stakeholder approach covers the overall community, the responsibility of HR includes the integration of CSR related behaviours among the personnel and the management (Jamali, Safieddine and Rabbath, 2008). Management of the different stakeholders requires a great deal of resources, whereas the issue of balancing the expectations of different stakeholders further complicates the situation.

4. Conclusion

The conclusion that can be drawn from the above discussion is shareholder and stakeholder approach to corporate governance offers benefits to organizations and have certain limitations as well. The perspective of governing bodies in an organization is inspires the adoption of specific HR practices, mainly seen in the area of incentive and supervision. The shareholder based approach carries the simplicity of managing the expectations of the investors and owners of an organization, with limited focus on the managerial expectations. Under this approach, the key objective of human resource managers is regulation of incentives to managers and supervision of their output in a way that is seen as favourable by the shareholders. The approach works best with a short-term perspective, but a central weakness of this perspective is that the management may become demotivated and loss of interest may occur as the HR compels the managers to follow shareholder’s expectations. The stakeholder approach takes the manager’s expectations and motivation into focus while guiding the HRM function in an organization. The human resource management is used for the purpose of establishing motivation and dedication among the workforce, which supports the aim of organizational growth in the long run. The presence of multiple stakeholders makes it difficult to connect employee performance with the distinctive need of each stakeholder group. The corporate governance should focus on adopting the HR practices with a long-term focus, using the personnel for attaining sustainable growth.

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