STAKEHOLDER THEORY

R. Edward Freeman founded the Stakeholder Theory in 1951, in his well-known work “Strategic Management: A Stakeholder Approach (1984)”. His main aim was to create a theory that challenged the normal view at the time that businesses only existed to maximize shareholder wealth. Instead, he wanted to argue that long-term success is dependent on the interests of multiple stakeholders being balanced and accounted for.

The main idea of the Stakeholder Theory is that business should create value for all parties affected by their actions, not just shareholders. These parties include customers, communities, employees, suppliers, the environment, and many more.

Let’s go over types of stakeholders before we get into the core principles. There are three types: primary, secondary, and tertiary stakeholders. Primary stakeholders are directly involved in economic transactions, such as employers and customers. Secondary stakeholders are indirectly affected by a company, such as NGOs, communities, and more. Finally, our tertiary stakeholders are what impact the company has on broader communities, such as the environment and future generations.

It’s time to get into the 3 core principles of the Stakeholder Theory. One is inclusive responsibility; this is a pretty basic idea, focusing on how decisions should consider every single party affected. The second is interconnected Value. This argues that maintaining stakeholder relationships are mutually beneficial. With happy employees, there are better products, which leads to more satisfied customers, which ends up leading to loyal shareholders. Finally, we have long-term orientation, which argues that a focus on short-term profit maximization can neglect stakeholders; instead, we should focus on long-term strategies and have resilience.

Some benefits of stakeholder oriented businesses include enhanced trust and reputation, employee loyalty and productivity, risk mitigation (which means we can prevent stakeholders from being upset), and sustainable growth since we also focus on broader communities such as the environment.

Some challenges, however, include the complexity of balancing all these interests, the inability to measure stakeholder value, and short-term tension. This is because short-term deprioritization can lead to stakeholders feeling like a company is failing.