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: