The Stakeholder Theory owes its origin in modern business management to the 1984 book “Strategic Management: A Stakeholder Approach” written by R. Edward Freeman. Freeman challenges the conventional view that the needs of shareholders in a company and increasing value for them should always be the primary focus of a business.
What is Stakeholder Theory?
With the Stakeholder approach to basic known business principles, there are many other parties that need to be recognized as having an interest in the company. Those interests must be considered along with the interests of the company shareholders. The exact definition of who counts as a stakeholder in company is a matter of intense discussion among business theorists. The list of potential stakeholders would generally include customers, employees, financiers, suppliers, communities, trade unions, and trade associations.
The Stakeholder approach is closely tied to the idea of corporate social responsibility (CSR). The idea of corporate social responsibility is that business needs to ensure full compliance with the spirit of both ethical standards and international law. Businesses also have to take full responsibility for all of the actions of the company and the impact those actions have on their various stakeholders. The stakeholders in this case being everyone who is impacted in any way by the company policies.
How does Stakeholder theory affect your corporate objective?
Applying the Stakeholder Theory to your business will naturally affect the corporate objective of your business. It raises the fundamental question of “Why are you in business?” Is it the sole purpose of your company to extract the greatest possible level of profits for your corporate shareholders, or are there other concerns and other stakeholders in your business who also have concerns that needs addressing? This is a question that economists, philosophers, and academics have been debating for decades and there is no clear winner in the debate. It is ultimately a matter of how you choose to run your business, and whether or not you decide to apply Stakeholder Theory.
If you do choose to apply Stakeholder Theory to your business then you will gain many benefits including the co-operation and goodwill of those designated business stakeholders as you seek to address their different needs. You will also need to carefully consider the way you do business. The starting point for Stakeholder Theory is the assumption that doing business actually requires values, and that it is that shared sense of the created value that draws together the business stakeholders. Freeman believes that “This propels the firm forward and allows it to generate outstanding performance.”
Stakeholder Theory also challenges business managers to think clearly about their business methods and the relationships which they need to forge with the company stakeholders to effectively deliver the finished product. It is these relationships that will prove crucial in establishing the long-term success or failure of the company.
Does Stakeholder theory prevent a business making profits?
According to Freeman “Economic value is created by people who voluntarily come together and cooperate to improve everyone’s circumstance.” He sees concern for profits as the result but not the driving force in the process of value creation.” Stakeholder Theory does not mean that businesses fail to value either profitability or their shareholders interests. What it does mean is that none of them make the pursuit of profitability the mainspring of their existence.