Chapter Two

Non-governmental Organization Theories

2. 1 A brief outline of stakeholder approaches

✓ Over the past few decades, an increasing amount of literature has focused on stakeholders.
✓ Freeman (1984) advanced the stakeholder perspective, sketching out the concept in his
seminal book Strategic management, a stakeholder approach2.
✓ In his view “[a] stakeholder in an organization is (by definition) any group or individual
who can affect or is affected by the achievement of the organization’s objectives” (Freeman
1984:46).
✓ An organization thus influences its stakeholders, but is also influenced by these
stakeholders.
✓ Developing an insight in how firms could deal with different stakeholder issues could be
pursued along various strains, as has been demonstrated in recent literature.
2.2. The stakeholder concept – popular and trendy
✓ In the past view years the concept of stakeholders has boomed a lot and academics wrote
a lot about the topic.
✓ But also non-governmental organizations (NGOs), regulators, media, business and
policymakers are thinking about the Stakeholder Theory concept and are trying to
implement it in some way or the other.
2.3. What is a Stakeholder?
✓ In the book of Freeman (1984) the earliest definition is often credited to an internal memo
report of the Stanford Research Institute (SRI) in 1963.
✓ They define them as “those groups without whose support the organization would cease to
exist”.
✓ Freeman (2004) has continued to use this definition in a modified form: “those groups who
are vital to the survival and success of the organization”.
✓ This definition is entirely organization orientated so the academic circles prefer the
definition of Freeman (1984) where he defines stakeholders as “any group or individual
who can affect or is affected by the achievement of the organization objectives”.
✓ About twenty of the 75 definitions share this definition.
✓ Friedman (2006) states that this definition is more balanced and much broader than the
definition of the SRI.
✓ The phrase “can affect or is affected by” seems to include individuals of outside the firm
and groups may consider themselves to be stakeholders of an organization, without the
firm considering them to be such.

2.4. Who are Stakeholders?

✓ A very common way of differentiating the different kinds of stakeholders is to consider

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 groups of people who have classifiable relationships with the organization.
✓ Friedman (2006) means that there is a clear relationship between definitions of what
stakeholders and identification of who are the stakeholders.
✓ The main groups of stakeholders are:
- Customers
- Employees
- Local communities
- Suppliers and distributors
- Shareholders
- The media
- The public in general
- Business partners
- Competitors
- Suppliers or distributors
- Financiers (donors)
- Government regulators, policy-makers
2.5. History of the Stakeholder Theory
✓ 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.
✓ The main idea behind the book of Freeman’s book titled Strategic Management, A
Stakeholder Approach, was to try to build a framework that was responsive to the concerns
of managers who were being confronted with unprecedented levels of environmental
turbulence and change.
✓ Traditional strategy frameworks were not helping managers anymore to develop new
strategic directions and also did not help creating new opportunities.
✓ Freeman (1984) said that current theories are inconsistent with both the quantity and kinds
of change that are occurring in the business environment of the 1980’s.
✓ Turbulence organizations are facing the need for new management and a new conceptual
framework was. And his approach was a response to this challenge.
✓ Freeman chose the word Stakeholder on the basis of the traditional term -stockholder which
takes only a look at the economic point of view.
✓ Where the stakeholders are defined as “any group of individuals who is affected by or can

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 affect the achievement of an organization’s objectives” (Freeman 1984).
✓ The purpose of stakeholder management was to create methods to manage the different
groups and relationships that resulted in a strategic fashion.
✓ Further Freeman (1984) thinks that the idea of stakeholders, or stakeholder management,
or a stakeholder approach to strategic management, suggests that managers must formulate
and implement processes which satisfy all and only those groups who have a stake in the
business.
✓ The main task in this process is to manage and integrate the relationships and interests of
shareholders, employees, customers, suppliers, communities and other groups in a way that
guarantees the long-term success of the firm.
✓ A stakeholder approach is very much concerned about active management of the business
environment, relationships and the promotion of shared interests in order to develop
business strategies.
✓ Freeman’s work “Strategic Management: A stakeholder Approach” (1984) offers a
managerial and practical scope and does not really constitute a theory.
✓ But it has constituted a base for the development of the stakeholder theory, which have
been widely developed since the 1980’s.
✓ Contributions to stakeholder theory include approaches that build on:
➢ Institutional theory
➢ Resource-dependence theory (Svendsen 1998; Frooman 1999)
➢ Resource-based and capability-building approaches (Litz 1996; Sharma and
Vredenburg 1998; Hillman and Keim 2001),
➢ Organizational life cycle models (Jawahar and McLaughlin 2001),
➢ Social network analysis (Rowley 1997)3, or combinations of perspectives.
A. Institutional theory
• The first organizational theory from which we address stakeholder influence
strategies is institutional theory.
• In this theory, it is studied “how organizations survive and succeed through
congruence between an organization and the expectations from its environment.
• This theory considers issues of legitimacy.
• As Rowley (1997: 895) notes: “an organization must acquiesce to external
pressures, since its survival is contingent on its compliance with expectations
from institutional constituents, such as the state, and professional and interest
groups.”
• The institutional environment thus is composed of norms and values from
different stakeholders.
• Organizations have to fit with expectations of their external environment.
• As Daft (1998: 539) puts it, firms “perform well when they are perceived by the
larger environment to have a legitimate right to exist.”
B. Resource dependence theory

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 • Resource dependence theory highlights proactive strategies that organizations can pursue
to deal with environmental constraints, challenging them to “gain and secure reliable and
dependable access to needed resources that exist in the environment” (Jaffee 2001: 218).
• Turning this broad description towards stakeholders, Frooman (1999: 195) notes:
➢ “It is the dependence of firms on environmental actors (i.e., external stakeholders)
for resources that gives those actors leverage over a firm.”

2.6. Stakeholders Mapping and Stakeholders Management Strategies for NGOs

✓ Belong to Freeman, in order to enhance an organization’s stakeholder management it is
necessary to begin by defining who the stakeholders of the corporation are.
✓ If we apply his definition, it means: “who are those groups who can affect or can be affected
by the achievement of the organization’s purpose”?
✓ This mean mapping the stakeholders, providing detailed list of the specific groups and
companies related to each category of stakeholders, and a corresponding list of interests.
✓ For Freeman the corporation occupies a central position and has direct connections to all
Stakeholders.
✓ Freeman suggests that each organization should distinguish important stakeholders and
negligible stakeholders.
✓ To facilitate important stakeholder mapping Freeman suggests the following question:
➢ Who are our current and potential stakeholders?
➢ What are their interests/rights?
➢ How does each stakeholder affect us?
➢ How do we affect each stakeholder?
➢ What assumption does our current strategy make about each important stakeholder?
➢ What are the “environmental variables” that affect us and our stakeholder?
➢ How do we measure each of these variables and their impact?
➢ How do we keep score with our stakeholders?
Types of Stakeholders
a. Active or passive
Actives are the one who affect or determine a decision or action in the system.
Passive are that are affected by decision and actions of others.
b. Primary or secondary
Primary are the intended beneficiary or the one that have direct relationship with the system
of organization.
Secondary are the one who performing as intermediaries or that have indirect relationship
with the system.
c. Stakeholders or key stakeholders
Stakeholders any group who are affected and affect the organization operation.
Key stakeholders are actors who are considered to have significant influence on the
organization.

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 d. Important or influential
Important are those whose needs are important to the organization process. Example the
existence of rural women farmer association is important for the operation of women affairs
bureau.
Influential are that have the power to control the decision of an organization
2.7. The law of unintended consequences
The concept of unintended consequences is a staple of economics. The basic idea is that the actions
of governments, firms, individuals and other societal actors alter the incentives and constraints
faced by other decision-makers, leading to feedback through induced behavioral response. Such
feedback effects are often hard to anticipate but very real nonetheless. Unintended consequences
can be favorable, as in Adam Smith’s “invisible hand” effect of individually self-interested
behavior leading to socially desirable outcomes or the “crowding-in” effects of certain public
investments that induce complementary private investment. But generally people think of negative
effects when they refer to unintended consequences, the attenuation of expected benefits due to
some induced response to the original intervention.
Unintended consequences can be grouped into three types:-
- Unexpected benefits (a positive unexpected benefit)
- Unexpected drawback (unexpected detriment occurring in addition to the desired effect
of the policy)
- Unexpected perverse result (perverse effect contrary to what was originally intended)
Unintended consequences (unanticipated, unforeseen consequences) are outcomes that are not the
one intended by a purposeful action of NGOs. In other words, unintended consequences refer to
unexpected drawback or unexpected detriment in the operation of NGOs.
Let us see, as a typical example, the intended and unintended consequences of
humanitarian/relief/food aid service provider NGOs as follow:

A. Intended Consequences
1. Food aid used in humanitarian emergencies is largely intended to protect human nutritional
status and human life, although in many kinds of emergencies, protecting livelihood assets is
critical as well. The most common applications of food aid for protecting human life and nutritional
status in acute humanitarian emergencies are: (i) general nutrition support, primarily through direct
distribution of a basic food ration to vulnerable groups (based on some assessment of need); (ii)
correcting malnutrition via supplementary or therapeutic feeding for especially acutely affected
sub-groups; and (iii) food for work (FFW) if the emergency intervention is mounted rapidly
enough to begin before people have been so badly affected by the crisis that they cannot undertake
sustained physical labor.

2. Market development
The main intended effect of food aid concerns market development, not in the sense of creating
future commercial export markets for donors, but in the sense of helping to nurture competitive,

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efficient channels through which food can flow from producers to final consumers. Market-
mediated food aid operations – whether on the supply-side through monetization of in kind food
aid, or on the demand-side through local and regional purchases using donor cash resources – often
have an explicit goal of helping to develop food marketing channels in low-income areas where
markets perform rather poorly.

3. Stimulate growth
At some level, the objective of all overseas development assistance, food aid included, is to
stimulate wealth accumulation and economic growth in poor countries. This occurs chiefly through
stimulating accumulation of productive assets – human capital being the chief asset food aid can
help protect or build – and increasing the productivity of preexisting assets.

B. Unintended Consequences
1. Price Effects
Food prices almost invariably fall in local markets after food aid distribution. Food aid can drive
down local (or national) food prices in at least three ways. First, monetization of food aid can flood
the market, increasing supply. Second, households receiving food aid may decrease demand for
the commodity received or for locally produced substitutes or, if they produce substitutes or the
commodity received, they may sell more of it. Finally, recipients may sell food aid to purchase
other necessities or complements, driving down prices of the food aid commodity and its
substitutes, but also increasing demand for complements. Lowered prices hurt net sellers of the
commodity and, if food aid deliveries are regular occurrences, can create a disincentive for them
to invest in their own agricultural production activities. At the extreme, producers could lose their
livelihoods due to low prices, rendering them dependent, although this seems more a hypothetical
extreme outcome than something actually observed, much a less common occurrence. Further,
lowered prices can decrease the relative payoff to investing in agriculture, either by governments
or by producers.

2. Production disincentives
Beyond – and building on – labor disincentive effects, food aid can have the unintended
consequence of discouraging household-level production. If food aid lowers local food prices, that
may decrease the relative payoffs to investing in one’s own production. This type of disincentive
impacts not only food aid recipients – who may enjoy a countervailing stimulative effect due to
the increased resources at their disposal – but perhaps especially to non-recipient producers who
live in or sell to areas receiving food aid flows. In theory, a producer is more at risk of facing food
aid-induced disincentives the more unresponsive (i.e., inelastic) demand they face. These
disincentive effects can be short-term in nature, in which case concerns about negative dependency
are minimal. The risk of triggering negative dependency looms largest when food aid has what
producers expect to be a relatively permanent negative effect on product prices, or when it
interrupts regular investment or maintenance cycles that maintain or enhance local agricultural

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productivity. The key triggers to study are thus the medium-to long-term expected price effects
and any disruptions in on-farm activities due to the method and timing of food distribution. Both
of these factors are largely driven by programming variables such as targeting methods and timing
of deliveries.

3. Household labor disincentives

Perhaps the most pervasive – and we believe, misguided – claim is that food aid somehow makes
people lazy, that food aid unintentionally discourages people from working. It is certainly true that
microeconomic theory suggests that because transfers increase recipients’ welfare, they generate
income effects that will tend to reduce labor supply simply because even hard-working people
prefer more leisure to less.4 The economic reality that any transfer – whether in the form of food
or not – discourages recipients from working, everything else held constant, undermines much
popular support for transfers.

4. Changed consumption patterns

Part of the donor-oriented rationale for food aid has long been export promotion. Since the exports
from temperate zone donors are commonly different from the staple crops grown in tropical
recipient countries, the logic of export promotion necessarily entails some effort to change
consumers’ preferences, to introduce them to new foods and thereby endogenously stimulate
demand for foods with which they were previously unfamiliar or which had formerly represented
only a minor share of their diet. As Barrett and Maxwell (2005) show, however, food aid has
generally failed in its trade promotion objectives. However, food aid that is relatively inappropriate
to local uses certainly can distort consumption patterns. Massive shipments of wheat and rice into
the West African Sahel during the food crises of the mid-1970s and mid-1980s were widely
believed to stimulate a shift in consumer demand from indigenous coarse grains (mainly millet
and sorghum) to more western crops, notably wheat, although hard empirical evidence of this
remains scarce, especially given how widespread the claim has become. Similarly, food aid
deliveries into pastoral areas in the Horn of Africa over the past decade have been criticized
repeatedly by pastoralists as having changed dietary patterns.

2.8. New Public Management (NPM) and NGOs

2.8.1. History of Administrative Reform
In the last two decades, public management reform has become very common in the public sector.
There are three main types: administrative reform in a traditional bureaucratic setting, new public
management reform and governance reform.

2.8.2 Definition and Features of New Public Management (NPM) Reform

By the end of 70s the new changes and concepts began to acquire a coherent shape in public
administration. The challenges to Weberian bureaucracy assumed a number of names. The
commonly used terms are managerialism, NPM and entrepreneurial government. The new buzz

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words are downsizing, resource squeeze, cut back management, effectiveness, efficiency,
economy, privatization, outsourcing, marketization, quasi-market, surrogate market, new public
management, contractualization, atomization, agentification, so on.

A whole array of methods and techniques employed to reform PA since the 1980s was given the
broad label of NPM. According to Richard Common NPM is ‘used to describe a vast range of
contemporary administrative change’. NPM has become a very popular concept, its secret leis in
its appeal as an attractive solution to the problem of big and inefficient government. The term was
coined by Christopher Hood in 1991 and used in his paper on ‘A public management for all
seasons’ published in public administration. NPM meant that government organizations started to
use management styles and instruments derived from the profit sector. It seems safe to say that
NPM too is very much focused on rational management and increasing economic efficiency and
effectiveness. The complex natures of the term also make it difficult to provide its universally
accepted definition. NPM is an umbrella term which encompasses wide ranges of meanings,
including organization and management design, the application of new institutional economics to
public management, and patterns of policy choice.

People tend to assume that government is less efficient than the private sector. It is difficult for
government to achieve efficiency, economy and effectiveness under the traditional bureaucratic
regime. Therefore, useful private sector practices, including privatization, contracting out, contract
systems and public-private partnerships, should be adopted in the public sector. The main
framework of NPM suggests that government and public sector be managed in the same way as
the private sector. NPM aims to downsize the bureaucracy, reinforce political control, reduce
government deficits, better allocate limited resources, improve service delivery and achieve the
target of small government. NPM has brought changes to the old traditional bureaucratic system
and led government to function more like private business.

Hood (1995) identified seven underlying doctrines of NPM and these principles have basically
been agreed among scholars. The principle developed by Hood and other scholars can be
summarized as follow.
1. Unbundling of the public sector into corporatized units organized by product: shifting
to disaggregation of units in public sector, I,e, break up large corporatized units around
products, found separately and dealing with one another on an arm length basis. This is
justified by the need to create manageable units and to gain the efficiency advantages of
franchise arrangement inside as well as outside the public sectors
2. More contract-based competitive provision, with internal markets and term of
contracts: introducing greater competition in public sector is an essential to enhance
efficiency and productivity of public sector. This is justified as using rivalry as a key to
lower cost and better standard.
3. Stress on private-sector styles of management practice: military style of bureaucracy is

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 discarded. It also involves a move away from military style public service ethics and
flexibility in hiring and reward and justified by the need to use proven private sector
management tools in public sector.
4. More stress on discipline and frugality in resource use: greater parsimony and discipline
in using resource in public sector is highly stressed or advocated in NPM. This is simply
means cutting direct cost raising labor discipline, resisting demand and limiting compliance
cost to business. And is typically justified by the need to check resource demands of public
sector and do more with less.
5. More emphasis on visible hands-on top management: this means hands-on professional
management of public organization. Manager should be given an extreme autonomy to
manage their organization. Provide freedom to the manager to manage or letting the
manager manage or as hoods put it active, visible, discretionary control of organization
from named persons at the top. The justification for this is that accountability requires clear
assignment of responsibility for action.
6. Explicit formal measurable standards and measures of performance and success: this
requires goals to be well defined and performance target to be set (later defined as
performance indicator). This is also expected to enhance efficiency and ensure
accountability and justified by the proponent as accountability requires a clear statements
of goal; efficiency require a hard look at objectives.
7. Greater emphasis on output controls: resources are directed to areas according to
measured performance, because of the need of stress on result rather than input and
procedures.

New public management (NPM) reform entered the public sector from the private sector, and
affected the management of not only government departments and public organizations but also
NGOs. It has also affected the relationship between the government and NGOs. The past decades
witnessed the New Public Management springing up as the blueprint of the reform of Welfare
State (Pollitt and Bouckaert, 2000). It has become an internationalization and global model
(McCourt and Minogue, 2001). Under NPM, the government should shift its roles from “rowing
to steering” ([Link] & Gaebler, 1992; OECD, 1996), and play the role as enabler (Gilbert,
2005) to encourage all sectors to shoulder the social responsibility. Commercial value and tools
stressing on market and competition are incorporated into public governance to enhance the
effectiveness and accountability. The government became more depend on “third party” to provide
social service (Salamon, 2002). Many governments are actively working on the development and
governance capacity building of NGOs.

2.8.3. Impacts of NPM Reform in NGOs

1. The NPM reform has also impacted the relationship between government and NGOs. The
government monitored and supervised NGOs through formulating & implementation of

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legislations. So, NGOs need to follow the instructions of the government on, for example, the rate
of service charges, number of staff members in a center and payment of staff members to qualify
for a subvention. . The relationship between the government and an NGO appeared to be
straightforward, with the roles and responsibilities of each party clearly defined. However, after
the NPM reform, the government changed its attitude towards NGOs. Nowadays, the governments
apply the concept of “less government but more governance” in managing NGOs. The
organizations enjoy more autonomy and freedom regarding their development, but at the same
time, have more responsibilities. In addition to providing front-line service, NGOs also need to
enhance accountability and achieve different service targets to meet the Funding and Service
Agreements. In this process, because NGOs need to fight for more subventions, there may be more
bargaining and negotiating between them and the government, which affects their previously stable
relationship.

2. NPM reform has brought a new culture into NGOs, which now function more like organizations
in the private sector. Follow the direction of the government, NGOs must adapt to new concepts
in management and daily operations, which include the following: (1) under the competitive
bidding system, NGO need to write proposals and compete with other NGOs to gain new service
contracts from the government; (2) NGOs have to cooperate and interact more with the private
sector to gain more financial support and ensure the continuous development of the organizations;
(3) some of the services are being contracted out to save money, such as meal services; (4) because
of the limited financial support from the government, NGOs must find different ways to achieve
financial balance, such as restructuring and cutting down the number of staff members; and (5)
performance measurement is being introduced into NGOs and becoming a common practice.

3. NPM leads changes in different areas/aspects of NGOs Management and Operations, such as:

Strategic Management
Strategic management refers to the long-term direction of an organization and the kinds of
outcomes that it should achieve. The organization should formulate its own strategic plan,
implement the plan, monitor the implementation process and evaluate the effectiveness of the plan
periodically. The ability of an organization to develop, implement, evaluate and reformulate a
strategic plan is very important. Accountability and communication are very important to
achieving good governance. An organization should have clear policies and procedures on the
structure of the organization and authority and responsibilities of different staff members.
Continuous communication with stakeholders is also important.

Human Resource Management

HRM is about the ability of an organization to assess the right people in the right jobs at the right
time, manage staff performance and reward good performance. Hence, staff recruitment,
performance appraisal and staff training and development are all very important.

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Financial Management
Financial management refers to the effectiveness of an organization in planning, deploying,
monitoring and reviewing the use of financial resources to achieve the organization’s objectives.
The NGOs has the responsibility to ensure the health, quality and reliability of the financial system.
Of course, it is great if the organization can utilize limited funding resources and achieve good
outcomes.

Performance Measurement and Management

Performance measurement and management refers to the ability of an organization to measure the
effectiveness and efficiency of the major processes in the organization. Related policies and
procedures should be formulated, implemented and reviewed accordingly.

User Participation
User participation is important in NPM and governance. In the past, service users and their family
members did not participate very much in the decision-making and service provision processes of
NGOs. They were mainly service receivers. However, after the NPM and governance reforms,
NGOs are responsible for providing necessary information to service users, which is related to
their interests. Meeting with service users are organized annually to gather their opinions and
comments.

Service Provision
Although the reforms and new policies introduced by the government have not aimed at changing
service provision by NGOs, they have done so in a number of ways. First, service users have to
pay more than before for some of the services. For instance, the activity and meal fees increased
because of the reduction of the subvention. Because units need to keep a balanced account between
income and expenditure, they have had no choice but to increase the service fees. In addition, more
projects or centers are self-financed.

2.8.4. Positive Impacts of NPM

First, it seems that NGOs have clearer development direction than they had before.
Second, the new management and governance trends have increased the autonomy of NGOs.
Third, in response to government requirements, the accountability of NGOs has been enhanced.
That is, more rules and regulations have been set to increase their accountability to the public, and
more information about their financial, managerial and operational issues is provided for the public
to access and assess. This makes it easier for the public and service users to assess the performance
of NGOs.
Fourth, service quality has improved in general, especially from the point of view of service users.
Nowadays, service users have more opportunities to participate in the decision making or
operational processes of NGOs.

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Fifth, there is more networking and collaboration among NGOs and other sectors. In the past,
these organizations operated more independently and were more likely to focus on their own
services and development.

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