Stakeholder theory states that the purpose of a business is to create value for stakeholders not just shareholders. Business needs to consider customers, suppliers, employees, communities and shareholders. stakeholdermap.com
"The idea that corporations have stakeholders has now become commonplace in the management literature, both academic and professional." (Donaldson & Preston, 1995. pg 65)The term "Stakeholder" is in common use among business students and professionals in all industries. The idea that stakeholders need to be managed or engaged is understood widely and implemented at tactical and strategic levels in organizations today. Stakeholders have become a valid consideration for project managers running small tactical projects and for CEOs planning their business strategy. Read more on project stakeholders.
This common understanding of stakeholders as a relevant consideration in business is reflected in recent new publications and long running editions of seminal works on the subject:
- A search on amazon reveals plenty of new books on or related to stakeholder management since January 2014.
- The ninth edition of Carroll and Boletus's textbook Business & Society: Ethics, Sustainability, and Stakeholder Management was published in January 2014 and
- Strategic Management: A Stakeholder Approach, by R. Edward Freeman first published in 1984 has since been republished in 2010 and released on Kindle in December 2013.
What is Stakeholder Theory?
Stakeholder theory suggests that the purpose of a business is to create as much value as possible for stakeholders. In order to succeed and be sustainable over time, executives must keep the interests of customers, suppliers, employees, communities and shareholders aligned and going in the same direction. (lexicon ft.com)
In his influential book Strategic Management: A Stakeholder Approach, R. Edward Freeman put forward the argument that managers are not just answerable to shareholders. In addition to shareholders or stockholders they also need to consider "[a]ny group or individual who can affect or is affected by the achievement of the firm's objectives". He redraws the traditional input/output model of the firm to include:
- political groups
- trade associations
- trade unions
Freeman's "landmark book set the agenda for what we now call stakeholder theory" , and the importance of taking a stakeholder approach has been proven by successful stakeholder actions over the past 30 years and recently by the global financial crisis (Cambridge University Press, 2015.):
"as the recent global financial crisis has taught us. The 21st Century is one of “Managing for Stakeholders.” The task of executives is to create as much value as possible for stakeholders without resorting to trade-offs. Great companies endure because they manage to get stakeholder interests aligned in the same direction.” (Freeman, E.)Watch Edward Freeman explain Stakeholder Theory in this short video.
Some criticisms of Stakeholder Theory
It is widely accepted that businesses need to consider more than their shareholders and more than maximising profit, and in that sense the case for Stakeholder Theory has been won.
However, there have been, and still are some vocal critics of Stakeholder Theory. It has been seen as particularly challenging for American corporations where fiduciary obligations apply. This often quoted objection to stakeholder theory argues that while it seems ethical to involve those affected by or affecting the firm it is also unethical in that it breaks the fiduciary duty that managers have to shareholders, this is described by Kenneth Goodpaster as the Stakeholder Paradox.
Why we need to take a stakeholder approach
"The business of business isn't just about creating profits for shareholders — it's also about improving the state of the world and driving stakeholder value."Marc Benioff, Salesforce, Chairman and CEO
"If we were only focused on making money we might put all of our energy on just increasing ads to people in the U.S. and the other most developed countries, but that's not the only thing that we care about here." Mark Zuckerberg, Facebook, CEO
If you do the right thing for the customer, it's always the right thing for the company, financially Justin King, former Sainbury's CEO on Thomas Cook's handling of the death of two children from Carbon Monoxide poisoningIt just makes sense at a project, programme and business level to consider those who can affect and will be affected by your business. Stakeholder Analysis techniques provide the tools to quickly identify important stakeholders and stakeholder engagement research helps businesses to effectively engage with their stakeholders. This is undoubtedly essential to save potentially massive costs from legal action, boycotts etc, but is also necessary for growth, and for moral and ethical reasons.
The company does "a lot of things for reasons besides profit motive. We want to leave the world better than we found it." Tim Cook, CEO of Apple
Stakeholder Theory - references and further reading
Freeman, Edward. (2010) Strategic Management: A Stakeholder Approach, Cambridge: Cambridge University Press.
Reference for Business. Stakeholder Theory.[online] Available at: https://www.referenceforbusiness.com/encyclopedia/Sel-Str/Stakeholder-Theory.html
Stakeholder Theory resourcesWatch Professor Thomas M. Jones discuss whether is an overlap between Ethics and Stakeholder Theory
Some critics of Stakeholder Theory say that it creates a paradox. This article explains the stakeholder paradox
R. Edward Freeman set the agenda for what is now known as stakeholder theory. In this video R. Edward Freeman explains Stakeholder Theory.
The CEO of Cummins explains why she embraces the stakeholder model
Watch Ed. Freeman answer the key question What are stakeholders?
Watch Professor Thomas M. Jones explain What's next for Stakeholder Theory