STAKEHOLDER THEORY: Definition, Benefits, and Challenges

Anyone with an interest in a project, business, or organization is considered a stakeholder. More importantly, stakeholder management is vital for the success of any project or organization since it has the ability to impact everything and everyone, including senior management, project leaders, team members, customers, users, and a variety of others.
As a result, managers must prioritize and concentrate on the most important stakeholders, those with authority, proximity, and urgency. Stakeholder theory enters the picture at this point.

What is Stakeholder Theory?

According to stakeholder theory, shareholders, often known as financial investors, are one of several groups that a corporation or organization must serve. Employees, customers, suppliers, local communities, environmental groups, governmental groups, and others are all considered stakeholders according to stakeholder theory.

According to stakeholder theory, organizations and companies should try to do the right thing for all of their stakeholders, and by doing so, the organization will achieve true long-term success.

Stakeholder theory and shareholder theory are diametrically opposed. According to shareholder theory, a company’s main goal should be to enhance the interests of its shareholders. Shareholder theory fundamentally translates to a “make more profit at all costs” attitude to business because shareholders are primarily interested in monetary growth.

Stakeholder theory, from the standpoint of project management, entails taking into account the needs of all stakeholders with a vested interest in a certain project. Stakeholders are “individuals and organizations who are actively involved in the project, or whose interests may be positively or negatively affected as a result of project execution or successful project completion,” according to the Project Management Institute.

Stakeholder Theory Principles

Principle of Entry and Exit – An entity should have unambiguous rules for hiring, firing, and the job profile of its workers.
Externalities Principle – Decisions made by an entity may have an impact on people who have no relationship with the entity. According to the theory, those who may be impacted by a company’s conclusions should be treated equally with other stakeholders.
Principle of Agency – The stakeholders appoint management to run the entity’s operations. Management is not the entity’s owner, but rather an agent operating on its behalf.
Governance Principle – Any changes affecting the connection between stakeholders and the organization must be authorized unanimously by them.
Contract Cost Principle – Each stakeholder should shoulder any cost equally, i.e., no one should pay more than another. Furthermore, the cost-sharing should be comparable to or equivalent to the benefit achieved.
Principle of Limited Immortality – The corporation should focus on long-term goals rather than short-term rewards. Longevity instills trust in the entity’s stakeholders. A stakeholder is concerned with the entity’s long-term goals.

History of Stakeholder Theory

R. Edward Freeman officially established stakeholder theory in 1984. The idea of recognizing all impacted parties as equal stakeholders arose as a response to shareholder theory, which maintains that a company’s sole purpose is to produce money for its owners, according to Edward Freeman in his book “Strategic Management: A Stakeholder Approach.” In his book “Capitalism and Freedom,” economist Milton Friedman discusses the foundations of shareholder theory and claims that companies have no genuine “social responsibility.” It is up to the shareholders, not the company, to be socially responsible, according to Friedman.

“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,” Freeman countered. stating that profits are the only thing that matters to a company is like to stating, ‘Red blood cells are life.’ You need red blood cells to live, but you need so much more.”

Stakeholder Theory Examples

Consider a recently publicized automobile firm as an example of how stakeholder theory works. Naturally, shareholders want their stock prices to rise, and the corporation wants to please those shareholders because they have put money into the company. However, according to stakeholder theory, those investors are merely one type of stakeholder that the company should seek to serve.
Other stakeholders would be:

#1. Employees

Employees are important stakeholders in every business. They expect to be well compensated and to work in safe settings. If the company fails to achieve these basic standards and treats its employees as if they are cogs in a wheel rather than valued team members, the business will suffer in the long run. Employee turnover will be constant, and the company will develop a terrible reputation among its employees, ultimately undermining the organization and its ability to collect larger sales.

#2. Manufacturers/suppliers

Manufacturers, suppliers, and other vendors with whom the auto firm works are considered stakeholders under the stakeholder theory. In business relations, the automaker should treat these vendors fairly and regard their employees and other stakeholders.

For example, if a supplier has a reputation for mistreating and underpaying its employees, stakeholder theory suggests that you choose an alternative supplier who is better aligned with your business ideals.

#3. Customers

If anyone who is affected by a firm or its operations is a stakeholder, then the car company’s consumers are among its most important stakeholders. According to stakeholder theory, the company’s first objective should be to provide a vehicle that reliably, comfortably, and efficiently carries its consumers from point A to point B.

#4. Neighbors and neighborhood members of customers

Because autos emit emissions that can harm the environment, stakeholder theory states that everyone who lives near one of these vehicles may be harmed and should be considered a stakeholder. With these stakeholders in mind, the corporation may implement more fuel-efficient technology to reduce harmful carbon emissions.

#5. Governmental organizations

Carmakers must also consider any restrictions imposed by the city, county, or state, such as pollution norms or safety features. Government entities that implement these regulations are another group of stakeholders for the automaker.

Shareholder vs. Stakeholder Theory

Although many people use these two names interchangeably, their fundamental notions are completely different.
The stakeholder theory is more managerial in nature, whereas the shareholder theory is more economic in nature.

The stakeholder theory, in contrast to the shareholder theory, contends that focusing solely on maximizing shareholder value is not necessarily the optimal approach. Instead, the optimal approach is to generate value for all stakeholders.

According to the shareholder theory, resources spent on staff and consumers may no longer be available to investors, indicating a trade-off. However, the stakeholder theory looks at the big picture and strives to raise the entire pie.

Stakeholders Management

Stakeholder theory is a subset of stakeholder management, which aims to foster beneficial relationships with stakeholders by managing their expectations and goals. A strategic plan is essential to oversee this process.

To begin, stakeholders are identified, their influence and interests are assessed, and a communication strategy is developed to keep them updated. However, not all stakeholders are created equal. This is not to say that some are more vital than others; rather, prioritizing provides a framework for effectively managing them.

Again, understanding stakeholders is critical for managing them and developing an effective strategic strategy. Understand their financial or emotional stake in the work’s outcome, what inspires them, what data you need from them, how they want to acquire information, what they think of the job you’re doing, who impacts their thoughts, and so on.

Communication is an important aspect of stakeholder involvement. Here are some pointers to keep stakeholder communication strong and efficient:

Ensure that communications are targeted and delivered on time.
Consult early and frequently.
Understand that stakeholders are individuals with feelings who must be treated as such in order to create trust.
Take into account potential risks and opportunities with each stakeholder.
Compromise
Understand how success is defined.
Accept responsibility

The Benefits of Stakeholder Theory

This is where things become a little more difficult. Despite what I indicated in the final sentence of the preceding portion of this piece, implementing stakeholder theory in your firm has financial benefits. They include stuff like:

Increased productivity as a result of employee satisfaction
Increased retention and recommendations from satisfied customers
Increased investment by pleased financiers
Improved talent acquisition as a result of a positive community image

So, certainly, implementing stakeholder theory can literally help your business increase revenues. However, these are more byproducts of using stakeholder theory than benefits of the ideology itself.

To truly appreciate the benefits of stakeholder theory, we must consider it from an ethical/societal standpoint. I’m referring to items like:

The increased mental health of the workforce as a result of job satisfaction
Scientific progress that benefits everyone
Improvements in the local community’s socioeconomic position
Contribution to a robust competitive ecosystem in which other companies can prosper and benefit their own stakeholders

And, on a completely personal (and selfish) note:

The chance to collaborate with like-minded amazing people who believe in making a difference
The satisfaction that comes from being a part of positive change in your own little corner of the globe.

Maslow’s Hierarchy of Needs

In fact, I compare the stakeholder theory to applying Maslow’s Hierarchy of Needs, which asserts that in order to reach true happiness, one must go beyond financial prosperity and toward self-actualization.

The stakeholder theory is an excellent strategy to achieve this for both yourself and your firm. By viewing things through the eyes of the stakeholders, you may emphasize their basic needs and assist them in moving up the Maslow pyramid.
So, if making the world a better place while also reaping a slew of lucrative side benefits sounds appealing, the stakeholder theory might be for you.

What are the Challenges With Stakeholder Theory?

According to critics of stakeholder theory, the requirements and interests of numerous stakeholder groups simply cannot be resolved fairly. According to stakeholder theory, stakeholders represent numerous broad and diverse groups, and at some time in the process, one or more of those groups will eventually take a back seat. Similarly, certain stakeholder groups will have more power or influence than others, which can lead to conflict and unrest.

With the use of a stakeholder management plan, project managers may overcome many of these difficulties. This plan should outline the expectations of each stakeholder group as well as the procedures for communication with stakeholders. Furthermore, stakeholders should be prioritized in the stakeholder management plan depending on their level of impact on the project and how much they care about the outcome.

Using the Stakeholder Theory Approach in Business

The stakeholder theory is one of the various strategic frameworks that you can use to help your firm prosper. You may have arrived here after reading our popular piece 5 of the Best Strategy Frameworks.
However, I will state right away that the best approach to use the stakeholder theory model in your firm is in tandem with another business framework. Because the stakeholder theory model isn’t a strategic framework, it won’t directly assist you to develop or grow your business.
Instead, it’s more like a means of conducting your firm in a way that is consistent with your personal principles.

Step #1. Identify Your Stakeholders

Begin by identifying your stakeholders and determining who they are. You can begin with the list we prepared above, but you must consider your own unique set of circumstances.

The normative method is to assess your organization’s function and then identify who you care about. Who will be affected by your actions and work? Which stakeholders is your board of directors willing to take into account? Make a list of them in simple bullet point form – you should have at least 5 or 6 and possibly many more.

Remember that you’ll need to develop stakeholder engagement plans for at least some groups. They’ll just be letters on paper if there’s no engagement.
If you’re having trouble coming up with a list of stakeholders, chat to your coworkers, acquaintances, and family members and ask them who they think your organization should consider a stakeholder.

Step #2. Examine Your Performance

Examine your strategic plan, which includes the objectives, goals, projects, and key performance indicators (KPIs) that you use to govern your organization. Begin categorizing these actions according to the stakeholders you’ve identified.

Consider which stakeholders will benefit from your success in achieving any given goal.

In your strategic strategy, prioritize ‘outcomes’ or ‘objectives’ over projects and KPIs.
Don’t conceive of this as a one-to-one relationship; a single conclusion might benefit numerous parties.
Don’t be afraid to think broadly – you’re unlikely to have particular goals aimed at friends and family, for example, but by thinking laterally, you’ll probably discover that some of the things you’re working on will help your friends and family indirectly at the very least.

Step #3. Recognize Your Gaps

Let’s be honest: the majority of your objectives will most likely benefit your shareholders, customers, or staff. At least, that is true for the majority of commercial enterprises.
That’s completely OK. Examine how your own approach aligns with the stakeholders you’ve stated are essential to you. Does the breakdown appear to be correct?

Step #4. Do Something Different

The whole idea of exercises like this is to help you understand your own structure but then take action to fill whatever gaps you see.
Hopefully, you found this method of reviewing your strategy to be interesting and informative.

Let me leave you with one final thought. Consider a company that:

Has hundreds of extremely satisfied employees
Creates fantastic goods that dramatically improve the lives of their consumers
Has boosted employment opportunities in the community
Its competitors have been inspired to improve their products and customer service.

So far, everything seems to be going well, right? The final piece of information is that they constantly lose $1 per fiscal year.

Do you think this is a successful business? Would your answer change if they generated a $1 profit per year instead? The response will be personal, but it is a terrific chance to put your stakeholder theory to the test.

Conclusion

According to the stakeholder theory, a business can achieve success only by pleasing all of its stakeholders, not just the shareholders. It depicts an organization as an ecosystem of interconnected groups, all of which should be content to maintain the overall organism healthy and prosperous in the long run.

STAKEHOLDER THEORY: Definition, Benefits, and Challenges

Table of Contents Hide

What is Stakeholder Theory?

Stakeholder Theory Principles

History of Stakeholder Theory