Stakeholder theory

Examples of a company's internal and external stakeholders

The stakeholder theory is a theory of organizational management and business ethics that accounts for multiple constituencies impacted by business entities like employees, suppliers, local communities, creditors, and others. It addresses morals and values in managing an organization, such as those related to corporate social responsibility, market economy, and social contract theory.

Quotes

• Lack of specificity around stakeholder identity remains a serious obstacle to the further development of stakeholder theory and its adoption in actual practice by business managers. Nowhere is this shortcoming more evident than in stakeholder theory's treatment of the constituency known as 'community.
  • R. Edward Freeman, "Enhancing Stakeholder Practice: A Particularized Exploration of Community," 2001

• The stakeholder concept was originally defined as "those groups without whose support the organization would cease to exist." The list of stakeholders originally included shareowners, employees, customers, suppliers, lenders and society. Stemming from the work of Igor Ansoff and Robert Stewart (in the planning department at Lockheed) and, later Marion Doscher and Stewart at SRI, the original approach served an important information function in the SRI corporate planning.
  • R. Edward Freeman (2010) Strategic Management: A Stakeholder Approach. p. 32

• Freeman is the acknowledged father of the stakeholder approach. His Strategic Management: a Stakeholder Approach (1984) introduced the concept of stakeholders, all of those individuals or groups other than shareholders (or owners) who have a stake in the particular decision or action of companies. The book proved to be a landmark in the development of stakeholder theory, a theory of management and business ethics that emphasises morality and ethicality in managing organisations. This theory was a departure from the dominant Anglo-Saxon approach that grants priority to shareholders and independence of management.
  Nowadays, the stakeholder approach is mentioned in virtually every publication on corporate governance and corporate social responsibility. By interacting with their stakeholders and societal context, organisations are able to establish their (social) responsibility system, enforced in part through laws and regulations but also increasingly voluntarily through company codes and business principles. The stakeholder theory is applied within various scientific disciplines ranging from business to law, from politics to health.
  • Radboud University Nijmegen, Honorary Doctorate for Professor R. Edward Freeman at ru.nl, 19 February 2013

• Stakeholder theory regards the firm as a nexus of stakeholders, commonly defined as groups or individuals who can affect or are affected by the achievement of the firm's goals (Freeman 1984). Depending on the ground for examining a firm's stakeholders, we can differentiate three approaches (Jones 1995):

The descriptive approach proposes an examination of firm-stakeholder relationships to provide an understanding of how the firm deals with different stakeholders.

The normative approach proposes an examination of firm-stakeholder relationships to discem stakeholders' interests and offer guidance on how to account for them using moral or philosophical principles.

The instrumental approach also proposes an examination of firm-stakeholder relationships to discem stakeholders' interests. However, in contrast to the normative approach, the instrumental approach involves the organizational performance consequences that stem from accounting for these interests.

The distinctive aspect of the instrumental approach to stakeholder theory is that it explicitly suggests linking stakeholder-directed activities (means) to corporate performance outcomes (ends) (Donaldson and Preston 1995; Freeman 1999).

• Christian Homburg, Marcel Stierl, and Torsten Bornemann. "Corporate social responsibility in business-to-business markets: How organizational customers account for supplier corporate social responsibility engagement." Journal of Marketing 77.6 (2013): 54-72. p. 56; On Instrumental stakeholder theory

• Looking at the business corporation through something other than the eyes of its equity holders has inspired great efforts to translate that intuitive appeal into a theory... The promise of stakeholder theory to offer a cogent alternative to the economic account of the firm, however, is impeded by a set of assumptions designed to accommodate economic considerations.
  • Joshua D. Margolis and James P. Walsh. "Misery loves companies: Rethinking social initiatives by business." Administrative science quarterly 48.2 (2003): 268-305, p. 279,