There are more and more people who are raising their voices, demanding a more sustainable way of operating businesses. In fact, in times of climate change and global pollution, companies must become more sustainable. Next to green innovations, the stakeholder theory is probably the most crucial element in making businesses more sustainable. In fact, it can serve as a blueprint for creating a sustainable business model.
But what is the stakeholder theory about? In this article we’re going to explain everything you need to know about the stakeholder theory by looking at its benefits and examples. Finally, we are providing a step-by-step guide how you can implement a “stakeholder theory type-of-thinking” in your company.
So let’s get right into it!
What is Stakeholder Theory?
The stakeholder theory assumes that a company can only continue to survive in the long-term if it focuses on providing value to all stakeholders equally. It is based on the assumption that businesses can only be considered successful when they deliver value to the majority of their stakeholders. It goes hand-in-hand with CSR (Corporate Social Responsibility) and, therefore, sustainability as well. This means that profit alone cannot be considered the only measure of business success, and value creation is not just about money.
A stakeholder is any party that has an interest in a company and can either affect or be affected by the business. Typically, investors, employees, customers, and suppliers are among the key stakeholders of a business.
However, today a large number of companies is mostly concerned about providing value to investors, disregarding the impact of their business on their other stakeholders. This is exactly what the stakeholder theory is critizising!
Instead, it argues that companies play a vital role in our society (creating jobs, driving innovations, improving quality if life, etc.) and that therefore their success must be valued as a whole, not just in the returns they make for their shareholders.
It’s about PURPOSE and value maximization, not wealth maximization!
Types of Stakeholders
Generally, stakeholders can be divided into two groups: internal & external stakeholders. In the following section we’ve summarized the most common types of stakeholders and look at the unique needs (“stakes”) that each of them typically has. The goal is to put yourself in the shoes of each type of stakeholder and see things from their point of view.
Internal Stakeholders
Internal stakeholders are, as the name suggests, stakeholders that exist inside a business. These are stakeholders who are directly affected by a project, such as employees.
1. Employees
Stake: Employment income and safety
Employees have a direct stake in the company in that they earn an income to support themselves, along with other benefits (both monetary and non-monetary). Depending on the nature of the business, employees may also have a health and safety interest (for example, in the industries of transportation, mining, oil and gas, construction, etc.).
2. Team leads & Executives
Stake: Resources, trust and freedom
Whereas team leads & executives are employees too, they have additional interests. In order to keep their teams and departments happy and motivated they need the support of their company. This can include the provision of resources such as time & budgets for team building events, team dinners, or personal development initiatives. Furthermore, they need to be trusted by investors and be given the freedom to lead their teams in a way to achieve their business goals.
3. Shareholders / Investors (Business Owners)
Stake: Financial returns
Investors include both shareholders and debtholders. Shareholders invest capital in the business and expect to earn a certain rate of return on that invested capital. Investors are commonly concerned with the concept of shareholder value. Lumped in with this group are all other providers of capital, such as lenders and potential acquirers. All shareholders are inherently stakeholders, but stakeholders are not inherently shareholders.
External Stakeholders
External stakeholders are those who have an interest in the success of a business but do not have a direct affiliation with the projects at an organization. A supplier is an example of an external stakeholder.
1. Customers
Stake: Product/service quality and value
Many would argue that businesses exist to serve their customers. Customers are actually stakeholders of a business, in that they are impacted by the quality of service/products and their value. For example, passengers traveling on an airplane literally have their lives in the company’s hands when flying with the airline.
2. Suppliers
Stake: Revenues and safety
Suppliers and vendors sell goods and/or services to a business and rely on it for revenue generation and on-going income. In many industries, suppliers also have their health and safety on the line, as they may be directly involved in the company’s operations.
3. Local communities
Stake: Health, safety, economic development
Communities are major stakeholders in large businesses located in them. They are impacted by a wide range of things, including job creation, economic development, health, and safety. When a big company enters or exits a small community, there is an immediate and significant impact on employment, incomes, and spending in the area. With some industries, there is a potential health impact, too, as companies may alter the environment.
4. Trade associations
Stake: Membership fees
Trade and industry associations are stakeholders that represent multiple members of one business sector or industry. They are usually set up to represent their members’ interest in national policy processes and to disseminate information to and from their members. Trade and industry associations are essential in consultation process as it is usually impossible for individual companies/entities to follow and participate in all consultative processes for reasons of lack of time and information.
5. Competitors
Stake: Market share
Competitors can also be an important stakeholder element in that they are materially affected by the actions taken by a company. Likewise, should a competitor introduce changes, for example to its marketing strategy, a company could be forced to alter their strategy too. In assessing competitors as a stakeholder group, comapnies should try to uncover what information is available concerning the status of potential rival projects being developed within competing firms. Further, where possible, the lessons learned by competitors can be an important and useful source of information for a company which is initiating a similar project.
6. Governments
Stake: Taxes, GDP & public opinions
Governments can also be considered a major stakeholder in a business, as they collect taxes from the company (corporate income taxes), as well as from all the people it employs (payroll taxes) and from other spending the company incurs (sales taxes). Governments benefit from the overall Gross Domestic Product (GDP) that companies contribute to.
7. Media
Stake: Information
It’s no secret that media are powerful! They can make or break your business in a matter of days. The media industry includes firms that specialize in broadcast content and delivery, including print, internet, television, radio, and direct mail. In addition, the media helps shape consumer attitudes toward business. Media companies are always happy to report on any topic that they think might be interesting to their audiences. As a company, it is key to use the media to your advantage and prevent any major negative coverage.
8. Society
Stake: Social purpose
The society in wich a company operates is another key stakeholder as it is (usually indirectly) impacted by the actions that the company takes. Social values should be an essential part of a company’s identity. If a company doesn’t have any social purpose, what’s the reason for its existence in the first place? In fact, if the society thinks that your business doesn’t have a social purpose or is even working against public interest, there is a likelyhood you will notice this in your numbers. Many companies have gone bankrupt already because of not properly communicating their social purpose. So, make sure you’r not one of them!
9. Environment
Stake: Environmental health
Finally, the environment is another key stakeholder of any business. Although it cannot express itself like humans can, it still has a huge impact on businesses. In fact, the environment’s impact on business performance is hugely underestimated by most companies. Just think about environmental issues such as climate change or pollution, which (already today) make it impossible to opertate for certain types of businesses. Ultimately, environmental activist groups are gaining more and more power, making it crucial to consider the environment as a legitimate stakeholder.
Stakeholder Theory vs Shareholder Theory
There is a longstanding debate among economists and business leaders as to the social responsibilities of companies. While some believe companies should focus their efforts solely on profits, and that way serve only the needs of shareholders, others believe that companies have an ethical responsibility to also serve the needs of their other stakeholders.
Whereas opponents of the shareholder theory have the opinion that a company’s sole responsibility is to make money for its shareholders. They view profits as a company’s only purpose and argue that a company has no real social responsibility to the public, since its only concern is to increase profits for its shareholders. The shareholders, in turn, would then privately shoulder any social responsibility later on.
However, in contrast to this purely profit-driven approach to business, the stakeholder theory suggest to go beyond the focus on shareholders and view them as one of many stakeholders a company needs to serve. According to the stakeholder theory, creating value for all its stakeholders is the only way a company can survive and thrive in the long-term.
6 Principles of Stakeholder Theory
The stakeholder theory is based on 6 fundamental principles. Only by applying these principles, a company can be considered to act according to the stakeholder theory.
3 Approaches to Stakeholder Theory
In 1995, business professors Thomas Donaldson and Lee E. Preston wrote an influential paper—“The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications”—arguing that there are three ways a company can approach stakeholder theory.
We’ve quickly summarized them for you below:
1. Descriptive approach to stakeholder theory
This approach examines stakeholder salience, or the importance of each stakeholder group to a company. It acknowledges that every stakeholder group has its own interests that affect the company in various ways, and the company must determine a fair system to balance the interests of each group.
2. Instrumental approach to stakeholder theory
This approach uses data to determine the appropriate stakeholder management method to achieve the company’s financial goals.
3. Normative approach to stakeholder theory
This approach follows the principle that the interests of all stakeholder groups have value outside of benefiting the company and shareholder’s interests. The normative approach establishes corporate ethical guidelines and is the approach that most closely aligns with the initial description of the stakeholder theory.
10 Benefits of Stakeholder Theory
1. Clarifying ethical dilemmas
Stakeholder theory is a practical model that can guide your business’s organization and operational processes. It’s also a way to prevent greenwashing and an ethical guideline that can help resolve moral conflicts regarding your business practices. When it comes to tough decision-making, like selecting vendors (e.g. choosing the lowest-cost provider versus a more sustainable provider), the stakeholder theory can guide morally smart choices.
2. Creating sustainable growth
If a company alienates a key stakeholder group by ignoring their interests, they may face hurdles to business operations. For example, ignoring the needs of workers can result in decreased morale, while providing bad customer service can diminish consumer loyalty. Prioritizing stakeholder interests supports sustainability and growth. Growth could also entail connecting with new stakeholders—for example, hiring independent professionals to support digital transformation or the circular economy.
3. Fostering long-term partnerships
Long-term business partnerships allow for more reliable operations. For example, switching to a new vendor can require complex adjustment of order placement, processing, and delivery processes—resulting in potential delays and interrupting operations. When a company has suppliers it can count on, it saves money, time, and stress on vetting new connections. By respecting the vendor stakeholder’s needs and wants, a company improves the odds of fostering successful relationships.
4. Earning public support
Companies have to work harder than in the past to earn and maintain support. A stakeholder-first approach to business can earn public support. For example, North American consumers are now eager to support brands that are environmentally conscious and exhibit good hiring practices.
5. Developing a purposeful culture
As mentioned, consumers are increasingly flocking to brands with “purpose,” as evidenced by demonstrable corporate social responsibility (CSR). The stakeholder theory can help a company develop a purposeful culture by encouraging it to reflect on the needs of diverse stakeholders, from trade associations to local communities. It’s no longer enough to simply peddle a product or service.
6. Establishing industry influence
Finally, companies that exhibit stakeholder-driven business practices can establish themselves as influencers and leaders in their field. Again, the public is now quicker to recognize companies that take care of their stakeholders and disparage those that don’t. This trend is likely to continue, and companies that have demonstrated a strong stakeholder-first approach can become leaders.
7. Improving talent acquisistion
More and more people are concerned about their personal impact on the environment. And their job is no exception to that! In the modern ecocnomy, workers want to not only work for their paycheck, but also for a bigger purpose. This can include things like equality, justice, climate action, and peace. By applying the principles of the stakeholder theory you can create a workspace with a bigger purpose to society and the environment. As a result, you’ll likely attract more talent and keep staff motivated. Finally, it is a great way to retain talent as workers feel that they are contributing to create a better world.
8. Increasing productivity of workers
Taking all stakeholders into account when making business decisions does not only help in acquiring and retaining talent, but it also helps to increase the productivity of your workforce. If your staff is closely connected to your company’s vision and shares the same values, it is more likely that they are ready to go that additional mile that brings your business forward. Furthermore, implementing the stakeholder theory in your company is also going to enhance creative & critical thinking of your employees, which in turn leads to higher productivity levels as a result of more effective processes.
9. Improving retention
Additionally, focusing on each stakeholder equally has the benefit of increased retention in all aspects of your business. By satisfying all stakeholders, you can heavily improve your company’s retention. Your customers are more likely to refer to you and your products. Suppliers are ready to treat you as a superior customer. The government is more likely to enact laws that are beneficial to your business. And the media are happy to share your company and your products with the public, which in turn will potentially perceive your company and your products as superior compared to the products of your competitors.
10. Increasing investments by financiers
Financiers are loooking at the potential long-term health of your business. If they think that your business won’t be able to survive and grow in the long-run, they probably won’t be ready to provide you with the capital that you need in order to bring your company to the next level. By applying the key ideas of the stakeholder theory (which has the shared goal of long-term success), you can prove to your financiers that they will be missing out on a huge deal when not investing in your company.
Stakeholder Theory Example
Okay, so how does the staekholder theory look like in practice?
As an example of how stakeholder theory works, imagine an automobile company that has recently gone public. Naturally, the shareholders want to see their stock values rise and/or receive dividends, and the company is eager to please those shareholders because they have invested money into the firm. However, stakeholder theory says that those investors are only one type of stakeholders that the company should strive to serve.
In this example, other stakeholders would include:
- Employees
They expect to be paid fairly and work in safe conditions. If the company doesn’t meet these basic expectations and treats its employees poorly rather than as valued team members, it can harm the business in the long run. There will be constant employee turnover, and the firm will earn a negative reputation among the workforce, ultimately weakening the company and its potential to earn higher revenues. - Manufacturers/suppliers
Under stakeholder theory, manufacturers, suppliers, and other vendors that the auto company works with are considered stakeholders. The auto company should treat these vendors fairly in business dealings and consider their employees and other stakeholders. For instance, if a supplier has a reputation for mistreating its employees and underpaying, then stakeholder theory would hold that you should find a different supplier that is more aligned with your business ethics. - Customers
The car company’s customers are some of its biggest stakeholders. According to stakeholder theory, a top priority for the company should be producing a vehicle that safely transports its customers from point A to point B as reliably, comfortably, and efficiently as possible. Of course, on top of that the car company has to take into account their customers needs and serve them accordingly. - Customers’ neighbors and community members
Since automobiles produce emissions that can impact the environment, stakeholder theory says that anyone who lives in proximity to one of these vehicles may be affected and should be viewed as a stakeholder. With these stakeholders in mind, the company may adopt more fuel-efficient technology and cut down harmful carbon emissions. - Governmental bodies
The carmaker must also consider any city, county, or state-mandated requirements, such as emission standards or safety features. The governmental agencies that enforce these standards are another set of stakeholders for the auto company.
Criticism of Stakeholder Theory
Critics of stakeholder theory have said that the needs and interests of the various stakeholder groups simply cannot be reconciled equitably. Under stakeholder theory, stakeholders represent multiple large and diverse groups, and one or more of those groups will inevitably take a back seat at some point in the process. Similarly, certain groups of stakeholders will hold more power or influence than others, which can create tension and discord.
For example, you cannot suffer to meet the hunger of various non-financial stakeholders. If there is a lower demand for your products, you cannot just pile up your inventory to please your suppliers. With an increase in pay of your employees, you cannot satisfy your financiers who are concerned with the cash flows retained by the entity.
Essentially, a business (and any other type of organization) stands or falls with money. If you cannot finance your operations in the long-term, your business is simply not going to survive. That is why, there are many who argue that, even though all stakeholders are important, the shareholders’ needs must always be served first.
Finally, critics say that it’s impossible to apply the stakeholder theory to all businesses equally. This is because every business is operating in a unique (stakeholder) environment that needs unique approaches to stakeholder management. For one company it might make sense to invest in resources for meeting the needs of environmental activism groups, whereas for another company it would make more sense to invest the same resources elsewhere, for example in green innovations or in a more sustainable workspace for its employees.
Applying Stakeholder Theory in Practice
1. Define your stakeholders
Begin with stakeholder identification and figure out who your stakeholders are. You can start with the ones we discussed in this article so far, but you need to think carefully about your own personal set of circumstances.
Examine the function of your organization and then decide who you care about. Who will be impacted by your work and activities? List them out and allocate each of them to one quadrant of our EcoCation® Stakeholder Template – you should have at least 5 or 6 and possibly many more.
If you’re struggling to come up with a satisfying list of stakeholders, talk to your colleagues, friends, and family – ask them whom they think your organization should consider a stakeholder.
EcoCation® Stakeholder Template - The Quadrants
2. Analyze your activities
Look at your strategic plan – the objectives, goals, projects, and KPIs you use to run your business. Start categorizing these activities into the list of stakeholders you have identified.
Do this by thinking about which stakeholders will benefit from your success against any given goal.
- Focus on the ‘outcomes’ or ‘objectives’ in your strategic plan rather than the projects and KPIs.
- Don’t think of this as a 1:1 relationship – a single outcome can contribute to multiple stakeholders.
- Don’t be afraid to think broadly – it’s likely you won’t have specific goals that are aimed at friends and family for example, but by thinking laterally you’ll probably find that some of the things you’re working on will help your friends and family indirectly at least.
3. Understand your gaps
Let’s be realistic – the majority of your goals will likely be contributing to either your shareholders, customers, or employees. At least that’s true for most commercial businesses.
And that’s perfectly ok. Have a look at how your own strategy maps against the stakeholders you’ve said you consider important. Does the breakdown look about right?
4. Create a communication plan
It’s important to engage your stakeholders with strong and efficient communication. Here are some tips:
- Firstly, create a contacts list and share it with all the stakeholders.
- Build trust. Ensure your communication — whether in person, over the phone, or online — is courteous, helpful, and frequent.
- Next, consider potential risks and opportunities with each stakeholder.
- Take ownership of projects and any issues, and prepare to compromise.
- Finally, deliver messages early and often.
5. Adapt as your business grows
The bigger your business becomes, the more different groups will be affected. Stakeholder management is the process of recognizing and adapting to the needs of these different groups, winning their support, and fostering good relationships. This is all crucial to the long-term health of your business. As Edward Freeman (the founder of the stakeholder theory) once said: “If you can get all your stakeholders to swim or row in the same direction, you’ve got a company with momentum and real power.”
