Stakeholder Theory

Stakeholder Theory

Over the next several months, I’ll be doing a deep dive into “stakeholder management” and will be sharing some of what I learn on my website and here on Google+ as well. 

Stakeholder theory centers on the idea that companies exist to serve their stakeholders. There are many interpretations of who qualifies as a stakeholder. One of the most widely cited definitions is from 1963 when Standford Research Institute referred to stakeholders as “those groups without whose support the organization would cease to exist.”

Flipping that definition a bit, you could also say that stakeholders are those people with a legitimate interest in the firm, which is to say, people who stand to gain from the successful operation of the business. In other words, they have a stake in its success. Using this criterion, it’s easy to see how most interpretations of the term stakeholder include: shareholders, lenders, employees, suppliers, distributors, customers, and even the members of the communities in which the business operates. Competitors are usually left out of the stakeholder mix for this reason, but I would argue the growing importance of coopetition is making even this distinction less clear.

The stakeholder perspective differs from the traditional view of business, which is sometimes pictured as an “input-output” model, where investors, suppliers and employees contribute inputs into the firm, with the resulting outputs going out to the customer:

In contrast, the stakeholder model pictures many more stakeholders at the table, each contributing and receiving something from the firm’s operations (see the image below). 

Why Care About Stakeholder Theory?

In their paper, Donaldson and Preston note that there are many ways of thinking about stakeholder theory, but that most fall into one of three buckets – each with very different arguments for why it matters.

Descriptive approaches explain stakeholder theory by showing how it maps to the way business actually works today. It might be opinion research showing that most management believes a sole focus on shareholder interests is unethical. Or it might be studies showing that a growing number of court cases and governmental regulations now give managers greater leeway in taking factors aside shareholder interests into account in their management decisions. With descriptive approaches, you care about stakeholder theory because it better describes the actual way business works.

Instrumental approaches essentially frame stakeholder theory as a means to increased efficiency, better business performance and ultimately higher profits. With instrumental approaches, you care about stakeholder theory because it will make more money for your business.

Normative approaches see stakeholder theory as a moral or ethical issue. This frame usually rests on the idea that each stakeholder group has intrinsic value, and that no group’s interests are more or less important than any other. With normative approaches, you care about stakeholder theory because it is just and because it is fair.

A lot of the above is really just my summary of an important paper by Thomas Donaldson and Lee E. Preston, called “The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications.”

This post is already a bit long, so for some closing thoughts on what I believe matters most, you can read the last few paragraphs on The Vital Edge: 


#stakeholdermanagement   #mission  

19 thoughts on “Stakeholder Theory”

  1. engaging with and finding a way of managing (not controlling) all these stakeholder conversations is now every brands’ challenge Gideon Rosenblatt as brands migrate from command and control to reconnaissance pull

    I suspect Google+ is actually a cultural change program as it’s changing Google and they’re changing us and we (John Kellden Bob Barker Baiju Solanki martin shervington Thomas Morffew Denis Labelle Colin Lucas-Mudd Scott K Wilder Prem Gyani) in turn are evolving our clients to adopt a platform both internally and externally

    Good luck with your study Gideon Rosenblatt here if you need anything. Tx

  2. Thanks Ron Serina, Paul Simbeck-Hampson and Paul Wooding. The more I did into this stuff, the more powerful it is. And very similar to the way I’ve managed organizations in the past – just didn’t really understand the theory behind it. So, it’s cool to see people describing what I was experiencing…

  3. Thomas Power, you are so, so right about the culture issue. This stakeholder stuff is really about networks – and this is some of what I’ll be writing about going forward. Networks because so much of the connections are outside traditional hierarchical management relationships. 

    So, I really do believe that Google+ (and Twitter, FB, etc.) really are shifting the culture within organizations. They show us a very real alternative. And I think that people like you (and the rest of the fine people you mention above) are really most effective when you’re making the connection between the cultures of these places and the cultures that need to be brought into our organizations. That’s part of why I think the ORS stuff you’re working on is particularly interesting too. 

    I think perhaps more than anything, that we all are learning what these new organizational forms are like by actually living them here. And that’s cool. Thanks for the comments and the connection to that IBM study. I’ve been meaning to come back to that again – quite coincidently, I was just thinking about it this morning. That Dave Pollard article I shared earlier is also related to all this. 

  4. Thanks awfully for sharing that, Thomas. I actually feel I let the community down a bit by not taking a more facilitative role, especially if I compare it to the engagement on Gideon and Adam’s community. I’m just tied up with a few projects that keep me from diving much deeper into it. But the road is long…

  5. I arrived in Madrid today to help support a client’s 3 day international marketing meeting. One of my talks is on Social Business and elements of it refer directly to what Gideon is surfacing here. Serendipity is a wonderful thing and so is the effort and discipline required to surface it with more regularity.

  6. From the very good 23 things they dont tell you about capitalism by

    Ha Joon Chang 

    _Unfortunately, despite being the legal owners of the company, shareholders are the ones who are least committed among the various stakeholders to the long-term viability of the company. This is because they are the ones who can exit the company most easily […] . In contrast, it is more difficult for other stakeholders, such as workers and suppliers, to exit the company and find another engagement, because they are likely to have accumulated skills and capital

    equipment (in the case of the suppliers) that are specific to the companies they do business with. Therefore, they have a greater stake in the long-run viability of the company than most shareholders. This is why maximizing shareholder value is bad for the company, as well as the rest of the economy_

  7. A lot of good common sense arguments for a more political approach to economics. What I love about it is that the other is a great economist: political arguments are supported by rigorous research.

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