The stakeholder theory proposed by Freeman R. Edward (Freeman, 2004) is a theory of organisational management and business ethics that addresses morals and values in managing an organization. Stakeholder theory takes into account a wider group of constituents rather than focusing on shareholders. A consequence of focusing on shareholders is that the maintenance or enhancement of shareholders’ value is paramount whereas when a wider stakeholder group such as employees, providers of credit, customers, suppliers, government and the local community is taken into account the overriding focus on shareholder value become less self-evident.

Nonetheless many companies do strive to maximize shareholders value whilst at the same trying to take into account the interests of the wider stakeholder group (Kay & Silberston, 1995). One rationale for effectively privileging shareholders over other stakeholders is that they are recipients of the residual free cash flow (being the profits remaining once other stakeholders such as loan creditors have been paid) (Kay & Silberston, 1995). This means that the shareholders have vested interest in trying to ensure that resources are used to maximum effect, which in turn should be to the benefit of the society.

2.3 Determinants of Financial Performance

The financial performance of a firm which is described as a measure of an enterprise’s gains over its operative years is determined by several factors according to various empirical studies. Stierwald (2009) investigated the determinants of financial performance by considering a case of large firms in Australia. The study established that the financial performance of a firm is influenced by a number of variables which include lagged profit, productivity level and size. It was further indicated that the degree of concentration in a given sector influences firm behaviour and financial performance. More so, it was postulated that differences in firm-level characteristics such as efficiency, organizational structure and/or quality management may cause differences in financial performance of mid- size manufacturing firms.